Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended November 29, 2015. Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted. Results are unaudited.
Business context
Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V’s. At quarter-end, it reported 1,534 company-owned restaurants in continuing operations. On November 9, 2015, Darden completed the spin-off of Four Corners Property Trust (FCPT), transferring 418 restaurant properties and six LongHorn restaurants. Darden received a $315 million cash distribution and leases back the transferred properties.
Key financial results
| Metric | Three months ended Nov. 29, 2015 | Six months ended Nov. 29, 2015 | Comparable prior period |
|---|---|---|---|
| Sales | $1,608.8 | $3,295.8 | $1,559.0 and $3,154.8 |
| Operating income | $81.7 | $215.9 | Loss of $20.9 and income of $46.7 |
| Continuing-operations earnings | $30.1 | $111.1 | Loss of $30.8 and $50.1 |
| Diluted EPS from continuing operations | $0.23 | $0.86 | Loss of $0.24 and $0.39 |
| Net earnings (including discontinued operations) | $43.2 | $129.6 | Loss of $32.8 and earnings of $470.4 |
| Operating cash flow from continuing operations | Not separately provided | $190.6 | $197.9 |
| Capital expenditures | Not separately provided | $122.2 | $167.4 |
Second-quarter sales rose 3.2%; six-month sales rose 4.5%. Management attributed growth to 14 net new company-owned restaurants since the comparable prior-year quarter and same-restaurant sales growth. Combined Darden same-restaurant sales increased 1.6% for the quarter and 2.5% for the six months on a fiscal basis; comparable-calendar growth was 2.9% and 3.2%, respectively.
Operating margin was 5.1% for the quarter versus negative 1.3% a year earlier, and 6.6% for six months versus 1.5%. Restaurant-level segment profit was $266.6 million for the quarter and $577.3 million for six months. Segment margins improved across Olive Garden, LongHorn, Fine Dining and Other Business. Food and beverage costs improved as a share of sales, while quarterly labor costs increased slightly as a share of sales.
Balance sheet, debt and liquidity
- Cash and cash equivalents were $857.6 million at November 29, up from $535.9 million at May 31, 2015.
- Total debt carrying value was approximately $1.20 billion, including $759.4 million classified as current in anticipation of repayment. Total current liabilities were $1.82 billion against current assets of $1.38 billion.
- Subsequent to quarter-end, Darden retired $743 million of notes; it also planned to repay the remaining $15 million variable-rate term-loan balance during fiscal 2016. The filing says $255 million of the term loan was repaid during the quarter.
- Darden had no borrowings under its $750 million revolving credit facility and reported compliance with its covenants. It stated that the facility and operating cash generation should fund fiscal 2016 needs.
- Six-month financing cash flows included $270 million of long-term debt repayment, $140.6 million of dividends paid and the $315 million FCPT cash distribution. The company declared dividends of $1.10 per share for the six-month period.
Material changes and unusual items
- Quarterly net interest expense increased to $57.3 million from $33.7 million, including approximately $35.2 million of accelerated amortization of previously settled interest-rate hedges related to planned debt retirements. This materially affected quarterly earnings; management estimated debt-retirement costs reduced quarterly continuing-operations diluted EPS by about $0.17.
- Real-estate-plan implementation costs reduced quarterly continuing-operations diluted EPS by about $0.16. For the six months, management estimated an approximately $0.21 per-share impact from these costs.
- Sale-leaseback transactions generated $228.3 million in net proceeds from 62 restaurant properties, and the headquarters sale-leaseback generated a further $131.0 million. These transactions and the FCPT distribution contributed to cash proceeds and debt reduction, while increasing rent exposure.
- Prior-year six-month net earnings included substantial Red Lobster sale gains: discontinued operations contributed $520.5 million, versus $18.5 million in the current six-month period. Thus, the 72.4% decline in reported six-month net earnings does not reflect the improvement in continuing operations.
- Current-period impairments and disposal charges were $7.7 million for the quarter and $6.0 million for six months, compared with $39.3 million and $46.3 million in the prior-year periods. The current-quarter amount included a $9.1 million Red Lobster-related landlord-consent gain in discontinued operations, not continuing operations.
Outlook, risks and contingencies
For fiscal 2016, Darden expected combined same-restaurant sales growth of 2.5%–3.0%, approximately 18–22 new restaurants, and capital expenditures of $230 million–$255 million. Brand same-restaurant sales outlook was 1.5%–2.5% for Olive Garden, 3.0%–4.0% for LongHorn, and approximately 3.0% blended for the other named brands. The filing does not provide a clear full-year earnings or EPS forecast.
Management cited food safety, labor and insurance costs, commodity and other input costs, competition, execution and sales growth, technology and cybersecurity, weather, regulation, litigation, and potential goodwill or trademark impairment among the principal risks. Darden reported ordinary-course lawsuits and claims, but did not expect their disposition to materially affect its financial position, results or liquidity. It also disclosed $145.5 million of guarantees associated with assigned leased properties and $132.6 million of standby letters of credit. Operating lease obligations totaled $3.08 billion, including the effects of the real-estate transactions and leasebacks.
Management noted that restaurant sales are seasonal and quarterly results may not indicate full-year performance. It also warned that impairment charges could adversely affect results and, if sufficiently large, could cause the company to breach its credit-agreement leverage limit. No material change in risk factors from the prior Form 10-K was reported.
Important facts for investors to verify
- Confirm the timing and cash, interest-expense and rent effects of the FCPT spin-off, restaurant-property leasebacks and headquarters sale-leaseback.
- Verify completion and funding of the $743 million post-quarter debt retirement, the remaining term-loan repayment, and the resulting debt maturity and interest-cost profile.
- Track same-restaurant sales, guest counts, average check and labor-cost trends against fiscal 2016 guidance, particularly at Olive Garden and LongHorn.
- Separate continuing operating performance from discontinued-operation gains and other unusual costs when comparing reported earnings and EPS.
- Monitor liquidity and covenant headroom alongside substantial lease obligations, property guarantees, capital spending and the newly authorized $500 million share-repurchase program.