Darden Restaurants, Inc. — Q1 FY2011 Form 10-Q
Reporting period: Quarter ended August 29, 2010; comparisons are with the quarter ended August 30, 2009. Darden operates full-service restaurants in the U.S. and Canada, including Olive Garden, Red Lobster and LongHorn Steakhouse. Unless noted, financial amounts are in millions.
Financial performance
| Metric | Q1 FY2011 | Q1 FY2010 | Change |
|---|---|---|---|
| Sales | $1,806.7 | $1,734.0 | +4.2% |
| Earnings from continuing operations | $113.3 | $95.0 | +19.3% |
| Net earnings | $113.1 | $94.3 | +19.9% |
| Diluted EPS from continuing operations | $0.80 | $0.67 | +19.4% |
| Net cash from continuing operating activities | $214.9 | $177.9 | +$37.0 |
| Capital expenditures | $113.2 | $95.7 | +$17.5 |
- Net earnings from continuing operations margin increased to 6.3% from 5.5%; pretax margin rose to 8.8% from 7.5%. Total costs and expenses declined to 91.2% of sales from 92.5%.
- Food and beverage costs were 28.1% of sales versus 28.8%; restaurant labor was 32.0% versus 32.8%. Restaurant expenses rose to 15.5% from 15.4%, and SG&A to 10.0% from 9.9%.
- Cash and equivalents were $77.5 at quarter-end, down from $248.8 at May 30, 2010. Current assets were $503.7 and current liabilities $1,148.1; management notes that the business typically carries current liabilities above current assets.
- Long-term debt, including its current portion, had a carrying value of approximately $1.48 billion; the balance sheet also shows $6.0 of short-term debt and $57.3 of noncurrent capital-lease obligations. The $150.0 senior notes due August 2010 were repaid at maturity. The company reported $675.8 of available revolving-credit capacity after commercial paper and letters of credit.
- Net cash used in financing was $277.9, including $150.3 of long-term debt repayments, $95.6 of treasury-stock purchases and $44.4 of dividends paid. Operating cash flow less capital expenditures was $101.7.
Material changes and operating trends
- Sales growth reflected 54 net restaurant additions since the prior-year quarter and a 1.1% blended same-restaurant sales increase at Olive Garden, Red Lobster and LongHorn Steakhouse. The restaurant base increased to 1,832 from 1,778 a year earlier.
- Olive Garden sales rose 6.8%, with U.S. same-restaurant sales up 2.7%; LongHorn sales rose 6.8%, with same-restaurant sales up 2.2%. Red Lobster sales fell 0.8%, and U.S. same-restaurant sales fell 1.7%, mainly due to fewer guests. Capital Grille sales increased 8.7%, Bahama Breeze 4.4%, and Seasons 52 51.3% from a smaller base.
- Management attributed improved earnings chiefly to higher sales and lower food and beverage and labor costs as a percentage of sales. Higher restaurant expenses, SG&A and the effective tax rate partly offset those benefits. The effective tax rate rose to 28.8% from 27.1%.
- Repurchases totaled 2.4 million shares for $95.6; 5.95 million shares remained authorized for repurchase. The quarterly dividend was increased to $0.32 per share, or $1.28 annualized; a $0.32 dividend was declared for payment November 1, 2010.
Outlook, risks and unusual items
- The filing refers to fiscal 2011 expectations for restaurant growth, U.S. same-restaurant sales, total sales, diluted EPS growth and capital expenditures, but provides no clear numerical guidance values in the supplied text. Management said operating cash generation and the revolving facility should fund fiscal 2011 capital spending, dividends, repurchases and other operations.
- Darden expected to issue unsecured debt when its $75.0 of medium-term notes mature in April 2011, effectively refinancing those notes and the August 2010 notes already repaid. It entered into $200.0 of forward-starting interest-rate swaps related to expected refinancing of $350.0 of notes due in October 2012.
- The $750.0 revolving facility matures September 2012. Darden reported compliance with its covenants; the facility includes a maximum lease-adjusted debt-to-capitalization ratio of 0.75 to 1.00. The company stated that an after-tax asset write-down exceeding approximately $1.10 billion at quarter-end would have been required to breach the leverage limit, though a smaller impairment could do so in future quarters.
- The cash flow statement reports $2.8 of asset impairment charges. The fair-value note details $2.5 of write-downs: $1.7 on assets held for disposal, including $0.1 related to discontinued operations, and $0.8 on assets held and used. Discontinued operations generated a $0.2 net loss.
- Contingencies include $114.3 of standby letters of credit and $8.5 of guarantees on assigned leases. Darden said ordinary-course lawsuits and claims were not expected, individually or collectively, to materially affect its financial position, results or liquidity.
- Key risks include food safety, labor and insurance costs, intense competition, commodity and utility prices, economic conditions, execution of new restaurant growth, the viability of newer brands, indebtedness, litigation, IT security and potential impairment of goodwill or other intangible assets. The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-restaurant sales momentum—particularly Red Lobster’s guest-count decline—continued after the quarter.
- How food, labor, credit-card and other restaurant costs affected margins in subsequent periods, and whether the higher tax rate persisted.
- Cash generation and planned capital spending, alongside the effects of dividends and share repurchases on cash and debt.
- Debt refinancing terms and interest-rate exposure, including the 2011 maturity and 2012 senior notes.
- Impairment assumptions, contingent obligations and developments in litigation or other disclosed risks.