Business Context and Reporting Period
Company: Darden Restaurants, Inc.
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: February 22, 2009 (Third Quarter of Fiscal 2009)
Business Overview: Darden owns and operates full-service dining restaurants in the U.S. and Canada under brands including Olive Garden, Red Lobster, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, and Seasons 52. The company completed the acquisition of RARE Hospitality International, Inc. (owner of LongHorn Steakhouse and The Capital Grille) in October 2007. Smokey Bones and Rocky River Grillhouse operations have been classified as discontinued operations.
Key Financial Metrics
| Metric (in millions, except per share) | Q3 2009 | Q3 2008 | 9 Months 2009 | 9 Months 2008 |
|---|---|---|---|---|
| Sales | $1,798.9 | $1,811.4 | $5,241.9 | $4,800.9 |
| Net Earnings (Continuing Ops) | $108.1 | $115.6 | $249.1 | $266.2 |
| Net Earnings (Total) | $107.5 | $126.0 | $249.2 | $275.4 |
| Diluted EPS (Continuing Ops) | $0.78 | $0.80 | $1.78 | $1.83 |
| Operating Cash Flow | $334.1 | $339.7 | $543.9 | $575.8 |
| Cash and Equivalents | $107.3 | $47.0 | $107.3 | $47.0 |
| Total Debt (Short + Long Term) | $1,955.6 | N/A | $1,955.6 | N/A |
| Capital Expenditures | $125.2 | $121.7 | $423.0 | $323.0 |
Note: Total Debt calculated as Short-term debt ($323.1M) + Long-term debt ($1,632.5M) as of Feb 22, 2009.
Material Changes vs. Prior Period
- Sales: Q3 sales decreased 0.7% year-over-year, driven by a 3.2% decline in combined same-restaurant sales for Olive Garden, Red Lobster, and LongHorn Steakhouse, partially offset by 69 net new restaurants. For the nine-month period, sales increased 9.2% primarily due to the inclusion of RARE Hospitality operations and new unit growth.
- Profitability: Net earnings from continuing operations decreased 6.4% in both the quarter and nine-month periods. This was attributed to declines in same-restaurant sales, increased food and beverage costs, higher wage rates, and increased interest costs.
- Cost Structure: Food and beverage costs as a percent of sales increased to 30.7% for the nine months ended Feb 22, 2009, compared to 29.9% in the prior year, due to commodity inflation. Restaurant labor costs as a percent of sales decreased slightly for the nine-month period due to the RARE acquisition mix, despite rising wage rates.
- Discontinued Operations: The company recorded a loss of $0.6 million from discontinued operations in Q3 2009, compared to earnings of $10.4 million in Q3 2008, reflecting the closure and sale of Smokey Bones and Rocky River Grillhouse concepts.
Outlook, Risks, and Management Commentary
- Goodwill Impairment Risk: Management performed annual impairment testing for goodwill and indefinite-lived intangibles (LongHorn Steakhouse and The Capital Grille) and found no impairment. However, the filing notes that a write-down of assets exceeding approximately $560 million (after-tax) would cause the company's leverage ratio to exceed the maximum permitted under its credit agreement, potentially triggering a default.
- Liquidity and Credit: The company maintains a $750 million revolving credit facility. Availability is reduced by $50 million due to the bankruptcy of Lehman Brothers, a lender under the agreement. As of Feb 22, 2009, available capacity was $329.5 million.
- Legal Proceedings: The company is involved in various litigation, including class actions regarding wage and hour violations in California and a securities class action alleging false statements regarding fiscal 2008 guidance. Management intends to vigorously defend these actions.
- Dividends: The Board declared a cash dividend of $0.20 per share on March 12, 2009, payable May 1, 2009.
- Stock Repurchases: The company repurchased 0.2 million shares in Q3 and 4.7 million shares in the first nine months of fiscal 2009. Cumulative repurchases total 151.7 million shares.
Investor Verification Checklist
- Same-Store Sales Trends: Verify the sustainability of the 3.2% same-restaurant sales decline in Q3 across key brands (Olive Garden, Red Lobster, LongHorn) amidst economic headwinds.
- Goodwill Sensitivity: Monitor stock price and market capitalization trends, as a sustained decline could trigger a material goodwill impairment charge, impacting leverage ratios.
- Commodity Costs: Assess the impact of rising food and beverage costs on future margins, given the 30.7% cost-to-sales ratio for the nine-month period.
- Credit Facility Availability: Confirm the status of the revolving credit facility and the impact of the Lehman Brothers default on future borrowing capacity.
- Legal Exposure: Track the status of the securities class action and wage/hour litigation for potential settlement costs or reputational impact.