Darden Restaurants, Inc. — Q1 FY2022 Form 10-Q
Business context and reporting period. The unaudited quarter ended August 29, 2021. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, and The Capital Grille. It reported 1,841 company-owned restaurants, up from 1,807 a year earlier. Comparisons are against the prior-year quarter, when COVID-19 restrictions had substantially affected operations.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Sales | $2.306 billion | $1.527 billion |
| Same-restaurant sales growth | 47.5% | Not stated |
| Operating income | $280.8 million | $56.6 million |
| Operating margin | 12.2% | 3.7% |
| Continuing-operations earnings | $231.7 million | $37.3 million |
| Net earnings | $230.9 million | $36.1 million |
| Diluted EPS from continuing operations | $1.76 | $0.28 |
| Operating cash flow, continuing operations | $180.3 million | $206.7 million |
| Capital expenditures | $82.7 million | $42.2 million |
Food and beverage costs were 29.7% of sales, versus 28.4%; restaurant labor was 31.9%, versus 32.8%. Restaurant expenses fell to 16.4% from 19.0%, and general and administrative expenses to 4.9% from 8.4%. Management cited food inflation and labor inflation, partly offset by sales leverage and pricing.
At August 29, 2021, cash and cash equivalents were $947.8 million; current assets were $1.658 billion and current liabilities $1.715 billion. Long-term debt was $936.7 million. Lease liabilities totaled $4.911 billion, including $3.982 billion of non-current operating lease liabilities. The company reported no borrowings under its then-existing $750 million revolver and compliance with its covenants.
Material changes and cash flows
- Sales rose 51.0%, driven by 47.5% same-restaurant sales growth and 34 net new company-owned restaurants compared with the prior-year quarter. Growth reflected reopened dining rooms and higher guest counts; same-restaurant sales also benefited from average-check increases.
- Segment profit margins improved year over year: Olive Garden 23.2% (+110 basis points), LongHorn Steakhouse 19.0% (+390), Fine Dining 19.8% (+750), and Other Business 17.7% (+500).
- Operating cash flow declined despite higher earnings, primarily due to working-capital timing, including repayment of $99.8 million of employer payroll taxes deferred under the CARES Act.
- Investing cash use increased with higher restaurant construction and remodeling spending. Financing cash use included $143.5 million of dividends paid and $186.3 million of share repurchases; 1.3 million shares were repurchased during the quarter.
- Net cash, cash equivalents, and restricted cash decreased $215.4 million during the quarter to $999.3 million. This includes $51.5 million of restricted cash held as security for a standby letter of credit.
Outlook, risks, and unusual items
- Fiscal 2022 outlook: sales of $9.4–$9.6 billion, same-restaurant sales growth of 27%–30%, 35–40 net new restaurants, and capital expenditures of $375–$425 million.
- COVID-19 restrictions had largely eased, but the company said some locations faced mask or vaccine requirements. Team-member exclusions and quarantines could disrupt restaurant operations with little notice.
- Management cited food, labor, utility, and other cost pressures. Food inflation contributed to higher food costs as a percentage of sales; labor inflation and lower productivity partly offset labor-cost leverage from higher sales.
- The prior-year quarter included $47.0 million of corporate restructuring costs and a postretirement benefit-plan valuation adjustment. Management said the restructuring-related costs reduced prior-year diluted continuing-operations EPS by approximately $0.28.
- On September 10, 2021, Darden entered a new $1 billion unsecured revolving credit facility maturing September 10, 2026, replacing the $750 million facility. On September 22, the board authorized an additional $750 million share-repurchase program. A $1.10-per-share dividend was declared for payment November 1, 2021.
- Standby letters of credit were $105.0 million; guarantees on assigned leased properties had a maximum potential payment of $115.7 million. Darden said it did not expect pending ordinary-course litigation to have a material adverse effect. Unrecognized tax benefits of $34.9 million could change within 12 months.
- Key risks include the course of COVID-19, hiring and retention, inflation and supply interruptions, food safety, competition and consumer demand, leases, weather, litigation, and impairment of goodwill or other assets. The filing reported no material change in risk factors from the prior Form 10-K.
Investor verification points
- Compare actual same-restaurant sales, guest counts, and average checks with the full-year outlook; the prior-year comparison was affected by pandemic restrictions.
- Monitor food and labor inflation, staffing and productivity, and whether improved restaurant margins persist as sales normalize.
- Reconcile operating cash generation with capital spending, dividends, and repurchases; assess cash levels and restricted cash separately.
- Track debt and lease obligations against the new revolver’s lease-adjusted leverage covenant and investment-grade ratings.
- Review the effects of COVID-19-related operating restrictions, deferred-tax matters, lease guarantees, and other contingencies as they develop.