Darden Restaurants, Inc. — Form 10-Q Summary
Business context and reporting period. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House and others. This unaudited filing covers the second quarter and first six months of fiscal 2019, ended November 25, 2018; comparisons are to the corresponding periods of fiscal 2018.
Financial performance
Amounts are in millions except per-share data. Growth rates are year over year.
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $1,973.4; +4.9% | $4,034.8; +5.7% |
| Operating income | $148.1; +14.9% | $337.2; +11.1% |
| Operating margin | 7.5%, versus 6.9% | 8.4%, versus 7.9% |
| Continuing-operations earnings | $115.9; +30.8% | $284.8; +35.7% |
| Net earnings | $115.6; +36.5% | $281.8; +38.3% |
| Diluted EPS from continuing operations | $0.92; +29.6% | $2.26; +36.1% |
- Combined same-restaurant sales rose 2.1% in the quarter and 2.7% for the six months. Sales growth also reflected 40 net new company-owned restaurants added since the year-earlier quarter.
- Food and beverage costs declined as a share of sales, but labor costs increased as a share of sales, primarily from wage inflation and workforce reinvestment. Operating-margin improvement also benefited from sales leverage and lower general and administrative costs.
- Olive Garden, LongHorn Steakhouse and Fine Dining segment margins improved. Other Business segment margin declined 110 basis points in both periods, principally due to negative same-restaurant sales, especially at Cheddar’s, workforce investments and the accounting presentation of franchisee inventory sales.
Cash flow, balance sheet and liquidity
- For the six months, continuing-operations operating cash flow was $433.9, versus $314.1 a year earlier. Purchases of property and equipment were $233.0, versus $197.7; operating cash flow less those purchases was $200.9.
- Cash and cash equivalents were $139.7 at November 25, 2018, compared with $146.9 at fiscal year-end. Current assets were $561.2 and current liabilities $1,385.3.
- Debt comprised $45.0 of short-term debt and $927.1 of long-term debt. Darden had no borrowings under its $750.0 revolving credit facility and reported compliance with its covenants. Management said cash generation and the facility should fund fiscal 2019 operating needs, capital spending, dividends and repurchases.
- Six-month financing included $186.0 of dividends paid and $92.3 of share repurchases. Dividends declared were $1.50 per share for the six months; a further $0.75-per-share dividend was declared December 12, payable February 1, 2019.
Changes, outlook and notable matters
- Fiscal 2019 outlook: sales growth of 5.0%–5.5%, including approximately 2.5% combined same-restaurant sales growth and 45–50 new restaurants; effective tax rate of 10.0%–11.0%; capital expenditures of $425–$475.
- The Tax Cuts and Jobs Act was the main reason for lower effective tax rates: 14.3% versus 21.9% for the quarter and 8.5% versus 23.1% for six months. Management estimated the lower tax rate increased continuing-operations diluted EPS by about $0.16 and $0.30, respectively.
- Impairments and disposal costs were $2.7 for the quarter and $2.8 for six months, primarily restaurant impairments related to underperforming locations. Discontinued-operations losses, mainly the run-off of Red Lobster-related retained obligations, were $0.3 for the quarter and $3.0 for six months.
- Management expects adoption of the new lease standard in fiscal 2020 to materially increase reported assets and liabilities, but does not expect a material impact on earnings. The filing identifies labor and commodity costs, competition, food safety, staffing, weather, litigation, cybersecurity and impairment of goodwill or trademarks among key risks.
- Ordinary-course lawsuits and claims were disclosed; management did not expect their resolution to materially adversely affect financial position, results or liquidity. Lease-assignment guarantees had a maximum potential payment of $155.3; no liability was recorded because default was considered remote.
Important facts for investors to verify
- Whether same-restaurant sales and guest counts sustain the outlook: quarter guest counts fell 0.8% at Olive Garden and 0.1% at LongHorn, while Cheddar’s, Yard House, Bahama Breeze and Seasons 52 reported negative quarterly same-restaurant sales.
- Whether labor inflation and workforce investments can be offset by pricing, productivity and sales growth, particularly in Other Business.
- How earnings and cash generation perform as the unusually low fiscal 2019 tax rate normalizes, and whether management delivers its sales, restaurant-opening and capital-spending targets.
- Debt, lease-standard adoption and the potential effects of restaurant or goodwill impairment on leverage and covenant headroom; management said an impairment exceeding approximately $1.14 billion at the reporting date would have caused the leverage ratio to exceed the credit-agreement limit.