Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Third quarter and first nine months of fiscal 2016, ended February 28, 2016. The filing period differs from the request metadata’s “2015 Q3.” Figures are unaudited; amounts are in U.S. dollars.
Business context and results
Darden operated Olive Garden, LongHorn Steakhouse, Fine Dining and Other Business brands, with 1,535 company-owned restaurants at quarter-end. The quarter’s results reflect the November 2015 spin-off of Four Corners Property Trust (FCPT), which received 418 restaurant properties and six LongHorn restaurants; Darden leases the properties back.
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Sales | $1,847.5m | $1,730.9m | $5,143.3m | $4,885.7m |
| Operating income | $221.2m | $170.4m | $437.1m | $217.1m |
| Operating margin | 12.0% | 9.8% | 8.5% | 4.4% |
| Continuing-operations earnings | $108.2m | $128.4m | $219.3m | $78.3m |
| Diluted continuing EPS | $0.84 | $1.01 | $1.69 | $0.60 |
| Net earnings | $105.8m | $133.8m | $235.4m | $604.2m |
| Operating cash flow, continuing operations | Not separately stated | Not separately stated | $597.2m | $556.0m |
| Capital expenditures | Not separately stated | Not separately stated | $172.8m | $230.1m |
Financial position and liquidity
- Cash and cash equivalents were $215.8m at February 28, 2016, down from $535.9m at May 31, 2015. Total assets were $4.50bn and stockholders’ equity was $1.92bn.
- Long-term debt, including current maturities, had a carrying value of $447.7m; fair value was $488.0m. Darden repaid approximately $1.01bn of principal during the first nine months and planned to retire the remaining $8m term-loan balance in Q4.
- Darden had no borrowings under its $750m revolving credit facility and reported compliance with its covenants. The company said operating cash generation and the facility should fund fiscal 2016 operating needs, capital spending, dividends and repurchases.
- Total contractual obligations were $5.04bn, including $3.03bn of operating leases. The FCPT spin-off and sale-leasebacks converted owned property into leased property, with triple-net leases generally carrying long initial terms and annual rent escalators.
Changes, drivers and unusual items
- Sales rose 6.7% in Q3 and 5.3% year to date. Darden reported combined same-restaurant sales growth of 6.2% for Q3 and 3.8% year to date on a fiscal basis; comparable-calendar growth was 4.2% and 3.6%, respectively. Sales growth also reflected seven net new company-owned restaurants versus the prior-year quarter.
- Q3 operating margin improved as operating costs declined to 88.0% of sales from 90.2%. Food-cost favorability, cost initiatives and sales leverage helped; wage inflation, higher manager compensation and rent from real-estate transactions were offsets. Restaurant expenses were 16.5% of sales versus 15.9%.
- Q3 net interest expense increased to $83.1m from $23.3m, largely because of $71.3m in debt-retirement costs. Nine-month debt-retirement costs were $106.8m, including $68.7m cash costs and $38.1m noncash charges. Management estimated the repayments would reduce annual interest expense by about $49m, excluding one-time costs.
- Reported Q3 diluted EPS from continuing operations was reduced by approximately $0.34 from debt-retirement costs and $0.03 from real-estate-plan implementation. Nine-month continuing EPS was $1.69 versus $0.60, but comparisons also reflect prior-year unusual items and differing debt-retirement costs.
- Discontinued operations included the Red Lobster sale. Nine-month discontinued earnings were $16.1m in FY2016 versus $525.9m in FY2015, which included a substantial sale gain. Q3 FY2016 discontinued operations recorded a $2.4m loss.
- Q3 segment profit margins improved at Olive Garden (21.6% vs. 21.0%), LongHorn (20.0% vs. 16.3%) and Fine Dining (23.2% vs. 22.3%). Other Business margin declined to 16.5% from 16.8%, primarily due to higher labor and marketing costs.
Outlook, risks and contingencies
- Fiscal 2016 outlook: combined same-restaurant sales growth of 3.0%–3.5%; approximately 18–22 new restaurants; and capital expenditures of $230m–$255m.
- Management identified risks including food safety, labor and commodity costs, competition, consumer demand, weather and natural disasters, regulation, cybersecurity, execution of growth plans, and possible goodwill or trademark impairment. It cautioned that quarterly results are seasonal and not necessarily indicative of full-year results.
- Management said pending ordinary-course lawsuits and claims were not expected, individually or collectively, to materially affect financial position, results or liquidity. Darden also disclosed $137.4m of guarantees for assigned leased properties and standby letters of credit; it reported no known nonperformance requiring payment under the guarantees.
- A $500m share-repurchase authorization was approved in December 2015. Darden repurchased 2.3m shares for $140.2m during the first nine months. Dividends declared were $1.60 per share year to date; a subsequent $0.50-per-share dividend was declared March 31, 2016.
Important facts for investors to verify
- Assess comparable-calendar same-restaurant sales alongside fiscal-basis growth, and monitor whether the 3.0%–3.5% full-year target is achieved.
- Reconcile reported earnings with the $106.8m debt-retirement charge and other real-estate-plan costs; test the expected $49m annual interest savings against later results.
- Evaluate the long-term rent and lease commitments created by the FCPT spin-off and sale-leasebacks, including the effect of annual rent escalators.
- Track cash generation, remaining debt, capital spending, dividends and repurchases against the company’s liquidity and covenant capacity.
- Review the continuing exposure from legal claims, assigned-lease guarantees, and potential impairment of goodwill or trademarks.