Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: The filing covers the fiscal third quarter and first nine months ended February 22, 2015, compared with the periods ended February 23, 2014. Although the request metadata says “2014 Q3,” the filing reports fiscal 2015 Q3. Results are unaudited. Red Lobster is presented as discontinued operations.
Financial performance
- Sales: Continuing-operations sales were $1.731 billion in Q3, up 6.9%, and $4.886 billion for nine months, up 5.4%. Management attributed growth to 46 net new restaurants and same-restaurant sales growth of 3.6% for Q3 and 1.8% year to date.
- Profit: Q3 continuing-operations earnings were $128.4 million, or $1.01 diluted EPS, versus $86.6 million, or $0.65, a year earlier. Nine-month continuing earnings fell to $78.3 million, or $0.60 diluted EPS, from $134.9 million, or $1.02. Net earnings, including discontinued operations, were $133.8 million in Q3 and $604.2 million year to date.
- Margins: Continuing-operations earnings before tax were 8.5% of sales in Q3 versus 5.5% a year earlier, and 1.0% for nine months versus 3.0%. Q3 cost of sales improved to 77.5% of sales from 78.2%; food and beverage costs rose as a share of sales, while labor and restaurant expenses improved. Year-to-date food costs rose as a share of sales and total costs and expenses increased to 99.0% of sales from 97.0%.
- Cash flow: Nine-month operating cash flow from continuing operations was $556.0 million, versus $506.4 million. Continuing-operations investing cash use was $208.8 million, including $230.1 million of capital expenditures. Continuing-operations financing cash use was $1.777 billion, reflecting debt retirement, share repurchases and dividends. Cash ended the period at $436.2 million, up from $98.3 million at fiscal year-end; discontinued operations contributed $1.767 billion of net cash, largely from the Red Lobster sale.
- Debt and liquidity: Long-term debt, including its current portion, was about $1.477 billion at February 22, compared with $2.496 billion at May 25, 2014; short-term debt was zero. The company had no borrowings under its $750 million revolving credit facility and reported compliance with its covenants. Current assets were $981.9 million and current liabilities were $1.351 billion.
- Capital returns: The company repurchased $502.3 million of stock during the nine months and paid $209.3 million in dividends. Dividends declared were $0.55 per share in Q3 and $1.65 year to date.
Material changes and unusual items
- Darden sold 705 Red Lobster restaurants on July 28, 2014. It had received $2.08 billion of cash proceeds, net of transaction costs, and recorded an $825.9 million pretax gain. The gain drove much of the increase in nine-month net earnings; it should not be treated as recurring operating profit. Seventeen properties remained subject to landlord consents and other requirements, with related gain recognition deferred.
- The company retired approximately $1.01 billion of long-term debt and recorded $91.3 million of debt-retirement costs, including $44.0 million cash costs and $47.3 million noncash charges. Management estimated the retirements would reduce annual interest expense by about $49 million, excluding those one-time costs.
- Nine-month continuing results included $51.0 million of asset impairment charges, $28.1 million of workforce-reduction costs, and $12.6 million of advisory, legal and other professional fees related to shareholder activism and the proxy contest. Management estimated these and other identified items reduced nine-month diluted EPS by approximately $0.94 in total.
- The nine-month effective tax rate was negative 60.5%, reflecting tax credits and discrete effects against reduced pretax earnings. Management said the rate would have been approximately 19.5% excluding specified charges, related tax benefits and other discrete items.
- Q3 brand same-restaurant sales were strongest at Eddie V’s (9.6%), The Capital Grille (6.1%), LongHorn Steakhouse and Yard House (5.4% each). Olive Garden rose 2.2%, with average check growth partly offset by lower guest counts.
Outlook, risks and contingencies
- Fiscal 2015 guidance: same-restaurant sales growth of 0.5%–1.0% at Olive Garden, 3.5%–4.0% at LongHorn Steakhouse, and approximately 3.0%–3.5% combined for The Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s and Yard House. Continuing-operations sales were expected to increase 7%–8%, including the 53rd week.
- Management expected food and beverage costs to rise as a percentage of sales, labor costs to fall, SG&A to fall despite Red Lobster separation costs, and restaurant expenses and depreciation to remain relatively flat as a percentage of sales. It expected about 34 net new restaurants and approximately $300 million in fiscal 2015 capital expenditures. No numeric EPS forecast is stated in the supplied filing text.
- Darden was evaluating real-estate monetization, including 31 properties listed for potential sale-leasebacks and a review of options for its headquarters. Management anticipated using proceeds to repay debt.
- Risks include food and labor cost pressures, competition and sales execution, food safety, employment-practices litigation, adverse publicity, technology and cybersecurity, weather, and potential impairment of goodwill or other assets. The company reported wage-and-hour cases, including Alequin and ChHab; it said possible losses could not be estimated at this stage and believed the matters would not materially affect its financial position, results or liquidity.
- The filing reported $143.3 million of guarantees associated with leased properties assigned to third parties; management considered default remote and recorded no liability. A $30.0 million balance of unrecognized tax benefits could change within twelve months.
Important facts for investors to verify
- Whether continuing-operations sales and same-restaurant sales guidance are achieved, particularly given food inflation and Olive Garden guest-count trends.
- How much reported earnings and cash generation depend on the Red Lobster sale, and whether the remaining property consents and deferred gain are resolved as expected.
- Whether debt reduction delivers the projected annual interest savings, and how real-estate monetization affects debt, lease commitments and liquidity.
- Whether impairment, workforce-reduction and shareholder-activism costs recur or materially change reported results.
- Developments in the wage-and-hour litigation, leased-property guarantees and tax exposures, for which outcomes or potential losses were not fully determinable.