Darden Restaurants, Inc. — Q2 FY2011 Form 10-Q
Reporting period: Quarter and six months ended November 28, 2010; comparisons are with the periods ended November 29, 2009. Darden operates full-service restaurant brands including Olive Garden, Red Lobster and LongHorn Steakhouse. Financial amounts below are in millions except per-share data.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Sales | $1,726.2; up 5.2% | $3,532.9; up 4.7% |
| Earnings from continuing operations | $75.8 vs. $61.2; up 23.9% | $189.0 vs. $156.1; up 21.1% |
| Diluted EPS from continuing operations | $0.54 vs. $0.43; up 25.6% | $1.34 vs. $1.10; up 21.8% |
| Net earnings, including discontinued operations | $74.5 vs. $60.3 | $187.6 vs. $154.6 |
| Net interest expense | $23.5 vs. $24.5 | $48.1 vs. $48.3 |
Quarterly earnings before tax were $103.2, or 6.0% of sales, versus $80.7, or 4.9%; continuing-operations earnings were 4.4% of sales versus 3.7%. Total costs and expenses fell to 94.0% of sales from 95.1%. Labor improved to 33.1% of sales from 34.3%, while restaurant expenses rose to 15.9% from 15.7%; food and beverage costs remained 28.7%. For six months, total costs were 92.6% of sales versus 93.8%, with lower food and labor costs as a share of sales partly offset by higher restaurant expenses.
Management attributed earnings growth mainly to higher sales and lower labor costs as a percentage of sales; six-month results also benefited from lower food costs as a percentage of sales. A higher effective tax rate partly offset these gains: 26.6% for the quarter and 27.9% for six months, compared with 24.2% and 26.0%, respectively.
Cash flow, debt and liquidity
- Six-month operating cash flow from continuing operations was $282.1, down from $310.5. Management cited inventory-purchase timing, product demand and higher tax payments, partly offset by increased earnings.
- Capital expenditures were $276.2 versus $214.4, principally for new restaurants, remodels, equipment and technology. Investing cash use was $275.9.
- Financing cash use was $203.6, including $170.7 of treasury-stock purchases, $88.3 of dividends paid and $150.8 of long-term debt repayment, partly offset by $168.0 of short-term borrowing. Cash declined to $52.9 from $248.8 at fiscal year-end.
- At November 28, short-term debt was $168.0, current long-term debt $75.0 and long-term debt $1,408.8. The company had no direct revolver borrowings; $168.0 of commercial paper and $68.2 of letters of credit were supported by its $750.0 revolving facility. Available credit was $513.8, and the company reported covenant compliance.
- Current assets were $563.0 and current liabilities $1,255.4. The company said operating cash generation and its revolving facility should fund fiscal 2011 capital expenditures, dividends, repurchases and operations.
Business trends, outlook and risks
- Blended same-restaurant sales for Olive Garden, Red Lobster and LongHorn rose 1.4% in the quarter and 1.2% for six months; 63 net restaurants were added since the prior-year quarter. Quarter same-restaurant sales varied by brand: Olive Garden +2.0%, Red Lobster −1.6%, and LongHorn +6.8%.
- Management’s forward-looking statements identify fiscal 2011 expectations for restaurant growth, same-restaurant sales, total sales growth, diluted EPS growth and capital expenditures, but the supplied filing text does not provide clear numerical targets. Management expected to issue unsecured debt after the April 2011 notes mature, effectively refinancing those notes and the notes repaid in August 2010.
- The board raised the quarterly dividend to $0.32 per share (annualized $1.28) and, after quarter-end, authorized an additional 25 million share repurchases. The company repurchased 4.0 million shares for $170.7 during the six months.
- Unusual items included $2.9 of asset impairment charges for six months ($2.2 on assets held for disposal and $0.9 on assets held and used, with allocations between continuing and discontinued operations). The company also accrued $1.4 for potential defaults on assigned-lease guarantees.
- Key disclosed risks include food safety, labor and insurance costs, competition, commodity and energy prices, economic conditions, restaurant expansion and brand viability, substantial indebtedness, derivative market exposure, litigation, technology/security failures and possible impairment of goodwill or other intangible assets. Management said pending ordinary-course legal matters were not expected to have a material adverse effect. It also cautioned that quarterly results are affected by seasonality and are not necessarily indicative of full-year results.
Most important facts for investors to verify
- Whether positive same-store sales and earnings growth persist, especially given Red Lobster’s declining comparable sales and guest counts.
- Whether restaurant labor and food-cost improvements continue to offset rising restaurant expenses, pre-opening costs and credit-card fees.
- How increased capital spending, dividends and buybacks affect cash balances, short-term borrowing and leverage.
- Terms and cost of refinancing the 2011 maturities, and continued access to commercial paper and revolver capacity.
- Any subsequent changes to fiscal 2011 numerical guidance, which is not clearly quantified in the supplied filing text.
- Potential outcomes of impairment tests, assigned-lease guarantees, litigation and other contingencies.