Darden Restaurants, Inc. — Form 10-Q Summary
Business and period. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse and The Capital Grille. This filing covers the second quarter and first six months of fiscal 2021, ended November 29, 2020; comparisons are with periods ended November 24, 2019. COVID-19 and related restrictions materially affected restaurant traffic and dining-room operations.
Financial results
| Metric | Three months ended Nov. 29, 2020 | Six months ended Nov. 29, 2020 |
|---|---|---|
| Sales | $1,656.5 million, down 19.4% | $3,183.9 million, down 24.0% |
| Same-restaurant sales | Down 20.6% company-wide | Down 24.9% company-wide |
| Operating income / margin | $120.7 million / 7.3% (prior-year margin 7.8%) | $177.3 million / 5.6% (prior-year margin 8.6%) |
| Continuing-operations earnings | $96.9 million; diluted EPS $0.74 | $134.2 million; diluted EPS $1.02 |
| Net earnings | $96.0 million; diluted EPS $0.73 | $132.1 million; diluted EPS $1.01 |
| Operating cash flow from continuing operations | Not reported here for the quarter alone | $428.6 million, versus $443.1 million |
| Capital expenditures | Not reported here for the quarter alone | $108.2 million, versus $256.5 million |
For the quarter, food and beverage costs were 28.7% of sales, restaurant labor 32.3%, restaurant expenses 20.0%, marketing 1.1%, and general and administrative expenses 5.4%. For the six months, operating costs were 94.4% of sales, compared with 91.4% a year earlier. Sales deleverage raised several expense ratios, while productivity and reduced marketing spending provided offsets.
Liquidity, debt and balance sheet
- At November 29, cash and cash equivalents were $777.3 million; current assets were $1.11 billion and current liabilities were $1.55 billion.
- Long-term debt was $929.4 million, with no short-term debt outstanding. Darden repaid its $270 million 364-day term loan during the first six months. It also had no borrowings under its $750 million revolving credit facility and reported compliance with its covenants.
- Operating lease liabilities were $4.22 billion non-current, plus $178.1 million current; finance lease liabilities totaled approximately $438.1 million. These lease obligations are significant relative to reported debt.
- Financing cash outflows included $270.0 million of term-loan repayment and $39.1 million of dividends paid. Share repurchases were $6.8 million for the six-month period; the company said repurchases were limited to shares associated with employee equity plans and tax withholding.
Changes, outlook and risks
- COVID-19: Same-restaurant sales declines were driven principally by lower guest counts. As of the filing, 84% of restaurants could open dining rooms to some extent, but capacity limits and closures varied by jurisdiction. Management expected near-term uncertainty and cautioned that further outbreaks or restrictions could reduce capacity or suspend dine-in service.
- Segment trends: Second-quarter same-restaurant sales fell 19.9% at Olive Garden, 11.1% at LongHorn, 31.0% in Fine Dining and 28.6% in Other Business. Olive Garden’s and Other Business’s segment margins improved year over year, while Fine Dining’s declined.
- Restructuring: A corporate and workforce restructuring generated $47.8 million of costs in the first six months, including cash and non-cash components. Management said the charges reduced first-half diluted continuing-operations EPS by approximately $0.28; remaining accrued costs were expected to be paid by the second quarter of fiscal 2022.
- Comparability: Prior-year results included a $147.1 million pension settlement charge; management said it reduced prior-year first-half diluted EPS by approximately $0.90. This helps explain why second-quarter continuing-operations earnings increased despite lower sales.
- Outlook: Management expected third-quarter fiscal 2021 sales to be approximately 65%–70% of third-quarter fiscal 2020 sales, 35–40 net new restaurants for the full year, and fiscal-year capital expenditures of $250–$300 million.
- Other matters: Darden reported ordinary-course lawsuits and claims, but did not expect their disposition, individually or collectively, to materially adversely affect its financial position, results or liquidity. Maximum potential payments under assigned-lease guarantees were $125.6 million; management considered third-party defaults remote. COVID-19, labor and supply availability, consumer demand, restrictions, and vaccine effectiveness and distribution remain important uncertainties.
Important facts for investors to verify
- Whether dining-room restrictions, guest traffic and same-restaurant sales recover in line with the stated third-quarter sales outlook.
- Whether the company achieves its full-year restaurant-opening and capital-expenditure plans while preserving cash and liquidity.
- How much of reported earnings and segment-margin performance reflects temporary cost reductions, restructuring, sales deleverage and other unusual items.
- Whether the $47.8 million restructuring costs and remaining liability are complete, and whether additional COVID-related costs or liquidity needs arise.
- The scale and terms of lease obligations and assigned-lease guarantees, alongside debt and the company’s continued compliance with credit-facility covenants.