Darden Restaurants, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 30, 2021 (52 weeks), compared with fiscal 2020 ended May 31, 2020 (53 weeks). Although the request metadata says “2020 Q4,” this filing reports fiscal 2021 annual results, not a standalone quarterly report.
Business context
Darden operated 1,834 company-owned restaurants in the U.S. and Canada across eight brands, including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen and The Capital Grille. It also had 57 franchised restaurants. The company attributed substantial operating disruption during the year to COVID-19 restrictions and changes in guest behavior; by the report date, nearly all U.S. restrictions had eased.
Financial and operating performance
- Sales: $7.196 billion, down 7.8% from $7.807 billion. The decline reflected negative combined same-restaurant sales of 7.8% and one fewer operating week, partly offset by 30 net new company-owned restaurants.
- Profit: Operating income was $648.7 million, or 9.0% of sales, versus $47.9 million, or 0.6%, in fiscal 2020. Continuing-operations earnings were $632.4 million ($4.80 diluted EPS), compared with a $49.2 million loss ($0.40 diluted loss per share). Net earnings were $629.3 million ($4.77 diluted EPS), versus a $52.4 million net loss.
- Margins and costs: Food and beverage costs were 28.8% of sales versus 28.7%; restaurant labor was 31.8% versus 34.4%; restaurant expenses were 18.7% versus 18.9%; and marketing was 1.3% versus 3.0%. Management cited labor productivity and lower marketing as key margin supports, while food inflation and investments in food quality raised food costs as a share of sales.
- Brand trends: LongHorn same-restaurant sales rose 5.5%, while Olive Garden fell 9.9%, Fine Dining fell 19.2%, and Other Business fell 13.5%. Guest-count declines drove the weaker segments; average checks increased across the reported segments.
- Cash flow and capital spending: Operating cash flow from continuing operations was $1.194 billion, up from $717.4 million. Capital expenditures were $254.9 million, down from $459.9 million. Investing cash use was $263.7 million; financing cash use was $478.9 million.
- Liquidity: Cash and cash equivalents were $1.215 billion, compared with $763.3 million. Current assets were $1.871 billion and current liabilities $1.848 billion. The company reported no borrowings on its $750 million revolving credit facility at year-end and said it complied with its covenants.
- Debt and leases: Long-term debt was $939.1 million before unamortized discount and issuance costs; the $270 million 364-day term loan was repaid during fiscal 2021. The reported debt-to-total-capital ratio was 25%; adjusted debt-to-adjusted-capital was 55%, including lease-debt equivalents and guarantees. Lease liabilities were substantial, with total future lease commitments reported at $7.018 billion before imputed interest.
- Capital returns: Fiscal 2021 dividends paid were $202.6 million and share repurchases were $45.4 million. The board declared a subsequent dividend of $1.10 per share, payable August 2, 2021.
Material changes and unusual items
- Fiscal 2021 earnings benefited from comparison with the severe COVID-19 impact in fiscal 2020, when the company recorded approximately $390 million of goodwill and other impairment charges and a $145.5 million pension settlement charge.
- Fiscal 2021 included a $55.9 million income tax benefit despite pre-tax earnings of $576.5 million. The company cited a tax net operating loss carried back to earlier years and other tax-related items; it estimated the tax benefit increased diluted continuing-operations EPS by $0.76.
- A corporate restructuring undertaken in the first quarter generated $47.0 million of employee termination and other costs. The company said $15.5 million remained accrued at year-end, expected to be paid by the fourth quarter of fiscal 2022.
- Fiscal 2021 results also included $6.6 million of impairments and disposal costs, compared with $221.0 million in fiscal 2020; no goodwill impairment was recorded in fiscal 2021.
Outlook, commentary and risks
For fiscal 2022, management expected continuing-operations sales growth of 28%–32%, same-restaurant sales growth of 25%–29%, and approximately 35–40 new restaurants. It projected an effective tax rate of 13%–14% and capital expenditures of $375–$425 million. These are forward-looking estimates, not guarantees.
Management said it intended to preserve operating efficiencies developed during the pandemic while restoring dining-room capacity and investing in team members, technology and guest experience. It announced a minimum hourly wage of $10 beginning in March 2021, rising to $11 in January 2022 and $12 in January 2023.
Key risks include renewed COVID-19 outbreaks or restrictions; labor availability, turnover and wage inflation; food and commodity costs and supply disruptions; intense competition and changing dining preferences; food safety; cybersecurity, privacy and technology disruptions; regulatory changes; and long-term lease obligations. The company disclosed $121.5 million of guarantees associated with assigned leases and stated that ordinary-course litigation was not expected to have a material adverse effect. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether the fiscal 2022 sales and same-restaurant sales outlook was achieved, and how much growth reflected reopening comparisons versus underlying demand.
- Whether reported earnings and cash generation remain robust excluding the unusual tax benefit and considering the prior-year impairment and pension charges.
- Whether labor, food inflation and staffing pressures affect restaurant margins, prices and service levels.
- How lease obligations, debt maturities and the $750 million revolving facility affect liquidity and leverage, including the company’s adjusted leverage measure.
- Whether the announced wage increases, restaurant openings and planned capital spending affect costs and returns as expected.