Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended February 24, 2019; comparisons are to the periods ended February 25, 2018, unless stated otherwise. The filing is unaudited. Darden operates full-service dining brands in the U.S. and Canada, with 1,772 company-owned restaurants at quarter-end.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Sales | $2,246.5 million | $2,128.4 million | $6,281.3 million | $5,946.0 million |
| Operating income | $265.5 million | $233.4 million | $602.7 million | $536.8 million |
| Continuing-operations earnings | $225.1 million | $218.5 million | $509.9 million | $428.4 million |
| Net earnings | $223.6 million | $217.8 million | $505.4 million | $421.5 million |
| Diluted EPS, continuing operations | $1.80 | $1.74 | $4.06 | $3.40 |
| Diluted net EPS | $1.79 | $1.73 | $4.02 | $3.34 |
- Sales increased 5.5% for the quarter and 5.6% year to date. Combined same-restaurant sales rose 2.8% in both periods; sales also benefited from 39 net new company-owned restaurants since Q3 FY2018.
- Operating margin improved to 11.8% from 11.0% for the quarter and to 9.6% from 9.0% year to date. Continuing-operations earnings margin was 10.0% versus 10.3% in the quarter and 8.1% versus 7.2% year to date.
- Quarterly food and beverage costs were 28.4% of sales (28.3% prior year); labor was 31.7% (32.1%). Year-to-date labor rose to 32.7% from 32.5%, with inflation and workforce reinvestment partly offset by pricing, sales leverage and productivity.
- Net interest expense was $12.4 million for the quarter and $38.3 million year to date, compared with $117.4 million and $147.9 million. The prior-year periods included $102.2 million of debt-retirement costs.
- Operating cash flow from continuing operations was $920.0 million for nine months, versus $751.0 million. Capital expenditures were $346.9 million versus $294.9 million; operating cash flow less capital expenditures was approximately $573.1 million versus $456.1 million.
- Cash was $302.9 million at February 24, 2019, compared with $146.9 million at May 27, 2018. Long-term debt was $927.4 million, compared with $926.5 million. Darden had no balance outstanding on its $750 million revolving credit facility and reported compliance with its covenants.
- Current liabilities exceeded current assets: $1,442.9 million versus $687.2 million. Management attributes the increase in current liabilities primarily to gift-card sales exceeding redemptions; the company says operating cash generation and its revolver are expected to fund ongoing needs through fiscal 2019.
Material changes and business drivers
- Olive Garden and LongHorn Steakhouse delivered positive same-restaurant sales: 4.3% and 3.8%, respectively, in the quarter. Olive Garden’s increase reflected a higher average check and slightly higher guest counts.
- Same-restaurant sales were negative at Cheddar’s Scratch Kitchen, Yard House, Bahama Breeze and Seasons 52; Fine Dining brands The Capital Grille and Eddie V’s reported increases. Other Business segment margin declined, which Darden attributed to negative comparable sales, workforce investment and the presentation effect of newly recognized franchisee inventory sales.
- Nine-month dividends paid were $278.4 million and share repurchases were $166.0 million. Dividends declared were $2.25 per share year to date. The board subsequently declared a $0.75-per-share dividend, payable May 1, 2019.
Outlook, risks and unusual items
- For fiscal 2019, management expects sales growth of approximately 5.5%, combined U.S. same-restaurant sales growth of 2.5% to 2.7%, and approximately 45 to 50 new restaurants. Expected capital expenditures are $425 million to $475 million and the expected annual effective tax rate is approximately 10%.
- Fiscal 2019 diluted EPS or profit guidance is not provided in the filing text.
- The prior-year comparison includes a $77.3 million one-time deferred-tax revaluation benefit under the Tax Cuts and Jobs Act. The company says the lower federal corporate tax rate also benefited fiscal 2019 diluted continuing-operations EPS by approximately $0.07 for the quarter and $0.37 year to date.
- Impairments and disposal of assets were a net expense of $1.6 million for the quarter and $4.4 million year to date, primarily reflecting underperforming restaurants; disposal gains were primarily from excess land sales. Excess land classified as held for sale at May 27, 2018 was sold during the quarter.
- Management identifies risks including food safety, labor availability and costs, commodity and utility inflation, competition, leases, weather and disasters, cybersecurity, regulation, litigation, and potential goodwill or trademark impairment. It reports that ordinary-course legal matters are not expected to have a material adverse effect and that there were no material changes to the prior annual report’s risk factors.
- Darden expects adoption of the new lease accounting standard in fiscal 2020 to materially affect balance-sheet presentation through operating-lease assets and liabilities, but does not expect a material impact on earnings.
- The company disclosed $75.9 million of standby letters of credit, $20.9 million of surety bonds and $145.3 million of maximum potential guarantees on assigned leases. It recorded no liability for those lease guarantees, assessing third-party default as remote.
Important facts for investors to verify
- Whether comparable-sales momentum and the forecast of 45–50 new restaurants are achieved, particularly given weak comparable sales at several Other Business brands.
- How labor, food and other operating-cost inflation affects margins, and whether pricing and productivity continue to offset those pressures.
- Whether the fiscal 2019 tax-rate and capital-spending outlook remains on track, and how reported earnings compare after accounting for the prior-year tax benefit and debt-retirement charge.
- Cash generation relative to capital expenditures, dividends and share repurchases, alongside liquidity and compliance with credit-facility covenants.
- The effects of lease-standard adoption, restaurant impairments, and any changes in litigation, lease guarantees or other contingencies.