DARDEN RESTAURANTS INC quarterly report, Q2 FY2021

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

MetricThree months ended Nov. 29, 2020Six months ended Nov. 29, 2020
Sales$1,656.5 million, down 19.4%$3,183.9 million, down 24.0%
Same-restaurant salesDown 20.6% company-wideDown 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 operationsNot reported here for the quarter alone$428.6 million, versus $443.1 million
Capital expendituresNot 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.