Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2017, ended November 27, 2016; comparable periods ended November 29, 2015. Amounts are in U.S. dollars. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, and Yard House.
Financial results
| Metric | Three months | Six months |
|---|---|---|
| Sales | $1,642.5 million, up 2.1% | $3,356.9 million, up 1.9% |
| Same-restaurant sales | Combined Darden up 1.7% | Combined Darden up 1.5% |
| Operating income / margin | $116.5 million / 7.1%, versus $81.7 million / 5.1% | $277.8 million / 8.3%, versus $215.9 million / 6.6% |
| Continuing-operations earnings | $79.7 million; diluted EPS $0.64 | $190.8 million; diluted EPS $1.52 |
| Net earnings | $79.5 million; diluted EPS $0.64 | $189.7 million; diluted EPS $1.51 |
| Operating cash flow from continuing operations | Not presented for the quarter | $294.3 million, versus $190.6 million |
For the six months, capital expenditures were $135.3 million, compared with $122.2 million. Cash and cash equivalents were $116.8 million at November 27, down from $274.8 million at fiscal year-end. Long-term debt was $440.5 million; no balance was outstanding under the $750 million revolving credit facility. Current assets were $683.4 million and current liabilities $1,151.3 million. Management says the cash-generative restaurant model permits current liabilities to exceed current assets.
Dividends declared were $0.56 per share for the quarter and $1.12 for the six months. The company repurchased 3.5 million shares for $214.7 million during the six months; $485.3 million remained available under a new $500 million authorization.
Changes and drivers versus prior periods
- Sales growth reflected combined same-restaurant sales growth and seven net additional company-owned restaurants versus the prior-year second quarter.
- Operating income and continuing-operations earnings increased, but comparisons benefited from prior-year costs: fiscal 2016 results included approximately $35.6 million of debt-retirement costs and real estate-plan implementation costs. Lower interest expense also reflected lower average debt balances. Accordingly, the reported earnings growth is not solely a measure of underlying operating improvement.
- Restaurant expenses rose to 18.6% of sales for the quarter from 17.3%, primarily due to higher rent following real estate transactions. Labor costs also increased as a percentage of sales, largely from wage inflation. Food costs fell as a percentage of sales, aided by pricing, cost savings, and beef deflation.
- Six-month discontinued operations recorded a $1.1 million loss, versus $18.5 million of earnings in the prior-year period, which included $17.4 million of pretax gains related to the Red Lobster sale.
- Six-month cash from operations increased to $294.3 million. Investing cash flow was a $140.7 million use, while financing cash flow was a $301.2 million use, chiefly reflecting dividends and share repurchases. Prior-year investing cash flow included substantial sale-leaseback proceeds, and prior-year financing included a $315 million special cash distribution from Four Corners Property Trust.
Outlook, commentary, and risks
For fiscal 2017, management expects combined same-restaurant sales growth of 1.0%–2.0%, continuing-operations sales growth of 1.7%–2.7%, approximately 24–28 new restaurant openings, and capital expenditures of $310–$350 million. Management believes operating cash generation and the revolving credit facility will fund fiscal 2017 capital spending, dividends, repurchases, and operations.
Brand results were mixed: Olive Garden same-restaurant sales rose 2.6% in the quarter, while LongHorn was up 0.1%; Seasons 52 was down 0.3%. Management cited higher rents from real estate transactions, wage-rate inflation, and restaurant-level cost pressures, partly offset by food-cost deflation and cost initiatives. Results are seasonal and a quarter is not necessarily indicative of the full year.
Risks identified include food safety, labor and commodity costs, competition, leases, adverse weather, cyber and technology disruptions, litigation, and possible impairment of goodwill or trademarks. The company reported compliance with credit-facility covenants and no material change in its previously disclosed risk factors. It states that ordinary-course legal matters are not expected, individually or collectively, to materially affect financial position, results, or liquidity. Guarantees for assigned leases had a maximum potential payment of $159.9 million; management considered third-party default remote and recorded no liability. Standby letters of credit totaled $136.4 million. A goodwill or other asset write-down exceeding approximately $1.01 billion would have been required at quarter-end to breach the credit agreement’s leverage limit, though management cautioned that seasonality could change the threshold.
A $0.56-per-share dividend was declared December 14, 2016, payable February 1, 2017. Management cautions that forward-looking statements are subject to risks and undertakes no obligation to update them.
Investor verification points
- Assess whether same-restaurant sales and guest-count trends support the fiscal 2017 outlook, particularly at LongHorn and Seasons 52.
- Separate recurring operating performance from prior-year debt-retirement and real estate-plan costs, as well as prior-year Red Lobster-related discontinued-operation gains.
- Monitor rent and wage inflation, food-cost assumptions, and the impact of real estate transactions on restaurant margins.
- Review the pace and funding of share repurchases, dividends, and planned capital expenditures against cash generation and the company’s liquidity position.
- Evaluate lease commitments and guarantees, covenant headroom, and potential goodwill or trademark impairment exposure.