Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 24, 2013; comparative periods ended February 26, 2012. Financial statements are unaudited. Darden operates full-service restaurant brands in the U.S. and Canada.
Financial performance
| Metric | Three months ended Feb. 24, 2013 | Year-over-year change | Nine months ended Feb. 24, 2013 | Year-over-year change |
|---|---|---|---|---|
| Sales | $2.258 billion | +4.6% | $6.253 billion | +5.4% |
| Earnings from continuing operations | $134.5 million | -18.0% | $279.3 million | -14.1% |
| Diluted EPS from continuing operations | $1.02 | -18.4% | $2.13 | -12.3% |
| Net earnings | $134.4 million | Down from $164.1 million | $278.8 million | Down from $324.3 million |
| Operating cash flow from continuing operations | Not separately provided | — | $690.0 million | Up from $550.5 million |
| Capital expenditures | Not separately provided | — | $518.5 million | Up from $483.4 million |
Margins and costs: Third-quarter net earnings from continuing operations were 6.0% of sales, versus 7.6% a year earlier; for nine months, 4.5% versus 5.5%. Total costs and expenses rose to 92.3% of sales in the quarter from 89.9%, and to 94.2% for nine months from 92.6%. Quarter cost pressure reflected higher labor, restaurant expenses, depreciation and food costs as a share of sales. Nine-month food costs as a share of sales improved slightly, but labor, restaurant expenses, SG&A, depreciation and interest weighed on results.
Balance sheet and liquidity: At February 24, cash was $103.9 million, current assets $853.4 million and current liabilities $1.535 billion. Short-term debt was $216.9 million and long-term debt, less current portion, was $2.502 billion; no current portion of long-term debt was reported. Darden had $533.1 million available under its $750 million revolving credit facility after commercial paper borrowings. It reported compliance with credit-facility covenants. The filing attributes increased debt mainly to acquisition funding and other financing activity.
Dividends and repurchases: Dividends declared were $0.50 per share in the quarter, versus $0.43 a year earlier. The Board declared another $0.50-per-share dividend for payment May 1, 2013. Nine-month dividends paid were $193.2 million; share repurchases were $52.4 million, compared with $357.0 million in the prior-year period.
Material changes and business drivers
- Sales growth was driven by 108 net new company-owned restaurants and the acquisition of 40 Yard House restaurants, partly offset by weaker same-restaurant sales at Olive Garden, Red Lobster and LongHorn Steakhouse.
- Blended U.S. same-restaurant sales for those three largest brands fell 4.6% in the quarter and 2.5% for nine months. In the quarter, Olive Garden declined 4.1%, Red Lobster 6.6% and LongHorn 1.6%.
- Yard House was acquired on August 29, 2012, for $585 million cash. Its 40 restaurants have been included from the acquisition date. Preliminary purchase accounting recorded $365.9 million of goodwill and a $109.3 million trademark. Acquisition and integration costs reduced diluted EPS by about $0.02 for the quarter and $0.08 for nine months.
- Quarter earnings were pressured by higher beef costs, unfavorable menu mix, wage inflation, employee insurance claims, reduced sales leverage and higher depreciation. Lower SG&A as a percentage of sales and a lower tax rate partly offset the pressure.
- Nine-month operating cash flow increased, primarily due to the timing of inventory purchases. Investing cash outflow rose to $1.119 billion, including $577.4 million for the Yard House acquisition. The company issued new debt and repaid $350 million of notes that matured during the period.
- Stockholders’ equity accounts changed substantially after Darden retired 159.3 million treasury shares and restored them to authorized but unissued shares. The retirement reduced common stock and surplus and retained earnings; it did not represent a comparable cash repurchase during the period.
Outlook, risks and contingencies
The filing discusses fiscal 2013 expectations for restaurant growth, same-restaurant sales, total sales, diluted EPS and capital expenditures, but the supplied filing text does not provide clear numerical guidance for those measures. Management stated that operating cash generation and the revolving credit facility should be sufficient to fund fiscal 2013 capital expenditures, dividends, repurchases and operations.
Key risks include weak consumer demand and same-store sales, food and labor cost inflation, competition, execution of the Yard House integration, added acquisition-related debt, supply interruptions, food safety, adverse publicity, litigation, regulation, weather, derivatives exposure and potential impairment of goodwill or trademarks. Management said a write-down exceeding approximately $700 million would have been needed at period-end to breach the credit agreement’s leverage limit, though a smaller impairment could have that effect in future quarters due to seasonality.
Darden reported ordinary-course lawsuits and claims, including matters involving guests, employees and trademarks, and said their resolution was not expected to materially adversely affect its financial position, results or liquidity. Standby letters of credit totaled $127.8 million, and guarantees on assigned leases totaled $4.5 million. Disclosure controls were assessed as effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether same-restaurant sales at Olive Garden, Red Lobster and LongHorn stabilize, and whether guest-count declines reverse.
- Whether cost inflation and weaker sales leverage continue to depress restaurant-level and consolidated margins.
- Yard House’s operating contribution, integration progress, final purchase-price allocation and ability to deliver expected synergies.
- Debt levels, interest expense, covenant headroom and capacity to maintain dividends and planned capital spending.
- Actual fiscal 2013 guidance and performance against expected restaurant growth, sales, EPS and capital expenditures, since clear numerical targets are not provided in this text.
- Potential impairment of goodwill and trademarks, and the status of litigation, guarantees and other contingencies.