Darden Restaurants, Inc. — Form 10-Q summary
Business and reporting period: Darden operates full-service restaurant brands in the U.S. and Canada, including Olive Garden, LongHorn Steakhouse and Ruth’s Chris Steak House. This unaudited report covers the second quarter and first six months of fiscal 2024, ended November 26, 2023; comparatives are the periods ended November 27, 2022. The quarter includes Ruth’s Chris results from its June 14, 2023 acquisition.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Sales | $2.727 billion, up 9.7% | $5.458 billion, up 10.6% |
| Operating income | $278.5 million; 10.2% margin versus 9.4% | $531.4 million; 9.7% margin, unchanged |
| Continuing-operations earnings | $212.3 million, up 13.2%; diluted EPS $1.76, up 15.8% | $407.1 million, up 6.8%; diluted EPS $3.35, up 8.4% |
| Net interest expense | $37.1 million, versus $19.8 million | $66.8 million, versus $39.6 million |
| Operating cash flow | Not presented separately for the quarter | $609.9 million, versus $635.6 million |
| Capital expenditures | Not presented separately for the quarter | $312.4 million, versus $280.3 million |
For the six months, food and beverage costs fell to 31.1% of sales from 32.7%, and labor costs to 32.2% from 32.5%; general and administrative costs rose to 4.9% from 3.6%. Management cited pricing and sales leverage as benefits, partly offset by inflation. Same-restaurant sales increased 2.8% for the quarter and 3.9% for the six months, excluding Ruth’s Chris, which is not yet eligible for the company’s 16-month comparison measure.
Liquidity, debt and capital allocation
At November 26, 2023, cash and cash equivalents were $195.7 million, current assets were $867.7 million and current liabilities were $2.382 billion. Debt comprised $350 million of commercial paper and $1.368 billion of long-term debt. The company had $899.5 million of availability under its $1.25 billion revolving facility after commercial paper and letters of credit; it reported compliance with facility covenants. Operating lease liabilities were $4.011 billion, separate from reported debt.
Six-month investing cash outflow was $1.023 billion, including $699.9 million for the Ruth’s Chris acquisition. Financing cash inflow was $216.7 million; the company paid $315.7 million in dividends and repurchased $323.9 million of shares. The October issuance of $500 million of 6.30% senior notes due 2033 helped repay the $600 million acquisition term loan.
Material changes, outlook and risks
Darden acquired all of Ruth’s Chris for $724.6 million and now includes the brand in its Fine Dining segment. The purchase-price allocation remains preliminary. Acquisition and integration expenses were $12.8 million for the quarter and $37.6 million for the six months, included across general and administrative expense, impairments and interest. Reported impairment and disposal expense was $7.5 million for the quarter and $10.6 million for the six months; the prior-year periods benefited from property-sale gains.
Fiscal 2024 outlook is sales of approximately $11.5 billion, same-restaurant sales growth of 2.5%–3.0%, approximately 50–55 new restaurant openings, and approximately $600 million of capital expenditures. Management noted seasonal sales patterns and cautioned that interim results may not indicate full-year results.
Risks highlighted include inflation and labor costs, staffing and retention, food safety and supply interruptions, competition and changes in consumer demand, technology and cybersecurity, weather and natural disasters, lease obligations, and successful integration of Ruth’s Chris. The company reported ordinary-course legal claims and believes their disposition will not materially adversely affect its financial position, results or liquidity. It also disclosed that sufficiently large asset impairments could threaten compliance with its leverage covenant; the estimated impairment threshold at quarter-end was approximately $530.9 million, subject to seasonal variation. No material risk-factor changes were reported.
Important facts for investors to verify
- Whether same-restaurant sales, especially guest counts at Fine Dining and other brands, support the full-year growth outlook.
- Ruth’s Chris integration performance, acquisition-related costs, and any final changes to the preliminary purchase-price allocation.
- Whether cost inflation, interest expense and higher G&A costs affect margins and earnings as the year progresses.
- Execution of the $600 million capital-spending and restaurant-opening plans, alongside dividends and share repurchases.
- Debt, commercial-paper use, available revolver capacity and covenant headroom, including the sensitivity to impairment charges.