Darden Restaurants, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 27, 2018 (52 weeks), compared with fiscal 2017 ended May 28, 2017 (52 weeks). This is an annual filing; the filing also reports fourth-quarter results.
Business context
Darden operated 1,746 company-owned restaurants in the U.S. and Canada across eight brands, with 71 additional franchised restaurants. It served nearly 390 million meals in fiscal 2018. Cheddar’s Scratch Kitchen, acquired in April 2017, was included in results from the acquisition date; Darden acquired 11 additional Cheddar’s franchised locations in August 2017.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Sales | $8,080.1 million | $7,170.2 million |
| Operating income | $766.8 million | $677.5 million |
| Operating margin | 9.5% | 9.4% |
| Continuing-operations earnings | $603.8 million | $482.5 million |
| Diluted EPS, continuing operations | $4.79 | $3.83 |
| Net cash from continuing operations | $1,019.8 million | $916.3 million |
| Capital expenditures | $396.0 million | $293.0 million |
- Sales rose 12.7%, driven principally by Cheddar’s acquisition, 2.3% combined same-restaurant sales growth excluding Cheddar’s, and net new restaurants. Darden added 40 net new company-owned locations, excluding the acquired restaurants.
- Same-restaurant sales increased at Olive Garden (2.4%), LongHorn Steakhouse (2.7%), Yard House (1.1%), The Capital Grille (2.8%), Bahama Breeze (1.1%) and Eddie V’s (4.1%); Seasons 52 declined 0.6%. Cheddar’s same-restaurant sales declined 2.0%.
- Food and beverage costs declined to 28.5% of sales from 28.9%; restaurant labor rose to 32.4% from 31.6%, reflecting wage inflation, Cheddar’s cost mix and workforce investments. Segment margins increased at Olive Garden, LongHorn and Fine Dining; Other Business fell to 14.8% from 16.9%, mainly due to Cheddar’s margin mix.
- Cash and cash equivalents were $146.9 million, down from $233.1 million. Current assets of $553.6 million were below current liabilities of $1,384.5 million, a working-capital deficit of $830.9 million. Management said operating cash generation and available financing were expected to cover fiscal 2019 needs.
- Long-term debt, net of discount and issuance costs, was $926.5 million; total debt including capital leases was $1,019.6 million. Darden had no borrowings under its $750 million revolving credit facility and reported covenant compliance. Adjusted debt to adjusted total capital, including lease equivalents and guarantees, was 60% versus 59%.
Material changes and unusual items
- Continuing-operations earnings increased 25.1%, but included a $79.3 million one-time tax benefit from remeasuring deferred taxes after the Tax Cuts and Jobs Act. The effective tax rate was 0.3%, compared with 24.3% in FY2017; management estimated the tax change added approximately $0.62 per diluted share from deferred-tax revaluation and $0.30 from the lower enacted rate.
- Darden issued $300 million of 4.55% senior notes due 2048 and used the proceeds, together with cash, to retire $310.9 million of higher-coupon debt. The refinancing generated $102.2 million of debt-retirement expense, including $97.3 million in cash costs, and materially increased reported net interest expense.
- Fiscal 2018 discontinued operations, primarily relating to the former Red Lobster disposition, recorded a $7.8 million net loss. FY2017 recorded a $3.4 million loss.
- Operating cash flow increased, while investing cash outflow was $451.1 million and financing cash outflow was $636.6 million. Financing outflows included $313.5 million in dividends and $234.8 million in share repurchases.
Outlook, commentary and risks
- For fiscal 2019, management forecast sales growth of 4%–5%, combined same-restaurant sales growth of 1%–2%, and approximately 45–50 new restaurants. Planned capital expenditures were $425–$475 million; the expected effective tax rate was 11%–12%.
- A quarterly dividend of $0.75 per share was declared in June 2018; the indicated annual rate of $3.00 per share was 19% above FY2018’s annual dividend, subject to future Board approval.
- Management’s “Back-to-Basics” priorities included culinary execution, attentive service, restaurant atmosphere and relevant marketing. It cited wage-rate inflation and workforce investment costs as pressures, while highlighting sales leverage and food-cost savings.
- Key disclosed risks include intense competition and changing consumer preferences; labor availability, wage inflation and retention; food safety and supply interruptions; commodity, utility and insurance costs; cyber and privacy incidents; weather and natural disasters; regulatory and employment-law changes; and the performance and integration of acquisitions. A majority of restaurants are leased, with substantial long-term lease commitments.
- Total contractual obligations were $6.0 billion, including $3.4 billion of lease obligations. Guarantees associated with leased properties assigned to third parties totaled $154.0 million; management considered default remote. The company said existing litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- How much of revenue and earnings growth reflects Cheddar’s acquisition and new units versus sustainable same-restaurant traffic and pricing.
- The degree to which the unusually low FY2018 tax rate and reported earnings benefit are nonrecurring; review fiscal 2019 tax-rate expectations.
- Whether labor inflation and Cheddar’s lower margin mix continue to pressure restaurant-level profitability.
- Cash available after dividends, repurchases, capital spending and lease obligations, and the effect of lease-adjusted debt on financial flexibility.
- Progress against fiscal 2019 sales, same-restaurant sales, openings and capital-expenditure forecasts, alongside the disclosed operational and regulatory risks.