Darden Restaurants, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended February 25, 2018, compared with the periods ended February 26, 2017. The filing covers fiscal 2018, notwithstanding the request metadata’s “2017 Q3.” Amounts are in millions except per-share data.
Business context and results
Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House and other concepts. At quarter-end it operated 1,733 company-owned restaurants. Cheddar’s results are included from its acquisition in April 2017; Darden also acquired 11 Cheddar’s franchisee locations in August 2017.
| Metric | Quarter | Nine months |
|---|---|---|
| Sales | $2,128.4; +13.3% | $5,946.0; +13.6% |
| Operating income | $233.4; +1.7% | $536.8; +5.8% |
| Operating margin | 11.0%, versus 12.2% | 9.0%, versus 9.7% |
| Continuing-operations earnings | $218.5; +31.4% | $428.4; +20.0% |
| Diluted continuing-operations EPS | $1.74, versus $1.32 | $3.40, versus $2.84 |
| Net earnings | $217.8 | $421.5 |
| Cash from continuing operations | Not separately stated | $751.0, versus $701.3 |
Margins, cash flow, debt and liquidity
- Quarterly food and beverage costs declined to 28.3% of sales from 28.8%, supported by pricing and cost savings. Labor costs increased to 32.1% from 30.8%, reflecting wage inflation, workforce reinvestment and Cheddar’s higher labor-cost mix, partly offset by sales leverage.
- For the first nine months, capital expenditures were $294.9, up from $214.0. Investing cash outflow was $342.3; financing cash outflow was $480.0. Cash declined $86.3 to $146.8.
- Cash and current assets were $146.8 and $569.6; current liabilities were $1,467.5. Unearned revenue, including gift-card balances, and $50.6 of short-term debt contributed to higher current liabilities. Darden says its restaurant cash flows and credit access support its operations despite current liabilities exceeding current assets.
- Long-term debt was $926.4 and short-term debt $50.6. The company had no borrowings under its $750.0 revolving credit facility and reported compliance with its covenants. Long-term debt principal is not directly comparable with the prior balance-sheet total because the company issued new notes and retired other debt during the period.
- Darden paid $234.9 in dividends and repurchased $207.6 of stock during the nine months. Dividends declared were $1.89 per share.
Material changes and unusual items
- Sales growth was driven largely by Cheddar’s acquisition, 37 net new company-owned restaurants since the prior-year quarter, and same-restaurant sales growth. Excluding Cheddar’s, combined same-restaurant sales increased 2.0% for the quarter and 2.3% for the nine months.
- Interest expense included $102.2 of debt-retirement costs, including approximately $97.3 in cash premiums and $4.9 in noncash loan-cost write-offs. The company issued $300.0 of 4.55% senior notes due 2048 and used the proceeds with cash to retire $310.9 of higher-coupon notes.
- The Tax Act reduced the federal corporate rate. Remeasurement of deferred taxes generated a one-time $77.3 tax benefit. The company said the calculation was provisional and could be adjusted. Management estimated the quarter’s continuing-operations diluted EPS was positively affected by about $0.22 from the lower rate and $0.61 from deferred-tax revaluation, and negatively affected by about $0.54 from debt-retirement costs and $0.04 from Cheddar’s integration costs.
- Quarterly and nine-month reported tax benefits were $102.5 and $39.5, respectively. Thus, the earnings and EPS increases were materially affected by tax changes and do not represent operating-income growth.
- Cheddar’s integration costs were approximately $6.7 for the quarter and $17.3 for the nine months. The Other Business segment’s profit margin fell, primarily reflecting Cheddar’s margin mix and a change in where consumer-packaged-goods revenue was reported.
Outlook, risks and contingencies
- Fiscal 2018 outlook: approximately 2.0% combined same-restaurant sales growth excluding Cheddar’s; approximately 13.0% sales growth including Cheddar’s; about 40 new restaurant openings; and approximately $400.0 of capital expenditures.
- Management cited risks including Cheddar’s integration and realization of expected benefits, wage and other cost pressures, food safety, competition, leases, adverse publicity, severe weather, cyber and technology risks, and potential impairment of goodwill or trademarks. Results are seasonal and interim performance may not indicate full-year results.
- Darden disclosed ordinary-course lawsuits and claims, which it believes will not have a material adverse effect. It had $96.9 of standby letters of credit related to workers’ compensation and general liabilities, plus $17.3 related to leases and other payments. Lease-assignment guarantees had a maximum potential payment of $149.4; no liability was recorded because default was considered remote.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- How much reported earnings growth persists after separating the one-time deferred-tax benefit and debt-retirement charges.
- Whether same-restaurant sales, guest counts and labor-cost trends support the fiscal 2018 outlook.
- Cheddar’s integration progress, margins and realization of expected acquisition synergies.
- Capital spending, dividends and buybacks relative to operating cash generation, cash balances and debt levels.
- Any subsequent updates to provisional Tax Act accounting, impairment assessments, or lease and other contingencies.