Darden Restaurants, Inc. — Fiscal 2012 First Quarter 10-Q
Business context and reporting period: Darden operates full-service restaurants in the U.S. and Canada, including Red Lobster, Olive Garden and LongHorn Steakhouse. This unaudited quarter ended August 28, 2011; comparisons are with the quarter ended August 29, 2010. Results are not necessarily indicative of the full fiscal year.
Financial performance
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Sales | $1,942.0 million | $1,806.7 million |
| Earnings from continuing operations | $106.8 million | $113.3 million |
| Net earnings | $106.6 million | $113.1 million |
| Diluted EPS from continuing operations | $0.78 | $0.80 |
| Operating cash flow from continuing operations | $118.3 million | $214.9 million |
| Capital expenditures | $138.2 million | $113.2 million |
- Sales increased 7.5%, driven by 71 net new restaurants and 2.8% blended U.S. same-restaurant sales growth at Olive Garden, Red Lobster and LongHorn Steakhouse.
- Continuing-operations earnings declined 5.7%, and diluted EPS declined 2.5%. Net earnings margin was 5.5%, compared with 6.3%; pretax margin was 7.6%, compared with 8.8%.
- Food and beverage costs rose to 30.6% of sales from 28.1%, primarily due to higher seafood and other commodity costs and unfavorable menu mix. Total cost of sales, excluding restaurant depreciation and amortization, rose to 77.6% of sales from 75.6%. Labor, restaurant expenses and SG&A fell as a percentage of sales; depreciation rose to 4.3% from 4.2%.
- The effective tax rate declined to 27.3% from 28.8%. Net interest expense was $21.7 million, down from $24.6 million.
- Cash and cash equivalents were $74.2 million at quarter-end. Current assets were $732.0 million and current liabilities were $1,452.2 million. Short-term debt was $330.5 million and long-term debt was $1,405.9 million. The filing reports $348.6 million of available capacity under the $750 million revolving facility after considering commercial paper and letters of credit.
Material changes and operating trends
- Brand performance diverged: Olive Garden same-restaurant sales fell 2.9%; Red Lobster rose 10.7%; LongHorn Steakhouse rose 4.8%. The Capital Grille, Bahama Breeze and Seasons 52 reported same-restaurant sales growth of 7.0%, 2.9% and 2.5%, respectively.
- Operating cash flow fell by $96.6 million, primarily due to the timing of inventory purchases and product demand. Investing cash outflow increased with higher remodeling and new-restaurant construction spending.
- Current liabilities rose from $1,286.8 million at May 29, 2011, primarily reflecting increased short-term borrowing used for share repurchases and capital expenditures. Short-term debt increased by $145 million during the quarter.
- Darden repurchased 1.9 million shares for $91.3 million and paid $57.7 million in dividends. The quarterly dividend was increased to $0.43 per share from $0.32; the board declared another $0.43 dividend for payment November 1, 2011.
Outlook, risks and contingencies
- The filing references fiscal 2012 expectations for restaurant growth, U.S. same-restaurant sales, total sales growth, diluted EPS growth and capital expenditures, but does not provide clear numerical guidance values in the supplied text. Management said it expects to issue debt in Q2 FY2012 to refinance the $225 million of notes repaid in FY2011 and part of short-term debt, and to replace the existing revolver with a substantially similar facility extending through October 2016.
- Management believes operating cash generation and the revolving facility will fund ongoing capital spending, dividends, repurchases and other operations through FY2012. Darden was in compliance with credit-facility covenants at quarter-end.
- Hurricane Irene reduced Q1 FY2012 diluted EPS from continuing operations by approximately $0.02. Management cited higher food costs as a principal earnings pressure. Key disclosed risks include food safety, labor and insurance costs, competition, macroeconomic and severe-weather impacts, commodity and interest-rate volatility, indebtedness, and potential goodwill or trademark impairment.
- Ordinary-course lawsuits, proceedings and claims were disclosed; management did not expect their ultimate disposition to materially adversely affect financial position, results or liquidity. Standby letters of credit totaled $117.1 million, and guarantees on assigned leased properties totaled $6.4 million.
- Derivative liabilities were $70.3 million at August 28, 2011, versus $23.2 million at May 29, 2011; the filing notes expected reclassification of $2.5 million of net hedge losses to earnings over the next 12 months, subject to settlement-date fair values.
Important facts for investors to verify
- Whether the sharp rise in food and beverage costs persists and how it affects margins, particularly at Olive Garden.
- Whether same-restaurant sales growth is sustained across brands, given Olive Garden’s decline and Red Lobster’s guest-count-driven increase alongside a lower average check.
- How inventory timing and higher capital spending affect operating cash flow and financing needs.
- Terms, timing and cost of the planned debt issuance and replacement revolving facility, including refinancing of the October 2012 notes.
- Fiscal 2012 numerical sales, EPS, restaurant-growth and capital-expenditure guidance; the supplied filing text does not state clear target values.
- Exposure from commodity and interest-rate hedges, contingent obligations, and any changes in litigation or impairment assessments.