Darden Restaurants, Inc. — Fiscal 2023 Third-Quarter 10-Q
Reporting period: Quarter and nine months ended February 26, 2023; unaudited. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse, and Cheddar’s Scratch Kitchen. It reported 1,890 company-owned restaurants at quarter-end.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Sales | $2,786.2 million | $2,448.9 million | $7,718.8 million | $7,027.1 million |
| Operating income | $349.9 million | $300.8 million | $827.3 million | $824.0 million |
| Continuing-operations earnings | $286.8 million | $247.9 million | $667.9 million | $673.0 million |
| Diluted continuing-operations EPS | $2.34 | $1.93 | $5.42 | $5.17 |
Quarterly sales rose 13.8% and nine-month sales rose 9.8% year over year. Blended same-restaurant sales increased 11.7% for the quarter and 7.8% for the nine-month period; sales also benefited from 35 net new restaurants over the 12 months ended February 26, 2023. Quarterly diluted net EPS was $2.34, up 21.2%; nine-month diluted net EPS was $5.41, up 4.8%.
Operating margin was 12.6% for the quarter versus 12.3% a year earlier, but 10.7% for the nine months versus 11.7%. Continuing-operations net margin was 10.3% for the quarter and 8.7% for the nine months, compared with 10.1% and 9.6%, respectively. Food and beverage costs rose to 31.8% of sales for the quarter and 32.4% for the nine months, primarily reflecting inflation. Pricing and sales leverage helped offset cost pressure; labor and restaurant expenses declined as a share of quarterly sales.
Cash flow, liquidity and capital
- Nine-month operating cash flow from continuing operations was $1.14 billion, up from $916.5 million, primarily due to working-capital changes. Investing cash outflow was $409.5 million, including $410.5 million of capital expenditures. Financing cash outflow was $862.7 million.
- At February 26, 2023, cash and cash equivalents were $275.3 million, current assets were $890.9 million, and current liabilities were $1.95 billion. Management says current liabilities typically exceed current assets given the cash-based nature of sales and payment timing.
- Long-term debt was $880.9 million, excluding lease liabilities. Operating lease liabilities were $3.74 billion; total lease liabilities, including finance leases, were $5.03 billion. The company had no balance outstanding on its $1 billion revolving credit facility and reported compliance with its covenants.
- Nine-month dividends paid were $443.3 million and share repurchases were $423.5 million, versus $426.2 million and $834.1 million, respectively, in the prior-year period. The board declared a further $1.21-per-share dividend payable May 1, 2023.
Changes, outlook and risks
Quarterly continuing-operations earnings rose 15.7%, while nine-month earnings declined 0.8%. The nine-month operating margin contraction and earnings decline reflected food-cost inflation and pressure on segment margins, partly offset by sales growth, pricing and operating leverage. Nine-month segment profit margins were lower year over year across all four reportable segments.
Management’s fiscal 2023 outlook was sales of $10.45–$10.50 billion, same-restaurant sales growth of 6.5%–7.0%, approximately 55 new restaurant openings, and capital expenditures of $550–$575 million.
Management cited continuing above-normal wage and product-cost inflation, staffing challenges and potential supply-chain disruptions. Other disclosed risks include macroeconomic conditions, food safety, competition, labor availability and costs, leases, weather, cyber and technology risks, and impairment of goodwill or other assets. The company recorded $1.5 million of restaurant impairments for the quarter and nine months, and a $12.4 million net gain from impairments and asset disposals for the nine months, largely reflecting property-sale gains. Ordinary-course legal matters were not expected to have a material adverse effect. Management said disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether pricing and same-restaurant sales growth can offset continuing food, labor and other cost inflation without further margin erosion.
- Progress against the fiscal-year sales, same-restaurant sales, restaurant-opening and capital-spending outlook.
- Cash generation and liquidity, including working-capital movements and the company’s substantial lease obligations.
- Capital returns and remaining repurchase authorization; $687.2 million remained available at quarter-end under the $1 billion program.
- Potential effects of economic, staffing and supply-chain conditions, as well as lease guarantees and other contingencies disclosed in the filing.