Darden Restaurants, Inc. — Q1 FY2023 10-Q
Business context and reporting period. Darden operates full-service restaurant brands including Olive Garden, LongHorn Steakhouse and The Capital Grille. This unaudited quarter ended August 28, 2022, compared with the quarter ended August 29, 2021. Darden reported 1,875 company-owned restaurants at quarter-end.
Financial performance
| Metric | Q1 FY2023 | Prior-year quarter |
|---|---|---|
| Sales | $2,446.1 million | $2,306.0 million |
| Operating income | $244.2 million | $280.6 million |
| Operating margin | 10.0% | 12.2% |
| Continuing-operations earnings | $193.6 million | $231.7 million |
| Net earnings | $193.0 million | $230.9 million |
| Diluted net earnings per share | $1.56 | $1.75 |
| Operating cash flow, continuing operations | $427.8 million | $180.3 million |
| Capital expenditures | $122.8 million | $82.7 million |
Sales rose 6.1%, driven by 4.2% blended same-restaurant sales growth and sales from 34 net new restaurants. Continuing-operations earnings fell 16.4%, and diluted EPS fell 10.9%. Continuing-operations net margin was 7.9%, compared with 10.0% a year earlier. Operating cash flow benefited substantially from changes in current assets and liabilities, including a $217.0 million benefit from prepaid/accrued income taxes; management attributed the year-over-year increase primarily to working capital.
Margins, segments and material changes
- Food and beverage costs increased to 32.5% of sales from 29.7%; restaurant labor rose to 32.5% from 31.9%. Management cited commodity inflation, wage inflation and lower productivity, partly offset by pricing and sales leverage.
- Restaurant and marketing expenses were 49.0% of sales, versus 49.3%; general and administrative expenses declined to 3.6% from 4.9%, mainly due to lower incentive pay and deferred-compensation mark-to-market effects.
- Same-restaurant sales were up 2.3% at Olive Garden, 4.2% at LongHorn Steakhouse, 7.6% in Fine Dining and 7.6% in Other Business. Olive Garden and LongHorn guest counts declined 6.1% and 2.0%, respectively, while higher average checks supported sales.
- Segment profit margins declined across all four segments: Olive Garden 19.1% (down 410 basis points), LongHorn 15.2% (down 380 bps), Fine Dining 16.4% (down 340 bps) and Other Business 13.7% (down 400 bps). Higher food and labor costs were the principal drivers.
- A $4.9 million net gain on asset disposals, primarily property sales, reduced reported operating costs; there were no restaurant impairment charges in the quarter.
Liquidity, debt and capital allocation
At August 28, 2022, cash and cash equivalents were $377.5 million, current assets $941.0 million and current liabilities $1,825.3 million. Long-term debt was $895.1 million. The company also reported $5,031.8 million in total lease liabilities, including finance and operating leases. A $1 billion revolving credit facility was undrawn, and Darden reported covenant compliance. Operating cash flow was $427.8 million; investing cash flow was a $118.1 million use, and financing cash flow was a $345.4 million use.
Darden paid $148.5 million in dividends and repurchased $199.0 million of shares during the quarter. The board authorized a new $1 billion share-repurchase program in June 2022. The quarterly dividend declared was $1.21 per share.
Outlook, commentary and risks
- Fiscal 2023 sales guidance: $10.2–$10.4 billion, with same-restaurant sales growth of 4%–6% and 55–60 new restaurant openings.
- Expected fiscal 2023 capital expenditures: $500–$550 million for new restaurants, remodels, maintenance and technology.
- Management cited ongoing risks from commodity and wage inflation, staffing availability, supply-chain disruption, COVID-19 effects, economic conditions and interest rates. These could pressure restaurant operations and margins.
- The Inflation Reduction Act introduces a 1% excise tax on qualifying share repurchases after December 31, 2022, and a 15% corporate alternative minimum tax beginning for Darden in fiscal 2024. Management did not expect a material adverse financial impact.
- Darden disclosed ordinary-course lawsuits and claims, but management did not expect their resolution, individually or collectively, to materially adversely affect financial position, results or liquidity. The filing reported no material change in risk factors and effective disclosure controls.
Important facts for investors to verify
- Whether sales guidance is achieved and whether guest-count trends improve, particularly at Olive Garden and LongHorn.
- Whether pricing can continue to offset food, labor and other inflation without further weakening traffic or margins.
- How much of the quarter’s elevated operating cash flow reflects timing and working-capital movements rather than recurring cash generation.
- Planned capital spending, dividends and repurchases relative to cash generation, debt and substantial lease obligations.
- Any subsequent changes in inflation, staffing, supply availability, regulatory exposure or the outlook.