Darden Restaurants, Inc. — Form 10-K Summary
Reporting period: Fiscal year ended May 26, 2019 (52 weeks), compared with fiscal 2018 ended May 27, 2018 (52 weeks). The supplied filing is an FY2019 10-K, not a 2018 Q4 filing; it includes unaudited quarterly data, including the quarter ended May 26, 2019.
Business context
Darden operated 1,785 company-owned restaurants in the U.S. and Canada across eight brands, and had 70 franchised restaurants operated by third parties. It serves the full-service dining market. Fiscal 2019 added 39 net company-owned restaurants; nearly all company-operated locations are in the U.S.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Sales | $8,510.4 million | $8,080.1 million |
| Operating income | $832.5 million; 9.8% margin | $766.8 million; 9.5% margin |
| Continuing-operations earnings | $718.6 million; diluted EPS $5.73 | $603.8 million; diluted EPS $4.79 |
| Net earnings | $713.4 million; diluted EPS $5.69 | $596.0 million; diluted EPS $4.73 |
| Operating cash flow | $1,267.6 million | $1,019.8 million |
| Capital expenditures | $452.0 million | $396.0 million |
| Cash and cash equivalents at year-end | $457.3 million | $146.9 million |
| Long-term debt, net of discount and issuance costs | $927.7 million | $926.5 million |
Sales rose 5.3%, driven by new restaurants and a 2.5% combined same-restaurant sales increase. Operating income increased 8.6%; continuing-operations earnings increased 19.0%. The effective tax rate was 8.1%, versus 0.3% in FY2018. The prior-year rate benefited from a $79.3 million one-time deferred-tax remeasurement benefit under the Tax Act; FY2019 EPS also benefited from the lower federal corporate tax rate.
Food and beverage costs improved to 28.3% of sales from 28.5%; labor costs rose to 32.6% from 32.4%. Segment profit margins improved at Olive Garden (20.6%), LongHorn (17.9%) and Fine Dining (21.1%), but fell at Other Business (14.3%). Operating cash flow less capital expenditures was approximately $815.6 million, calculated from the reported figures.
Year-end current assets were $892.6 million and current liabilities were $1,474.1 million, leaving a working capital deficit of $581.5 million. Darden reported $1,023.1 million of debt including capital lease obligations, no borrowings under its $750 million revolving facility, and compliance with its covenants. Adjusted debt to adjusted total capital, including lease-debt equivalents and guarantees, was 58%, down from 60%.
Material changes and unusual items
- Olive Garden same-restaurant sales rose 3.9% and LongHorn rose 3.3%; Cheddar’s declined 3.4%, Yard House 1.2%, Seasons 52 1.5% and Bahama Breeze 1.0%. Fine Dining brands posted increases: Capital Grille 3.7% and Eddie V’s 2.8%.
- FY2018 interest expense included $102.2 million of debt-retirement costs; this was a major reason FY2019 net interest expense fell to $50.2 million from $161.1 million.
- Restaurant impairment and disposal expense increased to $19.0 million from $3.4 million. FY2019 restaurant impairments were primarily associated with underperforming locations.
- Discontinued operations, primarily residual Red Lobster-related obligations, recorded a $5.2 million after-tax loss, versus a $7.8 million loss in FY2018.
- The primary defined-benefit pension plan is expected to terminate in FY2020. Darden expects approximately $130 million of non-cash, pre-tax pension settlement expense in that year.
- Darden planned to adopt the new lease accounting standard in the first quarter of FY2020, expecting to recognize approximately $4.0 billion in operating-lease right-of-use assets and $4.5 billion in lease liabilities, with no material earnings or cash-flow impact expected.
Outlook, commentary and risks
For FY2020, management forecast sales growth of 5.3%–6.3%, including the impact of a 53rd week, same-restaurant sales growth of 1.0%–2.0%, and approximately 50 new restaurants. It expected an effective tax rate of 10.0%–11.0% and capital expenditures of $450–$500 million. The Board declared a quarterly dividend of $0.88 per share, implying an annualized $3.52, subject to Board approval of future dividends.
Management emphasized its “Back-to-Basics” focus on culinary execution, attentive service, restaurant atmosphere and relevant marketing. Principal disclosed risks include intense competition and changing consumer preferences; wage, benefit, food and utility cost inflation; recruiting and retaining restaurant employees; food safety and supply disruptions; cyber and data-privacy incidents; weather and other business interruptions; long-term lease commitments; and litigation or regulatory changes. Management said current operating cash generation and financing sources should be sufficient to fund planned needs through FY2020.
Darden reported no material adverse effect expected from currently pending litigation, and no unresolved SEC staff comments. KPMG issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Confirm the filing period: the document covers FY2019, while the request metadata says “2018 Q4.” For FY2019’s quarter ended May 26, 2019, sales were $2,229.1 million and continuing-operations earnings were $208.7 million (diluted EPS $1.67).
- Assess whether sales growth and margins can be sustained, particularly given declining same-restaurant sales at several brands and higher labor costs.
- Separate recurring earnings from tax effects and FY2018 debt-retirement charges when comparing EPS growth.
- Review the pension-plan termination expense, lease-accounting transition, and the company’s substantial long-term lease commitments.
- Monitor liquidity and leverage, including the working-capital deficit, lease-adjusted debt measures, and the planned capital spending, dividends and share repurchases.
- Check subsequent results against management’s FY2020 sales, same-restaurant sales, restaurant-opening, tax-rate and capital-expenditure outlook.