01—Abstract
Summary
Summary of the 10-K filed August 22, 2003. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants (DRI), the largest publicly held casual dining company in the world by company-owned revenue, reported fiscal 2003 (ended May 25, 2003) sales of $4.65 billiona, up 6.6% from $4.37 billion, and operated 1,271 company-owned restaurants in the U.S. and Canada, including 673 Red Lobster, 524 Olive Garden, 34 Bahama Breeze, 39 Smokey Bones and one Seasons 52.
Net earnings declined 2.3% to $232 millionb, while diluted EPS rose 0.8% to $1.31 from $1.30, aided by a 6.6% reduction in diluted share count from continued buybacks (10.7 million shares repurchased for $213 million). Management stated that sales were below expectations due to weaker guest counts, a more competitive environment and a severe winter, and that Red Lobster's operating profit declined as labor, restaurant expenses, SG&A and depreciation rose as a percent of sales. Margin pressure is visible: total costs were 92.5% of sales versus 91.7% in fiscal 2002, and restaurant expenses rose to 15.1% of sales from 14.3%.
Olive Garden was the bright spot, with record sales of $1.99 billionc (up 6.8%), record operating profit, and 35 consecutive quarters of U.S. same-restaurant sales gains. Management is explicitly restructuring the Bahama Breeze concept, which is still dilutive to earnings and is slowing new openings to four in fiscal 2004, while Smokey Bones (sales of $93 million) and Red Lobster remain core growth and profit drivers respectively.
The balance sheet is conservative by restaurant standards: long-term debt was $658 milliond, the adjusted debt-to-capital ratio was 45%, the company maintained investment-grade ratings (Baa1/BBB+/BBB+), and operating cash flow of $509 million comfortably funded $423 million of capital expenditures. Management expects fiscal 2004 capital expenditures of roughly $400 million and 57 to 71 new restaurant openings.
02—Key points
Key Highlights
- Fiscal 2003 sales rose 6.6% to $4.65 billion, but guest counts fell and results came in below management's own expectations, driven by a tougher competitive environment, weaker advertising effectiveness and a harsh winter.
- Net earnings fell 2.3% to $232.3 million; diluted EPS rose 0.8% to $1.31, helped by share repurchases that cut the average diluted share count to 177.4 million from 183.5 million.
- Margin compression: total costs and expenses rose to 92.5% of sales from 91.7%, with restaurant expenses up to 15.1% of sales (from 14.3%) and restaurant labor up to 31.9% (from 31.5%), largely from insurance, workers' compensation, pre-opening and utility costs.
- Olive Garden is the standout performer, with record sales of $1.99 billion (+6.8%), record operating profit, and 35 consecutive quarters of U.S. same-restaurant sales growth; Red Lobster posted record sales of $2.43 billion but lower operating profit.
- Bahama Breeze is underperforming and under restructuring (test of lunch, new dinner menu, smaller prototype, slower openings to four in fiscal 2004) and is expected to remain dilutive to earnings in fiscal 2004.
- Balance sheet remains solid with $658 million of long-term debt, a 45% adjusted debt-to-capital ratio, investment-grade credit ratings, and $509 million of operating cash flow versus $423 million of capital expenditures.
- Growth outlook for fiscal 2004 includes 57 to 71 new openings (Smokey Bones 25-30, Olive Garden 20-25), capital expenditures of about $400 million, and a planned 2004 Smokey Bones expansion toward a long-term sales potential of $500 million or more.
03—Questions
Frequently Asked Questions
How did Darden perform financially in fiscal 2003?
Sales grew 6.6% to $4.65 billion and net earnings were $232 million ($1.31 diluted EPS), a 2.3% decline in net income but a slight EPS increase thanks to share buybacks. Results missed management's expectations because of softer guest counts and higher operating costs, particularly in restaurant labor, restaurant expenses and depreciation.
Which restaurant concepts are driving growth and which are struggling?
Olive Garden is the strongest performer, with record sales ($1.99 billion) and operating profit. Red Lobster set a sales record ($2.43 billion) but its operating profit declined. Smokey Bones (sales of $93 million, 39 units) is expanding rapidly, while Bahama Breeze is underperforming, is being restructured and is expected to remain dilutive to earnings in fiscal 2004.
How strong is Darden's balance sheet and how is it returning cash to shareholders?
Long-term debt was about $658 million at year end, with an adjusted debt-to-capital ratio of 45% and investment-grade ratings from Moody's, S&P and Fitch. The company repurchased 10.7 million shares for $213 million in fiscal 2003 and paid $13.5 million in dividends ($0.08 per share), and it remains authorized to repurchase up to 115.4 million shares in total (98.5 million used to date).
What are the key risks and what is the outlook for fiscal 2004?
Key risks include intense casual dining competition, weak consumer demand or an economic slowdown, rising food, labor, insurance and utility costs, seafood price volatility, negative publicity around food safety, and the execution risk of new concepts like Bahama Breeze and Smokey Bones. For fiscal 2004, Darden plans 57 to 71 new restaurants, about $400 million in capital expenditures, and expects Bahama Breeze to remain dilutive while its changes are tested.
04—Continue