01—Abstract
Summary
Summary of the 10-K filed August 12, 2004. 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 restaurant revenue, reported fiscal 2004 (53 weeks ended May 30, 2004) with sales of $5.00 billiona, up 7.5% from $4.65 billion, and net earnings of $231 million ($1.36 diluted EPS), versus $232 million ($1.31) in fiscal 2003.
Excluding the extra 53rd week (about $90 millionb of sales), 52-week sales growth was about 5.5%. Net earnings were flat (down 0.3%) because of a $38 million pre-tax asset impairment and restructuring charge tied to closing six underperforming Bahama Breeze restaurants and writing down several others. Diluted EPS still rose 3.8%, helped by a meaningful reduction in average diluted shares from continued buybacks (10.7 million shares repurchased for $235 million).
The brand mix tells a divergent story. Olive Garden was the standout, with U.S. same-restaurant sales up 4.6% and sales up 11.1% to $2.21 billionc, and management reported record operating profit and return on sales. Red Lobster, the largest concept at $2.44 billion in sales, was essentially flat (up 0.1%), with U.S. same-restaurant sales down 3.5% as guest counts fell 6.5%, ending a 23-quarter streak of comparable sales gains.
Smokey Bones (69 units after 30 openings) and Bahama Breeze (32 units after the closures) remain earlier-stage concepts that management says are not yet accretive to earnings. Management guides to fiscal 2005 diluted EPS growth of 8%d to 12%, same-restaurant sales growth of 1% to 3% for Red Lobster and Olive Garden, and 50 to 60 net new restaurants. Financially, Darden remains conservatively levered for a restaurant operator, with a debt-to-total-capital ratio of 35% and an adjusted debt-to-capital ratio of 45% that includes lease equivalents.
Operating cash flow was $525 million against $354 million of capital expenditures, and the company holds investment-grade ratings (Baa1/BBB+/BBB+). Chairman and CEO Joe Lee will retire on November 29, 2004, with Clarence Otis, Jr. succeeding him as CEO. Investors should weigh Olive Garden's strength and disciplined capital allocation against Red Lobster's traffic declines, the cost of underperforming new concepts, and rising labor and restaurant expense ratios.
02—Key points
Key Highlights
- Fiscal 2004 sales rose 7.5% to $5.00 billion (about 5.5% on a 52-week basis), driven by 54 net new restaurants, Olive Garden comps of +4.6%, and the extra operating week.
- Net earnings were flat at $231 million, but diluted EPS grew 3.8% to $1.36 as buybacks reduced diluted shares to about 169.7 million.
- A $38 million pre-tax impairment and restructuring charge related to closing six Bahama Breeze restaurants and writing down five others weighed on margins; asset impairment and restructuring expense was 0.8% of sales versus 0.1% in fiscal 2003.
- Olive Garden was the primary growth engine, with sales up 11.1% to $2.21 billion and record operating profit and return on sales, while Red Lobster sales were flat at $2.44 billion with U.S. same-restaurant sales down 3.5%.
- Restaurant labor rose to 32.0% of sales from 31.9%, and restaurant expenses rose to 15.4% from 15.1%, partly offsetting a 0.6-point improvement in food and beverage costs to 30.5% of sales.
- Fiscal 2005 guidance calls for 8% to 12% diluted EPS growth, 50 to 60 new restaurants, Red Lobster and Olive Garden same-restaurant sales growth of 1% to 3%, and fiscal 2005 capex of about $360 million.
- Leadership transition: CEO Joe Lee retires November 29, 2004, with Clarence Otis, Jr. becoming CEO and Drew Madsen becoming President and COO.
03—Questions
Frequently Asked Questions
How did Darden perform in fiscal 2004, and why was net income flat despite higher sales?
Sales grew 7.5% to $5.00 billion, but net earnings were essentially unchanged at $231 million, down 0.3%. The main drag was a $38 million pre-tax charge in the fourth quarter to close six underperforming Bahama Breeze restaurants and write down the carrying value of several others, including one Olive Garden and one Red Lobster location. Diluted EPS still rose 3.8% to $1.36 because the company repurchased about 10.7 million shares during the year.
Which of Darden's restaurant brands is driving growth, and which is struggling?
Olive Garden is driving growth, with sales up 11.1% to $2.21 billion, U.S. same-restaurant sales up 4.6%, and record operating profit and return on sales. Red Lobster, the largest brand at $2.44 billion, was flat, with U.S. same-restaurant sales down 3.5% because guest counts fell 6.5%, which ended a 23-quarter streak of comparable sales gains. Management is limiting Red Lobster expansion in fiscal 2005 while it focuses on improving returns.
How leveraged is Darden, and is its balance sheet a concern?
Leverage is moderate and manageable. The debt-to-total-capital ratio was 35%, and the adjusted debt-to-capital ratio, which includes lease-debt equivalents, was 45%, both unchanged from the prior year. Long-term debt was about $653 million, with $14.5 million of commercial paper outstanding. The company generated $525 million of operating cash flow against $354 million of capex, and it held investment-grade ratings of Baa1, BBB+, and BBB+. Management said it does not expect covenants to affect liquidity.
What is management guiding to for fiscal 2005, and what are the key risks?
Management expects diluted EPS growth of 8% to 12%, same-restaurant sales growth of 1% to 3% at Red Lobster and Olive Garden, 50 to 60 net new restaurants, and capex of about $360 million. It expects Bahama Breeze to be accretive to earnings, while Smokey Bones is expected to be dilutive for most of the year and accretive in the second half. Key risks include commodity volatility, especially seafood, labor and benefit costs, food-safety publicity, competition, and the performance of newer concepts. The filing also notes pending wage-and-hour class actions in California and Washington, which management does not expect to be material.
04—Continue