01—Abstract
Summary
Summary of the 10-K filed July 29, 2005. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants (NYSE: DRI), the largest publicly held casual dining company in the world by U.S. company-restaurant revenue, reported strong fiscal 2005 results (52 weeks ended May 29, 2005).
Sales rose 5.5% to $5.28 billiona (7.4% on a 52-week basis, excluding the extra week in fiscal 2004). Net earnings increased 27.9% to $291 million, and diluted EPS rose 32.8% to $1.78. Earnings were lifted by lower food and beverage, restaurant expense, and D&A costs as a percent of sales, along with a reduction in diluted share count from ongoing buybacks.
Fiscal 2004 was depressed by a $37 millionb Bahama Breeze impairment and restructuring charge, which makes the year-over-year comparison look stronger than the underlying trend. Operationally, Olive Garden was the standout, with U.S. same-restaurant sales up 7.2% on a 52-week basis and 43 consecutive quarters of comparable sales growth. Red Lobster returned to positive comparable sales (up 0.9%) and year-over-year operating profit growth after a difficult fiscal 2004.
Smokey Bones continues to expand rapidly, with 35 openings in fiscal 2005 and plans for 25 to 30 more in fiscal 2006, though it posted a modestly larger operating loss. Bahama Breeze remains a turnaround effort, with sales down 7.2% and the expansion program on hold. Financially, the company generated $583 millionc in operating cash flow and repurchased $312 million of stock.
It ended the year with $1.04 billiond of current liabilities, which were inflated by $300 million of notes maturing in fiscal 2005 and 2006 that management plans to refinance. Management guided to 55 to 65 net new restaurants and low double-digit diluted EPS growth in fiscal 2006. Risks disclosed include competition, food and labor cost inflation, and several California and Washington wage-and-hour class actions, one of which was settled for roughly $9.5 million.
02—Key points
Key Highlights
- Sales grew 5.5% to $5.28 billion; 7.4% growth on a 52-week basis after adjusting for the extra week in fiscal 2004
- Net earnings rose 27.9% to $291 million, and diluted EPS rose 32.8% to $1.78, benefiting from the absence of fiscal 2004's $37 million impairment charge and from a lower share count
- Olive Garden delivered 7.2% U.S. same-restaurant sales growth and 43 consecutive quarters of comparable sales increases, with record operating profit and return on sales
- Red Lobster posted its first positive comparable sales in the period (up 0.9%) and three consecutive quarters of year-over-year operating profit growth after its fiscal 2004 struggles
- Restaurant count reached 1,381 with a net increase of 56; fiscal 2006 guidance calls for 55 to 65 net new restaurants and low double-digit diluted EPS growth
- Bahama Breeze is still being fixed (sales down 7.2%, 32 units, expansion paused), while Smokey Bones continues rapid expansion with 35 openings in fiscal 2005
- Strong cash generation ($583M operating cash flow) funded $329M in capex and $312M in share repurchases; a $300M debt maturity in 2005-2006 is planned for refinancing, and the company maintains a Baa1/BBB+ rating
03—Questions
Frequently Asked Questions
What drove Darden's earnings growth in fiscal 2005?
Net earnings increased 27.9% to $291 million. The main drivers were lower food and beverage, restaurant expense, and depreciation costs as a percentage of sales, and the lack of the roughly $23 million after-tax impairment charge recorded in fiscal 2004. Fewer diluted shares, reduced by ongoing buybacks, added to the 32.8% increase in diluted EPS. Partly offsetting these were higher restaurant labor and SG&A costs as a percent of sales.
How is the Olive Garden brand performing compared with the rest of the portfolio?
Olive Garden is the strongest brand in the portfolio. Its U.S. same-restaurant sales rose 7.2% on a 52-week basis, driven by a 5.3% increase in guest counts, and it reached $2.40 billion in sales, up 8.5%. It also set record operating profit and return on sales. Red Lobster is recovering but more modestly, with same-store sales up only 0.9%, while Bahama Breeze and Smokey Bones are weaker or still investing heavily.
What are the main risks investors should watch?
The filing highlights intense competition, exposure to food and seafood commodity prices (shrimp, lobster, beef, and natural gas for utilities), labor costs tied to minimum wage increases, and rising insurance premiums. Litigation is also a concern, particularly California and Washington wage-and-hour class actions. One California matter was settled for about $9.5 million, and others remain pending. Bahama Breeze's underperformance and the need to keep building new restaurants profitably are further execution risks.
Is Darden's balance sheet under pressure?
The balance sheet is manageable but has some near-term pressure. Current liabilities rose to $1.04 billion because $300 million of senior notes and medium-term notes are due in fiscal 2005-2006, and management plans to refinance them with new debt. Adjusted debt to adjusted capital was 45%, down from 46%, and the fixed-charge coverage ratio improved to 6.8x. The company held $42.8 million of cash and $407 million of current assets, and it has a $400 million credit facility that was undrawn at year end.
What is management's outlook for fiscal 2006?
Management expects low double-digit diluted EPS growth on a consolidated basis, 55 to 65 net new restaurants, and 2% to 4% U.S. same-restaurant sales growth at Red Lobster and Olive Garden. Smokey Bones is expected to add 25 to 30 new restaurants and improve its earnings contribution by $0.04 to $0.06 per diluted share. Bahama Breeze is expected to have minimal effect on earnings growth as it continues repositioning. Capital expenditures are projected at $350 million to $375 million.
04—Continue