01—Abstract
Summary
Summary of the 10-K filed July 17, 2008. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants' fiscal 2008 10-K (fiscal year ended May 25, 2008) shows a company that grew sharply in size but saw margins compress, largely because of the October 2007 acquisition of RARE Hospitality (LongHorn Steakhouse and The Capital Grille).
Continuing-operations sales rose 19.0% to $6.63 billiona, driven by RARE, 39 net new Olive Gardens, and a 4.9% U.S. same-restaurant sales increase at Olive Garden. Net earnings from continuing operations fell 2.0% to $369.5 million, though diluted EPS from continuing operations rose 0.8% to $2.55 thanks to a lower share count. Total diluted EPS was $2.60, including a $0.05 contribution from discontinued operations, which mainly reflects the Smokey Bones sale.
Integration costs and purchase accounting adjustments tied to RARE totaled about $44.8 millionb pre-tax, and food, labor, and interest costs also weighed on results. The balance sheet changed materially. Total assets rose to $4.73 billion from $2.88 billion, and long-term debt rose to $1.63 billion from $492 million after the company issued $1.15 billion of senior notes to refinance the acquisition bridge loan.
The debt-to-total-capital ratio increased to 57% from 39%, and the lease-adjusted ratio reached 64% from 50%. Management says it still aims to keep an investment-grade rating (currently Baa3/BBB/BBB), and it expects fiscal 2009 sales growth of 14% to 15%, with capital expenditures of about $600 millionc and an 11% increase in the indicated annual dividend to $0.80. Risks investors should weigh include the higher leverage, a securities class action and a shareholder demand letter tied to 2008 guidance, and weak same-restaurant sales at LongHorn and The Capital Grille.
02—Key points
Key Highlights
- Continuing-operations sales rose 19.0% to $6.63 billion, primarily from the RARE acquisition (completed October 1, 2007) and 39 net new Olive Garden restaurants.
- Olive Garden U.S. same-restaurant sales grew 4.9% (3.0% check, 1.9% traffic), its 55th consecutive quarter of same-restaurant sales growth, while Red Lobster grew only 1.1% and LongHorn same-restaurant sales fell 1.9%.
- Net earnings from continuing operations declined 2.0% to $369.5 million, but diluted EPS from continuing operations rose 0.8% to $2.55 on a lower diluted share count (145.1 million vs. 148.8 million).
- RARE integration costs and purchase accounting adjustments of about $44.8 million (pre-tax) and higher food and beverage costs pressured margins; food and beverage rose to 30.1% of sales from 29.0%.
- Total debt rose sharply: long-term debt reached $1.63 billion from $492 million after $1.15 billion of new senior notes; the debt-to-total-capital ratio rose to 57% from 39%.
- Management guides fiscal 2009 sales growth of 14%-15%, diluted EPS growth from continuing operations of 14%-15%, and about 75-80 net new restaurants, with capex around $600 million.
- Dividend increased to $0.20 quarterly (indicated $0.80 annually, up 11%), and the company repurchased 5.0 million shares for $159.4 million in fiscal 2008 with 15.4 million shares remaining under authorization.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2008, Darden Restaurants Inc kept $0.06.
- Revenue$6.63B100.0%
- Cost of revenue−$5.14B77.5%
- Gross profit$1.49B22.5%
- Operating costs−$1.12B16.9%
- Operating income$369.5M5.6%
- Interest, other & tax$7.7M0.1%
- Net income$377.2M5.7%
Where FY2008 revenue went
$6.63B- Cost of revenue: $5.14B, 78% of revenue
- Operating income: $369.5M, 5.6% of revenue
- SG&A: $641.7M, 9.7% of revenue
- Other operating costs: $476.6M, 7.2% of revenue
Kept 5.6% as operating incomeOperating income $369.5M · 5.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2008filed July 17, 2008Financial Statements
| Revenue | $6.63B |
| Cost of Revenue | $5.14B |
| Gross Profit | $1.49B |
| SG&A Expenses | $641.70M |
| Operating Expenses | $6.11B |
| Operating Income | $369.50M |
| Net Income | $377.20M |
| EPS (Basic) | $2.69 |
| EPS (Diluted) | $2.60 |
| Shares Outstanding (Basic) | 140.40M |
| Shares Outstanding (Diluted) | 145.10M |
05—Questions
Frequently Asked Questions
How did the RARE Hospitality acquisition affect Darden's financial results in fiscal 2008?
RARE added LongHorn Steakhouse and The Capital Grille, which contributed $574.9 million and $169.8 million of sales respectively from the October 1, 2007 close through fiscal year-end. The acquisition drove the 19.0% sales increase, but it also brought about $44.8 million in pre-tax integration costs and purchase accounting adjustments, higher food and beverage costs (RARE concepts have historically had higher food costs as a percent of sales), and substantially higher interest expense, which rose to $85.7 million from $40.1 million.
Why did net earnings from continuing operations fall even though diluted EPS rose?
Net earnings from continuing operations dropped 2.0% to $369.5 million because of acquisition-related costs, higher food and beverage and wage costs, and higher interest expense. Diluted EPS still rose 0.8% to $2.55 because the diluted share count fell from 148.8 million to 145.1 million, mainly due to ongoing share repurchases.
How much debt does Darden carry now, and is it a concern for investors?
Long-term debt was $1.63 billion at May 25, 2008, versus $492 million a year earlier, and short-term debt was $178.4 million. The debt-to-total-capital ratio rose to 57% and the lease-adjusted ratio to 64%. The company says it intends to maintain an investment-grade rating (Baa3/BBB/BBB) and that its cash flow should cover fiscal 2009 needs, but the higher leverage reduces financial flexibility and raises interest costs, which is a key risk to weigh.
What legal risks does Darden disclose?
The company faces a federal securities class action filed March 13, 2008 on behalf of purchasers of its stock between June 19 and December 18, 2007, alleging misleading statements about fiscal 2008 guidance and prospects. A shareholder demand letter (May 9, 2008) alleges fiduciary breaches, and the board has formed a special litigation committee. Darden also settled several California wage-and-hour class actions (about $4.0 million accrued, plus $0.7 million for a second matter). Management intends to defend the securities action vigorously and does not expect these matters to have a material adverse effect, though outcomes cannot be predicted.
What is management's outlook and capital return plan for fiscal 2009?
Management expects fiscal 2009 sales growth of 14%-15% (including about 2 points from a 53rd week), diluted EPS growth from continuing operations of 14%-15%, combined U.S. same-restaurant sales growth of about 2% for Red Lobster, Olive Garden and LongHorn, and 75-80 net new restaurants. Capital expenditures are projected near $600 million, including about $85 million for a new restaurant support center. The quarterly dividend was raised to $0.20 per share, an indicated annual rate of $0.80, and the company had 15.4 million shares left under its repurchase authorization.
06—Continue