01—Abstract
Summary
Summary of the 10-K filed July 24, 2009. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants' fiscal 2009 10-K (year ended May 31, 2009, a 53-week year) shows a company that grew sales while absorbing a weak consumer environment and a heavier debt load from the 2007 RARE Hospitality acquisition.
Sales from continuing operations rose 8.9% to $7.22 billiona, driven mainly by the first full year of LongHorn Steakhouse and The Capital Grille, 64 net new restaurants across the core concepts, and the extra week (which contributed $123.7 million). Excluding the 53rd week, the company's own commentary implies growth closer to the mid-single digits. Same-restaurant sales for Olive Garden, Red Lobster and LongHorn combined fell 1.4%, which management notes compares favorably to a 5.6% decline in the Knapp-Track benchmark.
Diluted EPS from continuing operations rose 3.9% to $2.65b, though net earnings from continuing operations rose only 0.6%, reflecting the share count reduction from buybacks. Margins compressed: the restaurant-level cost of sales rose as a percentage of sales, interest expense climbed 25% to $107.4 million, and pre-tax margin fell from 7.8% to 7.1%. Balance sheet and cash flow are the key investor watch items.
Total debt was about $1.85 billionc against $1.61 billion of stockholders' equity, and the adjusted debt-to-adjusted-capital ratio improved modestly to 62% from 64%. Operating cash flow from continuing operations was $783.5 million, comfortably covering capital expenditures of $535.3 million and dividends of $110.2 million. Management guided fiscal 2010 to flat-to-slightly-lower sales and EPS from -2% to +8%, with 50-55 net new restaurants and a 25% dividend increase to an annualized $1.00 per share.
The company also disclosed a Lehman Brothers commitment default that reduced revolver availability to $502.6 milliond, and several pending legal matters, including a securities class action and a shareholder derivative suit. Goodwill ($518.7 million) and trademarks ($454.4 million) remain significant and carry sensitivity to discount-rate changes, particularly for LongHorn and The Capital Grille.
02—Key points
Key Highlights
- Sales from continuing operations rose 8.9% to $7.22 billion, aided by a 53rd week that contributed $123.7 million and by the full-year contribution of the RARE concepts (LongHorn Steakhouse and The Capital Grille).
- Diluted EPS from continuing operations was $2.65, up 3.9%, while net earnings from continuing operations rose only 0.6% to $371.8 million, reflecting the benefit of share repurchases.
- Combined same-restaurant sales for Olive Garden, Red Lobster and LongHorn fell 1.4%, outperforming the 5.6% decline in the Knapp-Track benchmark, though guest counts weakened across most concepts.
- Interest expense rose 25% to $107.4 million following the RARE acquisition debt, and the pre-tax margin fell to 7.1% from 7.8%.
- Operating cash flow from continuing operations was $783.5 million versus $535.3 million of capital expenditures; the quarterly dividend was raised to $0.25 (annualized $1.00), a 25% increase.
- Fiscal 2010 guidance calls for sales of -1% to +1% and diluted EPS of -2% to +8%, with 50-55 net new restaurants and capex of $450-475 million.
- Risk items include a Lehman Brothers revolver default (reducing availability to $502.6 million), a securities class action, a shareholder derivative suit, and goodwill/trademark sensitivity at LongHorn and The Capital Grille.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2009, Darden Restaurants Inc kept $0.05.
- Revenue$7.22B100.0%
- Cost of revenue−$5.64B78.1%
- Gross profit$1.58B21.9%
- Operating costs−$1.21B16.7%
- Operating income$371.8M5.2%
- Interest, other & tax$400,0000.0%
- Net income$372.2M5.2%
Where FY2009 revenue went
$7.22B- Cost of revenue: $5.64B, 78% of revenue
- Operating income: $371.8M, 5.2% of revenue
- SG&A: $665.6M, 9.2% of revenue
- Other operating costs: $543.2M, 7.5% of revenue
Kept 5.2% as operating incomeOperating income $371.8M · 5.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2009filed July 24, 2009Financial Statements
FY2009 against FY2008
| Line item | FY2009FY2008 | Change |
|---|---|---|
| Revenue | $7.22B$6.63B | +8.9% |
| Cost of Revenue | $5.64B$5.14B | +9.7% |
| Gross Profit | $1.58B$1.49B | +6.2% |
| SG&A Expenses | $665.60M$641.70M | +3.7% |
| Operating Expenses | $6.71B$6.11B | +9.7% |
| Operating Income | $371.80M$369.50M | +0.6% |
| Interest Expense | $113.70M— | — |
| Net Income | $372.20M$377.20M | −1.3% |
| EPS (Basic) | $2.71$2.69 | +0.7% |
| EPS (Diluted) | $2.65$2.60 | +1.9% |
| Shares Outstanding (Basic) | 137.40M140.40M | −2.1% |
| Shares Outstanding (Diluted) | 140.40M145.10M | −3.2% |
05—Questions
Frequently Asked Questions
How much of the fiscal 2009 sales growth was organic versus driven by the extra week and the RARE acquisition?
The 53rd week added $123.7 million, and the RARE concepts were included for a full year versus about eight months in fiscal 2008. Olive Garden sales grew 7.2% and LongHorn grew 3.6% over the comparable prior-year period, but same-restaurant sales were mixed (Olive Garden +0.3%, Red Lobster -2.2%, LongHorn -5.6%, all on a 52-week basis). Growth was therefore driven mainly by new units and acquisition timing rather than comparable-store strength.
Why did net earnings grow far less than diluted EPS?
Net earnings from continuing operations rose only 0.6% to $371.8 million, while diluted EPS rose 3.9% to $2.65. The difference is due to a reduction in diluted shares from 145.1 million to 140.4 million, driven by the company's ongoing repurchase program, which bought back 5.1 million shares for $144.9 million in fiscal 2009.
How leveraged is Darden after the RARE acquisition, and is the balance sheet a concern?
Total debt was $1.85 billion at May 31, 2009, and the debt-to-total-capital ratio was 54%, down from 57%. The adjusted debt-to-adjusted-capital ratio, which includes lease obligations, was 62%, down from 64%. Fixed-charge coverage was 4.2 times. The company stated it was in compliance with its covenants, and the next major maturities are $225 million in 2011 and $350 million in 2013. Management describes the financial condition as strong, though the higher leverage reduces flexibility relative to pre-acquisition levels.
What are the main risks to fiscal 2010 earnings that investors should monitor?
Key risks include continued weakness in restaurant traffic (Red Lobster guest counts fell 5.1%), commodity and food cost inflation (dairy, wheat, pork, seafood volatility), higher interest expense from refinancing maturities, a possible goodwill or trademark impairment if LongHorn or The Capital Grille underperform (a 100-basis-point rise in LongHorn's discount rate would trigger impairment), and litigation including a securities class action and derivative suit. Management's guidance already reflects an absence of the 53rd-week benefit, which masks a weaker underlying sales trend.
Why did the company raise its dividend and what does it signal?
The board increased the quarterly dividend from $0.20 to $0.25 per share, an annualized $1.00 versus $0.80 in fiscal 2009 (a 25% increase). This signals management confidence in cash generation, given operating cash flow of $783.5 million and dividends paid of $110.2 million in fiscal 2009. Dividend payments are subject to board approval and may change, and the increase raises annual cash outflows at a time when debt levels are elevated.
06—Continue