01—Abstract
Summary
Summary of the 10-K filed July 23, 2010. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants (DRI) reported fiscal 2010 (52 weeks ended May 30, 2010) results that showed resilience despite a weak same-restaurant sales environment.
Sales from continuing operations were $7.11 billiona, down 1.4% from $7.22 billion in fiscal 2009, which had a 53rd week contributing $123.7 million. Combined same-restaurant sales for Olive Garden, Red Lobster and LongHorn fell 2.6%, though this outperformed the Knapp-Track benchmark decline of 4.9%. Net earnings from continuing operations rose 9.5% to $407.0 million, and diluted EPS from continuing operations rose 7.9% to $2.86, helped by lower food and beverage, restaurant expense and interest costs as a percent of sales, partly offset by a roughly nine-cent hit from a gift card breakage estimate change.
The balance sheet strengthened meaningfully. Total debt fell to $1.70 billionb from $1.85 billion, the adjusted debt-to-adjusted-capital ratio improved to 57% from 62%, and cash rose to $248.8 million. Operating cash flow from continuing operations increased to $903.4 million.
Management guided fiscal 2011 to 70-75 net new restaurants, a 2-3% combined U.S. same-restaurant sales increase, 5.5-6.5% sales growth, and 14-17% diluted EPS growth from continuing operations. The Board also raised the quarterly dividend 28% to $0.32c. Key risks for investors include continued traffic weakness at Red Lobster and Olive Garden, the still-elevated leverage after the 2007 RARE acquisition, goodwill and trademark exposure to LongHorn and The Capital Grille (LongHorn goodwill cushion of about 82% and Capital Grille about 18%), commodity and seafood cost volatility, and the unproven profitability of newer brands Bahama Breeze and Seasons 52.
02—Key points
Key Highlights
- Sales from continuing operations were $7.11 billion, down 1.4% year over year, largely because fiscal 2009 included a 53rd week worth $123.7 million; combined same-restaurant sales for Olive Garden, Red Lobster and LongHorn declined 2.6%, outperforming the -4.9% Knapp-Track benchmark.
- Diluted EPS from continuing operations rose 7.9% to $2.86 (net earnings from continuing operations up 9.5% to $407.0 million), though a gift card breakage adjustment reduced EPS growth by about nine cents.
- Total debt declined to $1.70 billion from $1.85 billion, and the adjusted debt-to-adjusted-capital ratio improved to 57% from 62%, back near pre-RARE-acquisition levels.
- Operating cash flow from continuing operations increased to $903.4 million, up from $783.5 million, while capital expenditures fell to $432.1 million from $535.3 million as the new restaurant support center was completed.
- Olive Garden remains the largest contributor with $3.32 billion in sales and 723 restaurants, while Red Lobster posted a 5.3% sales decline to $2.49 billion driven by a 6.3% drop in guest counts.
- Fiscal 2011 guidance calls for 70-75 net new restaurants, 2-3% combined same-restaurant sales growth, 5.5-6.5% sales growth, and 14-17% diluted EPS growth from continuing operations.
- The quarterly dividend was raised 28% to $0.32 per share (annualized $1.28), and the company had 8.3 million shares remaining under its repurchase authorization.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2010, Darden Restaurants Inc kept $0.06.
- Revenue$7.11B100.0%
- Cost of revenue−$5.48B77.1%
- Gross profit$1.63B22.9%
- Operating costs−$1.22B17.2%
- Operating income$407.0M5.7%
- Interest, other & tax−$2.5M0.0%
- Net income$404.5M5.7%
Where FY2010 revenue went
$7.11B- Cost of revenue: $5.48B, 77% of revenue
- Net income: $404.5M, 5.7% of revenue
- SG&A: $690.7M, 9.7% of revenue
- Other operating costs: $531.4M, 7.5% of revenue
Kept 5.7% as net incomeNet income $404.5M · 5.7%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2010filed July 23, 2010Financial Statements
FY2010 against FY2009
| Line item | FY2010FY2009 | Change |
|---|---|---|
| Revenue | $7.11B$7.22B | −1.4% |
| Cost of Revenue | $5.48B$5.64B | −2.7% |
| Gross Profit | $1.63B$1.58B | +3.1% |
| SG&A Expenses | $690.70M$665.60M | +3.8% |
| Operating Expenses | $6.57B$6.71B | −2.0% |
| Operating Income | $407.00M$371.80M | +9.5% |
| Interest Expense | $95.70M$113.70M | −15.8% |
| Net Income | $404.50M$372.20M | +8.7% |
| EPS (Basic) | $2.90$2.71 | +7.0% |
| EPS (Diluted) | $2.84$2.65 | +7.2% |
| Shares Outstanding (Basic) | 139.30M137.40M | +1.4% |
| Shares Outstanding (Diluted) | 142.40M140.40M | +1.4% |
05—Questions
Frequently Asked Questions
How did Darden perform in fiscal 2010 compared with fiscal 2009?
Sales from continuing operations fell 1.4% to $7.11 billion, mainly because fiscal 2009 had a 53rd week and same-restaurant sales declined. Despite lower sales, net earnings from continuing operations rose 9.5% to $407.0 million, and diluted EPS from continuing operations rose 7.9% to $2.86, reflecting lower food, restaurant expense and interest costs as a percent of sales.
Is Darden's balance sheet getting stronger?
Yes. Total debt fell to $1.70 billion from $1.85 billion, cash increased to $248.8 million from $62.9 million, and the adjusted debt-to-adjusted-capital ratio improved to 57% from 62%. The company also had no borrowings outstanding under its $750 million revolving credit facility at year end, with $691.6 million of credit available. However, the balance sheet still carries leverage from the 2007 RARE acquisition, and the company's covenant headroom is limited to roughly $1.07 billion in after-tax impairments before a leverage default.
What are the main risks to Darden's growth and earnings?
Key risks include weak guest traffic at Red Lobster and Olive Garden, intense competition from casual and supermarket alternatives, commodity and seafood price volatility, labor and insurance cost inflation, and the unproven long-term viability of Bahama Breeze and Seasons 52. There is also goodwill and trademark impairment risk tied to LongHorn Steakhouse and The Capital Grille, where a higher cost of capital of roughly 725 and 170 basis points, respectively, would trigger goodwill impairment. Macroeconomic pressure on consumer discretionary spending and health care reform costs are additional concerns.
What does management expect for fiscal 2011?
Management expects 70 to 75 net new restaurants, combined U.S. same-restaurant sales growth of 2% to 3% for Red Lobster, Olive Garden and LongHorn Steakhouse, sales growth of 5.5% to 6.5%, and diluted EPS growth from continuing operations of 14% to 17%. Capital expenditures are estimated at $475 million to $525 million, and annual dividends are expected to be $1.28 per share following the quarterly increase to $0.32.
Why is the dividend increasing, and how sustainable is it?
The Board raised the quarterly dividend 28% from $0.25 to $0.32 per share, bringing the annual rate to $1.28, after increasing it from $0.72 in fiscal 2008 to $1.00 in fiscal 2010. Dividends paid rose to $140.0 million in fiscal 2010. Sustainability depends on continued earnings growth and operating cash flow, which covered dividends comfortably at $903.4 million in fiscal 2010, but dividends remain subject to Board approval.
06—Continue