01—Abstract
Summary
Summary of the 10-K filed July 22, 2011. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants (NYSE: DRI) closed fiscal 2011 (ended May 29, 2011) with sales from continuing operations of $7.50 billiona, up 5.4% from $7.11 billion in fiscal 2010, and diluted EPS from continuing operations of $3.41, up 19.2% from $2.86.
Net earnings were $476.3 millionb. Growth was driven by 70 net new restaurants (including 31 Olive Garden, 23 LongHorn Steakhouse) and a 1.4% blended same-restaurant sales increase across Olive Garden, Red Lobster and LongHorn. Restaurant-level margin improved as food and beverage costs rose as a percent of sales but restaurant labor and restaurant expenses fell, and the effective tax rate rose to 26.1%.
The balance sheet and capital allocation were central to the year. Darden repurchased 8.6 million shares for $385.5 millionc, raised the quarterly dividend to 43 cents (an expected $1.72 annual rate for fiscal 2012, a 34.4% increase), and repaid $226.8 million of maturing notes, partly funded by $185.5 million of commercial paper. Adjusted debt to adjusted total capital improved to 56% from 57%, and management guided fiscal 2012 to roughly 80-90 new restaurants, 2.5% blended same-restaurant sales growth, 6-7% total sales growth and 12-15% diluted EPS growth.
Capital expenditures are estimated at about $600 milliond. Key risks for investors include the concentration of goodwill and trademarks in LongHorn Steakhouse and The Capital Grille (LongHorn's fair value exceeded carrying value by only about 116% and The Capital Grille's by about 7%), commodity inflation in seafood and other food costs, the unproven economics of Bahama Breeze, Seasons 52 and synergy restaurants, and the sensitivity of consumer discretionary spending to unemployment and energy prices. The filing reports effective internal controls and an unqualified KPMG audit opinion.
02—Key points
Key Highlights
- Record fiscal 2011 sales from continuing operations of $7.50 billion, up 5.4% year over year, with 70 net new restaurants opened.
- Diluted EPS from continuing operations rose 19.2% to $3.41, on net earnings from continuing operations of $478.7 million (up 17.6%).
- Blended same-restaurant sales rose 1.4% for Olive Garden, Red Lobster and LongHorn Steakhouse, versus a 0.7% benchmark for the industry.
- Share repurchases of $385.5 million (8.6 million shares), with 24.7 million shares remaining under authorization.
- Quarterly dividend raised to $0.43 from $0.32, implying a $1.72 annual rate for fiscal 2012 (+34.4%).
- Fiscal 2012 guidance: 80-90 net new restaurants, ~2.5% blended same-restaurant sales growth, 6-7% sales growth and 12-15% diluted EPS growth.
- Goodwill and trademarks of $971 million are concentrated in LongHorn Steakhouse and The Capital Grille, where fair value headroom is thin (about 7% for The Capital Grille).
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2011, Darden Restaurants Inc kept $0.06.
- Revenue$7.50B100.0%
- Cost of revenue−$5.70B76.0%
- Gross profit$1.80B24.0%
- Operating costs−$1.32B17.6%
- Operating income$478.7M6.4%
- Interest, other & tax−$2.4M0.0%
- Net income$476.3M6.4%
Where FY2011 revenue went
$7.50B- Cost of revenue: $5.70B, 76% of revenue
- Net income: $476.3M, 6.4% of revenue
- SG&A: $742.7M, 9.9% of revenue
- Other operating costs: $579.3M, 7.7% of revenue
Kept 6.4% as net incomeNet income $476.3M · 6.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2011filed July 22, 2011Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $7.50B$7.11B | +5.4% |
| Cost of Revenue | $5.70B$5.48B | +3.9% |
| Gross Profit | $1.80B$1.63B | +10.5% |
| SG&A Expenses | $742.70M$690.70M | +7.5% |
| Operating Expenses | $6.85B$6.57B | +4.3% |
| Operating Income | $478.70M$407.00M | +17.6% |
| Interest Expense | $93.70M$95.70M | −2.1% |
| Net Income | $476.30M$404.50M | +17.8% |
| EPS (Basic) | $3.48$2.90 | +20.0% |
| EPS (Diluted) | $3.39$2.84 | +19.4% |
| Shares Outstanding (Basic) | 136.80M139.30M | −1.8% |
| Shares Outstanding (Diluted) | 140.30M142.40M | −1.5% |
05—Questions
Frequently Asked Questions
How did Darden perform financially in fiscal 2011?
Sales from continuing operations rose 5.4% to $7.50 billion, driven by new restaurants and a 1.4% blended same-restaurant sales increase. Earnings before income taxes rose to $647.6 million from $543.6 million, and diluted EPS from continuing operations reached $3.41 versus $2.86 in fiscal 2010. Margin gains came mainly from lower restaurant labor and restaurant expenses as a percent of sales, partly offset by higher food and beverage costs.
What is the outlook for fiscal 2012?
Management expects 80-90 net new restaurants, blended U.S. same-restaurant sales growth of about 2.5% for Olive Garden, Red Lobster and LongHorn, total sales growth of 6-7%, and diluted EPS growth from continuing operations of 12-15%. Capital expenditures are estimated at about $600 million.
How strong is Darden's balance sheet and how is it returning capital?
Total debt was $1.65 billion and adjusted debt to adjusted total capital improved to 56% from 57%. Darden repurchased $385.5 million of stock and paid $175.5 million in dividends in fiscal 2011, and raised the dividend sharply for fiscal 2012. It plans to refinance the $350 million of 5.625% notes due October 2012 with new unsecured debt, and it holds a $750 million revolver with $496.3 million of availability. Debt ratings are Baa2/BBB/BBB.
What are the main risks to the investment case?
Key risks include seafood and other commodity inflation, consumer sensitivity to unemployment and energy prices, and intense competition. Goodwill and trademark impairment is a concern because The Capital Grille's fair value exceeded its carrying value by only about 7% and LongHorn's by about 116%. Bahama Breeze, Seasons 52 and the synergy restaurant format are still unproven, and the company has significant exposure to labor-cost and health care reform changes.
Are there any notable one-time items or accounting changes affecting the results?
Fiscal 2010 earnings were reduced by about nine cents per diluted share from gift card breakage adjustments, which made the fiscal 2011 comparison easier. Discontinued operations produced a small after-tax loss of $2.4 million ($0.02 per share). Asset impairment charges were modest at $4.7 million. The company also reclassified workers' compensation and general liability accruals to a gross basis, with no effect on reported earnings.
06—Continue