01—Abstract
Summary
Summary of the 10-K filed July 20, 2012. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants (DRI) closed fiscal 2012 (ended May 27, 2012) with sales from continuing operations of $8.00 billiona, up 6.6% from $7.50 billion, driven by 89 net new restaurants, 11 acquired Eddie V's locations and a 1.8% blended same-restaurant sales increase at Olive Garden, Red Lobster and LongHorn Steakhouse.
Diluted EPS from continuing operations rose 5.0% to $3.58b, even though net earnings from continuing operations slipped 0.5% to $476.5 million, because the share count fell from 140.3 million to 133.2 million through buybacks. Margin pressure was visible: food and beverage costs rose to 30.8% of sales from 29.0%, driven by seafood and other commodity inflation and unfavorable menu mix, while restaurant labor and SG&A leverage partly offset it. Balance sheet leverage increased meaningfully.
Total debt rose to $2.13 billionc from $1.65 billion, the debt-to-total-capital ratio reached 54% versus 46%, and the adjusted debt-to-adjusted-capital ratio reached 62% versus 56%. Stockholders' equity fell to $1.84 billion. Management funded $375 million of buybacks and $224 million of dividends while also investing $640 million in capital expenditures, with operating cash flow declining to $762 million from $895 million.
The company also agreed to acquire Yard House for $585 milliond in cash (expected to close early in fiscal 2013), and it raised the quarterly dividend to $0.50 from $0.43. Looking ahead, management guided fiscal 2013 blended same-restaurant sales growth of 1% to 2% for the core brands, total sales growth of 9% to 10% including Yard House, diluted EPS growth of 5% to 9%, about 100 to 110 net new restaurants and capex of roughly $750 million. Investors should weigh the growth in unit count and acquisitions against the rising leverage, the commodity cost headwinds and the still-modest same-store sales growth at the core brands.
02—Key points
Key Highlights
- Sales from continuing operations rose 6.6% to $8.00 billion, driven by 89 net new restaurants, 11 acquired Eddie V's units and a 1.8% blended same-restaurant sales increase at Olive Garden, Red Lobster and LongHorn Steakhouse.
- Diluted EPS from continuing operations increased 5.0% to $3.58, while net earnings from continuing operations declined 0.5% to $476.5 million; the difference reflects a 6.8% reduction in average diluted shares from share repurchases.
- Food and beverage costs rose to 30.8% of sales from 29.0% in fiscal 2011, reflecting seafood and commodity inflation and unfavorable menu mix, which compressed margins despite pricing and labor leverage.
- Total debt increased to $2.13 billion from $1.65 billion; the debt-to-total-capital ratio reached 54% (vs. 46%) and the adjusted debt-to-adjusted-capital ratio reached 62% (vs. 56%), with $375 million spent on buybacks and $224 million on dividends.
- Operating cash flow from continuing operations fell to $762 million from $895 million, mainly due to a $103 million inventory build and the settlement of October 2011 treasury-lock instruments.
- Pending $585 million all-cash acquisition of Yard House (39 restaurants) is expected to close early in fiscal 2013 and will be funded with additional debt.
- Fiscal 2013 guidance calls for 1%-2% blended same-restaurant sales growth, 9%-10% total sales growth including Yard House, 5%-9% diluted EPS growth, 100-110 net new restaurants and roughly $750 million of capital expenditures.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2012, Darden Restaurants Inc kept $0.09.
- Revenue$5.33B100.0%
- Cost of revenue−$4.09B76.7%
- Gross profit$1.24B23.3%
- Operating costs−$959.6M18.0%
- Operating income$279.2M5.2%
- Interest, other & tax$196.3M3.7%
- Net income$475.5M8.9%
Where FY2012 revenue went
$5.33B- Cost of revenue: $4.09B, 77% of revenue
- Operating income: $279.2M, 5.2% of revenue
- SG&A: $540.1M, 10% of revenue
- Other operating costs: $419.5M, 7.9% of revenue
Kept 5.2% as operating incomeOperating income $279.2M · 5.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2012filed July 20, 2012Financial Statements
FY2012 against FY2011
| Line item | FY2012FY2011 | Change |
|---|---|---|
| Revenue | $5.33B$7.50B | −29.0% |
| Cost of Revenue | $4.09B$5.70B | −28.3% |
| Gross Profit | $1.24B$1.80B | −31.2% |
| SG&A Expenses | $540.10M$742.70M | −27.3% |
| Operating Expenses | $4.97B$6.85B | −27.4% |
| Operating Income | $279.20M$478.70M | −41.7% |
| Interest Expense | $102.70M$93.70M | +9.6% |
| Net Income | $475.50M$476.30M | −0.2% |
| EPS (Basic) | $3.65$3.48 | +4.9% |
| EPS (Diluted) | $3.57$3.39 | +5.3% |
| Shares Outstanding (Basic) | 130.10M136.80M | −4.9% |
| Shares Outstanding (Diluted) | 133.20M140.30M | −5.1% |
05—Questions
Frequently Asked Questions
How did Darden perform in fiscal 2012 compared with fiscal 2011?
Sales from continuing operations grew 6.6% to $8.00 billion, and diluted EPS from continuing operations rose 5.0% to $3.58. Net earnings from continuing operations, however, fell 0.5% to $476.5 million, as higher food costs, depreciation and interest expense outweighed sales growth. The EPS gain came mainly from a lower share count.
Why did Darden's leverage increase, and is it a concern?
Total debt rose by about $470 million to $2.13 billion, largely from short-term commercial paper used to fund share repurchases, the $400 million 4.5% senior notes issued in October 2011, and capital spending. The debt-to-total-capital ratio rose to 54% and the adjusted ratio, which includes lease obligations, to 62%. Management says the company still maintains an investment-grade rating (Baa2/BBB/BBB), but the higher leverage limits financial flexibility, and the Yard House acquisition will add further debt.
What is driving food costs higher, and can margins recover?
Food and beverage costs increased to 30.8% of sales from 29.0%, due to higher seafood and other commodity costs and unfavorable menu mix, partly offset by pricing. Restaurant labor and SG&A fell as a share of sales, which limited the overall margin hit. Recovery depends on commodity prices, pricing power and the mix of menu items; the 10-K flags seafood price volatility and hedging-related earnings volatility as ongoing risks.
What are the key growth drivers and risks for fiscal 2013?
Growth drivers include 100-110 planned net new restaurants (Olive Garden, LongHorn Steakhouse and the Specialty Restaurant Group), the Yard House acquisition, and a new digital and marketing platform. Management guides to 1%-2% blended same-restaurant sales and 5%-9% diluted EPS growth. Key risks include weak consumer spending, commodity and labor cost inflation, the unproven economics of newer brands such as Bahama Breeze, Seasons 52 and Eddie V's, integration of Yard House, and goodwill and trademark impairment exposure if performance weakens.
Is the dividend and share repurchase program sustainable?
Darden raised its quarterly dividend 16.3% to $0.50 per share, an expected $2.00 annual rate, after paying $224 million in fiscal 2012. It repurchased 8.2 million shares for $375 million and had 16.5 million shares left under authorization. Cash flow from operations of $762 million covered dividends and capex but not the full buyback amount, which was funded partly with short-term debt. Sustaining both at current levels would therefore depend on continued operating cash flow growth or additional borrowing, which the higher leverage makes more costly.
06—Continue