01—Abstract
Summary
Summary of the 10-K filed July 19, 2013. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants (NYSE: DRI) reported fiscal 2013 (ended May 26, 2013) results that show a company growing its top line through expansion and acquisition while absorbing margin pressure.
Sales from continuing operations rose 6.9% to $8.55 billiona, driven by 104 net new company-owned restaurants, the addition of 40 Yard House restaurants acquired for $585 million in August 2012, and a 2.1% blended same-restaurant sales gain at The Capital Grille, Bahama Breeze and Seasons 52. Those gains were partially offset by a 1.3% blended same-restaurant sales decline at Olive Garden, Red Lobster and LongHorn Steakhouse, where U.S. same-restaurant guest counts fell at Olive Garden (-2.8%) and Red Lobster (-1.8%). Profitability weakened meaningfully.
Earnings from continuing operations fell 13.4% to $412.6 millionb, and diluted EPS from continuing operations dropped 12.3% to $3.14. Management attributed the decline to higher SG&A (up 13.5%, including media costs and Yard House acquisition and integration costs of roughly $0.09 per share), restaurant expenses, depreciation and interest expense, partially offset by a lower effective tax rate of 21.0% (versus 25.3% in fiscal 2012, aided by FICA tips credits). Restaurant labor rose as a percent of sales on wage inflation and lost sales leverage.
Leverage also increased: total debt rose to $2.72 billionc and the adjusted debt-to-adjusted-capital ratio reached 65% (from 62%), with the company citing an investment-grade rating (Baa2/BBB/BBB). Looking ahead, management guided fiscal 2014 blended U.S. same-restaurant sales from flat to +2.0%, total sales growth of 6–8% including Yard House, diluted EPS from continuing operations 3–5% below fiscal 2013, roughly 80 net new restaurants, and capital expenditures of $600–650 million. Capital returns remain a priority: the quarterly dividend was raised to $0.55 (a $2.20 annualized rate, up 10%), and the company retired 159.3 million treasury shares in fiscal 2013 while repurchasing only 1.0 million shares.
The filing also discloses a pending collective wage-and-hour action (Alequin v. Darden) covering servers and bartenders, for which no loss estimate can yet be made.
02—Key points
Key Highlights
- Sales from continuing operations rose 6.9% to $8.55 billion, aided by 104 net new restaurants and the 40-unit Yard House acquisition ($585 million, cash).
- Blended U.S. same-restaurant sales fell 1.3% at Olive Garden, Red Lobster and LongHorn Steakhouse, driven by guest count declines at Olive Garden (-2.8%) and Red Lobster (-1.8%).
- Earnings from continuing operations fell 13.4% to $412.6 million; diluted EPS from continuing operations fell 12.3% to $3.14, with Yard House costs weighing about $0.09 per share.
- SG&A rose 13.5% to $847.8 million and net interest expense rose 23.9% to $125.9 million, reflecting media spending and acquisition-related debt.
- Effective tax rate fell to 21.0% from 25.3%, which flattered net earnings relative to operating trends.
- Total debt increased to $2.72 billion; adjusted debt-to-adjusted-capital rose to 65% from 62%, while the company maintains investment-grade ratings.
- FY2014 guidance: 6–8% total sales growth, EPS 3–5% below FY2013, about 80 net new restaurants, $600–650 million capex; quarterly dividend raised 10% to $0.55.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2013, Darden Restaurants Inc kept $0.07.
- Revenue$5.92B100.0%
- Cost of revenue−$4.86B82.0%
- Gross profit$1.06B18.0%
- Operating costs−$663.3M11.2%
- Operating income$400.0M6.8%
- Interest, other & tax$11.9M0.2%
- Net income$411.9M7.0%
Where FY2013 revenue went
$5.92B- Cost of revenue: $4.62B, 78% of revenue
- Operating income: $400.0M, 6.8% of revenue
- SG&A: $625.4M, 11% of revenue
- Other operating costs: $279.0M, 4.7% of revenue
Kept 6.8% as operating incomeOperating income $400.0M · 6.8%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2013filed July 19, 2013Financial Statements
FY2013 against FY2012
| Line item | FY2013FY2012 | Change |
|---|---|---|
| Revenue | $5.92B$5.33B | +11.1% |
| Cost of Revenue | $4.62B$4.09B | +12.9% |
| Gross Profit | $1.06B$1.24B | −14.2% |
| SG&A Expenses | $625.40M$540.10M | +15.8% |
| Operating Expenses | $5.52B$4.97B | +11.0% |
| Operating Income | $400.00M$279.20M | +43.3% |
| Interest Expense | $126.20M$102.70M | +22.9% |
| Net Income | $411.90M$475.50M | −13.4% |
| EPS (Basic) | $3.19$3.65 | −12.6% |
| EPS (Diluted) | $3.13$3.57 | −12.3% |
| Shares Outstanding (Basic) | 129.00M130.10M | −0.8% |
| Shares Outstanding (Diluted) | 131.60M133.20M | −1.2% |
05—Questions
Frequently Asked Questions
Why did Darden's earnings decline in fiscal 2013 even though sales grew nearly 7%?
Sales growth was driven largely by new units and the Yard House acquisition, but costs grew faster. SG&A rose 13.5% (including media spending and acquisition costs), restaurant expenses rose 11.1% (Yard House carried higher expense ratios), depreciation rose 13.1%, and interest expense rose 23.9%. Same-restaurant sales also declined at the three largest brands, so operating leverage worked against the company. A lower tax rate partially cushioned the decline.
How healthy is Darden's balance sheet after the Yard House acquisition?
Leverage increased. Total debt rose to $2.72 billion from $2.13 billion, and the adjusted debt-to-adjusted-capital ratio reached 65% versus 62% a year earlier. The company remains within its covenants (maximum 0.75x lease-adjusted debt to capitalization), had $585.5 million of revolver availability, and holds investment-grade ratings (Baa2/BBB/BBB). Management characterizes its financial condition as strong, but the higher debt load reduces financial flexibility and raises interest costs.
What is management guiding to for fiscal 2014?
Management expects blended U.S. same-restaurant sales of flat to +2.0% for Olive Garden, Red Lobster and LongHorn Steakhouse, total sales growth of 6–8% including Yard House, and diluted EPS from continuing operations 3–5% below fiscal 2013. It expects higher food and beverage and labor costs as a percent of sales, approximately 80 net new restaurants, and capex of $600–650 million.
Is the dividend safe, and how much capital is being returned to shareholders?
The dividend appears well covered by operating cash flow ($949.5 million in fiscal 2013 from continuing operations). Dividends paid rose to $258.2 million, and the quarterly rate was raised to $0.55 (a $2.20 annual rate, up 10%). Share repurchases were modest at $52.4 million (1.0 million shares) versus $375.1 million in fiscal 2012, with 15.5 million shares remaining under authorization. Dividend growth is currently outpacing earnings growth, which bears watching given the expected EPS decline in fiscal 2014.
What legal or operational risks should investors monitor?
The most specific legal exposure is Alequin v. Darden, a nationwide collective action under the Fair Labor Standards Act alleging off-the-clock work and improper tip-credit practices for servers and bartenders at several brands. The court conditionally certified the class in July 2013, and the company cannot yet estimate a potential loss. Other ongoing risks include food-cost and wage inflation, the Affordable Care Act's cost impact expected in fiscal 2014, the still-unproven smaller brands (Bahama Breeze, Seasons 52, Eddie V's), and goodwill and trademark impairment risk, since headroom is sensitive to a higher discount rate.
06—Continue