01—Abstract
Summary
Summary of the 10-K filed July 18, 2014. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants' fiscal 2014 10-K (year ended May 25, 2014) shows a company in transition.
Continuing-operations sales rose 6.2% to $6.29 billiona, driven by 70 net new restaurants and a 2.7% same-restaurant sales gain at LongHorn Steakhouse, partly offset by a 3.4% decline at Olive Garden. However, profitability weakened sharply: continuing-operations net earnings fell 22.8% to $183.2 million ($1.38 diluted EPS), as food and beverage and restaurant labor costs rose faster than sales, and the company absorbed roughly $0.23 per share of one-time strategic plan, impairment and workforce reduction costs. Total diluted EPS, including discontinued operations, was $2.15 versus $3.13 a year earlier.
The defining event is the pending $2.11 billionb cash sale of Red Lobster (announced May 15, 2014), which is classified as discontinued operations and held for sale. Management plans to use about $1.00 billion of the expected ~$1.60 billion net proceeds to retire debt and $500-600 million for share repurchases, while maintaining the $2.20 annual dividend. The filing also discloses an activist challenge from Starboard Value, which has nominated 12 director candidates for the 2014 annual meeting.
A potential board change could trigger change-of-control provisions in the company's credit facilities and certain notes, a material risk that management says the Board may be able to mitigate through technical actions. For investors, the key questions are whether the Red Lobster sale closes as expected in fiscal Q1 2015, whether Olive Garden's same-restaurant sales decline can be reversed, and how the proxy contest and debt-retirement plan play out. Management guides fiscal 2015 continuing-operations diluted EPS up 30-35%c, sales up 5-7% (including a 53rd week), and 35-40 net new restaurants.
02—Key points
Key Highlights
- Continuing-operations sales grew 6.2% to $6.29 billion, but diluted EPS from continuing operations fell 23.3% to $1.38 as cost inflation pressured margins.
- Red Lobster sale for $2.11 billion in cash is pending, expected to close in Q1 fiscal 2015; net proceeds of about $1.60 billion are planned for debt reduction (~$1.00 billion) and share repurchases ($500-600 million).
- Olive Garden same-restaurant sales fell 3.4% (guest counts down 4.2%), while LongHorn Steakhouse grew same-restaurant sales 2.7% and added 34 net new restaurants.
- Starboard Value nominated 12 director candidates for the 2014 annual meeting; a majority board change could trigger change-of-control provisions on about $1.9 billion of debt and management agreements.
- Approximately $0.23 per diluted share of one-time costs hit continuing operations, including strategic plan expenses, asset impairments and a September 2013 workforce reduction.
- Quarterly dividend held at $0.55 ($2.20 annualized); fiscal 2015 guidance calls for diluted EPS from continuing operations up 30-35%, sales up 5-7%, and capex of $325-350 million.
- Net debt-related and lease obligations are substantial: total debt of $2.76 billion, adjusted debt-to-adjusted capital of 65%, and a pending tender offer for up to $610 million of senior notes.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2014, Darden Restaurants Inc kept $0.05.
- Revenue$6.29B100.0%
- Cost of revenue−$5.24B83.4%
- Gross profit$1.04B16.6%
- Operating costs−$733.9M11.7%
- Operating income$308.9M4.9%
- Interest, other & tax−$22.7M0.4%
- Net income$286.2M4.6%
Where FY2014 revenue went
$6.29B- Cost of revenue: $4.99B, 79% of revenue
- Net income: $286.2M, 4.6% of revenue
- SG&A: $663.5M, 11% of revenue
- Other operating costs: $322.7M, 5.1% of revenue
Kept 4.6% as net incomeNet income $286.2M · 4.6%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2014filed July 18, 2014Financial Statements
FY2014 against FY2013
| Line item | FY2014FY2013 | Change |
|---|---|---|
| Revenue | $6.29B$5.92B | +6.2% |
| Cost of Revenue | $4.99B$4.62B | +8.1% |
| Gross Profit | $1.04B$1.06B | −1.9% |
| SG&A Expenses | $663.50M$625.40M | +6.1% |
| Operating Expenses | $5.98B$5.52B | +8.3% |
| Operating Income | $308.90M$400.00M | −22.8% |
| Interest Expense | $134.00M$126.20M | +6.2% |
| Net Income | $286.20M$411.90M | −30.5% |
| EPS (Basic) | $2.18$3.19 | −31.7% |
| EPS (Diluted) | $2.15$3.13 | −31.3% |
| Shares Outstanding (Basic) | 131.00M129.00M | +1.6% |
| Shares Outstanding (Diluted) | 133.20M131.60M | +1.2% |
05—Questions
Frequently Asked Questions
Why did Darden's earnings decline in fiscal 2014 even though sales grew?
Sales from continuing operations rose 6.2%, but food and beverage costs rose to 30.1% of sales from 29.4%, restaurant labor rose to 32.1% from 32.0%, and restaurant expenses rose to 17.2% from 16.6%. Continuing-operations net earnings fell 22.8% to $183.2 million. About $0.23 per diluted share of one-time strategic plan, impairment and workforce reduction costs also weighed on results.
What happens to Darden after the Red Lobster sale?
Red Lobster and two closed synergy restaurants are classified as discontinued operations and held for sale. The company expects to close the $2.11 billion sale in Q1 fiscal 2015 and plans to use about $1.00 billion of net proceeds to retire debt, with $500-600 million earmarked for share repurchases. The remaining four synergy restaurants will be converted to Olive Garden. Darden will then consist of Olive Garden, LongHorn Steakhouse and its Specialty Restaurant Group brands.
What is the risk from the activist shareholder Starboard Value?
Starboard nominated 12 director candidates for the 2014 annual meeting and could gain a board majority. A change in a majority of the board could trigger change-of-control provisions in the revolving credit facility, term loan and certain senior notes, potentially accelerating obligations on about $1.9 billion of debt. The board says it may take technical actions to avoid triggering these provisions, and management continuity agreements could also be affected. A proxy contest would also raise legal and solicitation costs.
How is Olive Garden performing, and why does it matter?
Olive Garden is the largest brand, with fiscal 2014 sales of $3.64 billion, down 1.1%. U.S. same-restaurant sales fell 3.4%, driven by a 4.2% drop in guest counts partly offset by a 0.8% increase in average check. Average annual sales per restaurant declined to $4.4 million from $4.6 million. Management is pursuing a 'brand renaissance' and a new online ordering system, and the brand's trajectory is central to the investment case after the Red Lobster sale.
What does Darden's fiscal 2015 outlook imply for investors?
Management expects continuing-operations sales to rise 5-7% (including a 53rd week), diluted EPS from continuing operations to rise 30-35%, same-restaurant sales of flat to +1% at Olive Garden and +1-2% at LongHorn, and 35-40 net new restaurants with capex of $325-350 million. Food and labor costs are expected to rise as a percent of sales. The dividend is maintained at $2.20 per share annualized, and the outlook is contingent on completing the Red Lobster sale and debt retirement.
06—Continue