01—Abstract
Summary
Summary of the 10-K filed July 24, 2015. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants (DRI) reported fiscal 2015 (53 weeks ended May 31, 2015) with continuing-operations sales of $6.76 billiona, up 7.6% from $6.29 billion, driven by 33 net new company-owned restaurants and a combined same-restaurant sales increase of 2.4% on a 52-week basis.
Excluding the 53rd week, sales grew about 5.6%. Earnings from continuing operations rose 7.2% to $196.4 millionb ($1.51 diluted EPS), but that figure absorbed roughly $1.10 per share of one-time charges, including $91.3 million of debt extinguishment costs, lobster aquaculture and other impairments, severance, and strategic action plan and proxy contest costs. Reported net earnings were $709.5 million ($5.47 diluted EPS), inflated by the $837.0 million pre-tax gain on the July 2014 sale of Red Lobster to RL Acquisition LLC for $2.08 billion in net proceeds.
Note that continuing-operations results were also helped by a negative effective tax rate of -12.0%. The balance sheet improved materially. Darden used Red Lobster proceeds to retire about $1.01 billionc of long-term debt and repurchased $502 million of stock through a $500 million accelerated share repurchase.
Total debt fell to $1.54 billiond from $2.76 billion, and the adjusted debt-to-capital ratio improved to 55% from 65%. Cash rose to $536 million. Management guided fiscal 2016 for combined same-restaurant sales growth of 2.0% to 2.5%, sales growth of 2.0% to 2.5%, and diluted EPS growth of 20% to 25% excluding the contemplated real estate transactions.
The company also announced a plan to transfer about 430 restaurant properties into a REIT, with proceeds expected to pay down debt. Key risks include the REIT transaction's execution, weak Olive Garden traffic (guest counts down 1.6%), commodity inflation, and the performance of smaller brands such as Bahama Breeze and Seasons 52.
02—Key points
Key Highlights
- Sales from continuing operations rose 7.6% to $6.76B; same-restaurant sales up 2.4% on a 52-week basis, and about 5.6% excluding the 53rd week
- Diluted EPS from continuing operations was $1.51 (up 9.4%), depressed by roughly $1.10 of one-time charges including $91.3M debt breakage costs and impairments; reported diluted EPS was $5.47 including the Red Lobster sale gain
- Red Lobster sale to RL Acquisition LLC closed July 2014 for $2.08B net proceeds, generating an $837.0M pre-tax gain in discontinued operations
- Total debt cut to $1.54B from $2.76B, and adjusted debt-to-capital improved to 55% from 65%, after retiring about $1.01B of long-term debt
- Olive Garden same-restaurant guest counts fell 1.6% in fiscal 2015, with growth driven by a 2.9% average check increase; LongHorn SRS rose 4.4%
- Fiscal 2016 guidance: same-restaurant sales +2.0% to 2.5%, EPS from continuing operations up 20% to 25% excluding real estate transactions, and 18 to 22 new restaurants
- Proposed REIT transfer of about 430 owned restaurant properties, plus roughly 75 sale-leaseback listings, is expected to close in fiscal 2016 and fund further debt paydown; a shareholder rights plan was also adopted to deter stakes above 9.8%
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2015, Darden Restaurants Inc kept $0.10.
- Revenue$6.76B100.0%
- Cost of revenue−$5.58B82.6%
- Gross profit$1.18B17.4%
- Operating costs−$811.6M12.0%
- Operating income$367.6M5.4%
- Interest, other & tax$341.9M5.1%
- Net income$709.5M10.5%
Where FY2015 revenue went
$6.76B- Cost of revenue: $5.58B, 83% of revenue
- Operating income: $367.6M, 5.4% of revenue
- Operating costs: $811.6M, 12% of revenue
Kept 5.4% as operating incomeOperating income $367.6M · 5.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2015filed July 24, 2015Financial Statements
FY2015 against FY2014
| Line item | FY2015FY2014 | Change |
|---|---|---|
| Revenue | $6.76B$6.29B | +7.6% |
| Gross Profit | $1.18B$1.04B | +13.1% |
| Operating Expenses | $6.40B$5.98B | +7.0% |
| Operating Income | $367.60M$308.90M | +19.0% |
| Interest Expense | $186.20M$134.00M | +39.0% |
| Net Income | $709.50M$286.20M | +147.9% |
| EPS (Basic) | $5.56$2.18 | +155.0% |
| EPS (Diluted) | $5.47$2.15 | +154.4% |
| Shares Outstanding (Basic) | 127.70M131.00M | −2.5% |
| Shares Outstanding (Diluted) | 129.70M133.20M | −2.6% |
05—Questions
Frequently Asked Questions
How much of reported fiscal 2015 earnings came from the Red Lobster sale rather than core operations?
Most of the reported $5.47 diluted EPS came from discontinued operations, which contributed $3.96 per share, largely the $837.0 million pre-tax Red Lobster gain. Continuing operations produced $1.51 per diluted share, and that was after about $1.10 of one-time charges. Investors should focus on continuing-operations results when assessing the core restaurant business.
Is the 53rd week a material driver of reported growth?
Yes. Reported sales growth of 7.6% includes the extra week. Excluding it, sales from continuing operations rose about 5.6%, and diluted EPS growth from continuing operations fell from 9.4% to about 4.3%.
What is the status of the proposed REIT transaction and why does it matter?
On June 23, 2015, Darden's board approved a plan to transfer about 430 owned restaurant properties into a REIT, with substantially all assets leased back. The company expects to complete it during fiscal 2016 and use proceeds to pay down long-term debt. It remains subject to regulatory approvals, tax qualification of the REIT, financing terms, and the board's right to terminate. Long-term leases with 15-year initial terms would increase fixed rent obligations, which could constrain flexibility for underperforming restaurants.
Which brands are driving growth and which are under pressure?
LongHorn Steakhouse (sales +11.6%, SRS +4.4%), The Capital Grille (+11.0%), and Yard House (+18.8%, though much of that reflects new units) led growth. Olive Garden remains the largest brand, with sales up 4.0% on a 53-week basis, but its same-restaurant guest counts declined 1.6%. Bahama Breeze had only 3.8% sales growth and its SRS was up 1.8%. Management identified Bahama Breeze, Seasons 52 and Eddie V's as riskier, early-stage investments.
06—Continue