01—Abstract
Summary
Summary of the 10-K filed July 25, 2016. Cited figures are marked; the original filing is the authoritative source.
Darden Restaurants (DRI) reported fiscal 2016 (52 weeks ended May 29, 2016) with sales from continuing operations of $6.93 billiona, up 2.5% from $6.76 billion, driven by a 3.3% combined Darden same-restaurant sales increase and two net new company-owned restaurants.
Operating income rose 69% to $622.2 millionb, and earnings from continuing operations increased 83% to $359.7 million ($2.78 per diluted share). Those figures are flattered by the 53rd week in fiscal 2015 comparisons, and by lower impairments and G&A. Diluted EPS including discontinued operations was $2.90, versus $5.47 in fiscal 2015, which included the large Red Lobster sale gain.
Management attributed margin gains to food and beverage cost favorability, sales leverage, and lower marketing and G&A as a percent of sales, partly offset by higher restaurant expenses from new rent. The balance sheet was substantially deleveraged. Darden retired about $1.03 billionc of long-term debt using proceeds from the Four Corners REIT spin-off ($315 million special dividend), sale-leasebacks of 64 restaurant properties ($238 million net), and the corporate headquarters sale-leaseback ($131 million).
Total debt fell to $502 milliond from $1.54 billion, and the debt-to-total-capital ratio dropped to 20% from 40%. The adjusted debt-to-adjusted-capital ratio, which includes lease obligations, improved to 53% from 55%. The tradeoff is much higher rent: total rent expense rose to $265.6 million from $194.9 million, and 1,449 of 1,536 restaurants are leased.
Operating lease commitments total about $2.8 billion, and capital and financing leases add roughly $230 million more. Cash flow from continuing operations was $820 million, and share repurchases were $185 million, with $316 million remaining under the $500 million authorization. Management guides fiscal 2017 same-restaurant sales growth of 1–2%, continuing-operations sales growth of 1.7–2.7%, 24–28 new restaurant openings, and capex of $310–350 million.
Key risks include the rising rent burden from real estate monetization, intense full-service competition, commodity and labor cost pressure (including minimum wage increases), cyber and data privacy exposure, and ongoing weakness at the smaller brands (Bahama Breeze, Seasons 52, Eddie V's). Goodwill and trademarks total about $1.45 billion, and a write-down of roughly $1.22 billion would breach the leverage covenant, though the company reported no impairment. Management said the 2016 results reflected a 'Back-to-Basics' operating focus.
02—Key points
Key Highlights
- Fiscal 2016 sales from continuing operations rose 2.5% to $6.93 billion, driven by a 3.3% combined Darden same-restaurant sales increase and two net new restaurants.
- Earnings from continuing operations rose 83.1% to $359.7 million ($2.78 diluted EPS), helped by lower G&A, impairments, and food cost favorability; diluted EPS including discontinued operations was $2.90 versus $5.47 in fiscal 2015 (Red Lobster sale gain in prior year).
- Darden retired about $1.03 billion of long-term debt, cutting total debt to $502 million from $1.54 billion; the debt-to-total-capital ratio fell to 20% from 40%.
- Real estate monetization (Four Corners REIT spin-off, 64 sale-leasebacks, corporate HQ sale-leaseback) raised rent expense to $265.6 million from $194.9 million; 1,449 of 1,536 restaurants are leased.
- Adjusted debt-to-adjusted-capital (including lease obligations) improved to 53% from 55%, and management says the company remains targeting an investment-grade rating (Baa3/BBB/BBB).
- Fiscal 2017 guidance: same-restaurant sales +1.0% to +2.0%, sales from continuing operations +1.7% to +2.7%, 24–28 new restaurants, and capex of $310–350 million.
- Returned capital through dividends of $268 million and share repurchases of $185 million; $315.6 million remains under the $500 million authorization, and the quarterly dividend was raised to $0.56.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2016, Darden Restaurants Inc kept $0.05.
- Revenue$6.93B100.0%
- Cost of revenue−$5.63B81.2%
- Gross profit$1.30B18.8%
- Operating costs−$680.9M9.8%
- Operating income$622.2M9.0%
- Interest, other & tax−$247.2M3.6%
- Net income$375.0M5.4%
Where FY2016 revenue went
$6.93B- Cost of revenue: $5.63B, 81% of revenue
- Net income: $375.0M, 5.4% of revenue
- Operating costs: $680.9M, 9.8% of revenue
- Interest, other & tax: $247.2M, 3.6% of revenue
Kept 5.4% as net incomeNet income $375.0M · 5.4%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2016filed July 25, 2016Financial Statements
FY2016 against FY2015
| Line item | FY2016FY2015 | Change |
|---|---|---|
| Revenue | $6.93B$6.76B | +2.5% |
| Gross Profit | $1.30B$1.18B | +10.5% |
| Operating Expenses | $6.31B$6.40B | −1.3% |
| Operating Income | $622.20M$367.60M | +69.3% |
| Interest Expense | $165.40M$186.20M | −11.2% |
| Net Income | $375.00M$709.50M | −47.1% |
| EPS (Basic) | $2.94$5.56 | −47.1% |
| EPS (Diluted) | $2.90$5.47 | −47.0% |
| Shares Outstanding (Basic) | 127.40M127.70M | −0.2% |
| Shares Outstanding (Diluted) | 129.30M129.70M | −0.3% |
05—Questions
Frequently Asked Questions
How much did Darden's underlying sales grow in fiscal 2016, and how much of the reported growth is from the calendar?
Reported sales from continuing operations grew 2.5% to $6.93 billion. Fiscal 2015 had a 53rd week, which depressed the year-over-year comparison, so the 52-week comparable growth is somewhat higher. Darden's combined same-restaurant sales (52-week basis) rose 3.3%, and the company added a net two restaurants. Olive Garden (+1.3% total, +3.1% SRS) and LongHorn (+2.8% total, +3.5% SRS) were the largest contributors, while Yard House grew fastest among major brands at +7.9%.
Why did reported earnings jump so much in fiscal 2016?
Operating income rose to $622 million from $368 million, largely due to lower G&A (down $45 million, reflecting fewer strategic action plan costs), lower impairments (down $56 million from fiscal 2015's restaurant write-downs), lower D&A after the REIT spin-off, and food and beverage cost improvement. Interest expense also fell as a percent of sales, though it included $106.8 million of debt retirement costs. The effective tax rate rose to 20% from a negative rate in fiscal 2015, which partly offset these gains.
What are the main trade-offs of the real estate strategy?
The strategy generated substantial liquidity ($315 million REIT dividend, $238 million from 64 sale-leasebacks, $131 million from the headquarters sale-leaseback) and let Darden pay down debt. However, it converted owned properties into long-term leases with fixed escalations (1.5% annually for Four Corners leases) and about 15-year initial terms. Total lease commitments are roughly $2.8 billion in operating leases alone, and rent expense is expected to remain a larger share of sales. Investors should watch whether restaurant-level margins absorb this higher fixed cost, especially at underperforming locations where Darden may be unable to exit leases.
Is Darden's balance sheet riskier or safer after these transactions?
On a traditional debt basis the balance sheet is much safer: debt fell by roughly two-thirds, and debt-to-capital dropped to 20%. Including lease obligations, the adjusted debt-to-capital ratio improved more modestly to 53% from 55%, so the economic leverage reduction is smaller than the headline debt figures suggest. Goodwill and trademarks total $1.45 billion; a write-down of about $1.22 billion would breach the credit agreement's leverage covenant, a sensitivity investors should monitor. Interest savings are estimated at roughly $50 million annually, excluding one-time retirement costs.
What risks does management highlight that could affect future performance?
Key risks include intense full-service competition and the broader casual-dining slowdown; rising labor costs from minimum wage increases and health care mandates; commodity volatility (seafood, beef, dairy) and tariffs on imported food; cybersecurity and data privacy exposure; food safety and negative publicity; and the performance of the smaller brands (Bahama Breeze, Seasons 52, Eddie V's), which management says have not yet proven long-term viability. Management also flags potential future impairments and the fixed-cost burden of leases if sales growth slows.
06—Continue