10-QPeriod: Q2 FY2013

DARDEN RESTAURANTS INC Quarterly Report for Q2 Ended Nov 25, 2012

Filed January 2, 2013For Securities:DRI

Summary

Darden Restaurants, Inc. reported its second quarter fiscal year 2013 results, ending November 25, 2012. The company experienced a notable increase in total sales, primarily driven by the acquisition of Yard House and the addition of new company-owned restaurants. However, this top-line growth was tempered by a decrease in same-restaurant sales across key brands like Olive Garden, Red Lobster, and LongHorn Steakhouse, indicating some consumer spending pressure or competitive challenges within its core offerings. Despite the sales increase, profitability metrics saw a decline. Net earnings and diluted earnings per share from continuing operations were lower compared to the prior year's quarter. This reduction in profitability is attributed to increased operating expenses, including higher restaurant expenses, selling, general, and administrative costs (partially due to acquisition-related expenses), and depreciation and amortization. The company also saw an increase in net interest expense due to higher average long-term debt balances. While the company is expanding its restaurant footprint, investors will be closely watching its ability to manage costs and improve same-restaurant sales to drive future earnings growth.

Financial Highlights

51 data points
Beta

Revenue

$1.37B

-14.6% Gross Margin

Net Income

$33.60M

2.5% Net Margin

EPS (Diluted)

$0.26

Total Assets

$6.83B

Cash & Equivalents

$61.40M

Free Cash Flow

-$191.50M

Financial Statements
Beta
Revenue$1.37B
Cost of Revenue$1.57B
Gross Profit-$199.40M
SG&A Expenses$216.10M
Operating Expenses$1.92B
Operating Income$7.80M
Net Income$33.60M
EPS (Basic)$0.26
EPS (Diluted)$0.26
Shares Outstanding (Basic)128.80M
Shares Outstanding (Diluted)131.70M

Key Highlights

  • 1Total sales increased by 7.0% year-over-year for the quarter, reaching $1.96 billion, driven by new restaurant openings and the acquisition of Yard House.
  • 2Same-restaurant sales decreased by 2.7% for Olive Garden, Red Lobster, and LongHorn Steakhouse combined, indicating a challenging sales environment for established locations.
  • 3Net earnings from continuing operations decreased by 37.7% to $33.7 million, and diluted EPS from continuing operations fell 36.6% to $0.26.
  • 4Operating expenses, particularly restaurant expenses and SG&A, increased as a percentage of sales, impacting profitability.
  • 5The acquisition of Yard House for $585.0 million was completed, contributing to sales growth but also incurring acquisition and integration costs.
  • 6Long-term debt increased significantly, contributing to a rise in net interest expense.
  • 7The company declared a quarterly dividend of $0.50 per share, an increase from $0.43 in the prior year's quarter.

Frequently Asked Questions

The primary drivers of the sales increase were the operation of 99 net new company-owned restaurants and the addition of 40 Yard House acquired restaurants since the second quarter of the prior fiscal year. The acquisition of Yard House, completed in August 2012 for $585.0 million, significantly contributed to the top-line growth.

Net earnings and earnings per share from continuing operations decreased due to an increase in operating expenses as a percentage of sales. This includes higher restaurant expenses, selling, general and administrative expenses (partially due to acquisition and integration costs related to Yard House), depreciation and amortization, and net interest expense. Additionally, same-restaurant sales declines in core brands indicate pressure on profitability at existing locations.

The Yard House acquisition contributed positively to overall sales growth by adding 40 new restaurants. However, it also resulted in acquisition and integration costs of approximately $10.1 million for the quarter, which increased selling, general and administrative expenses and negatively impacted earnings per share by an estimated $0.05 for the quarter. Goodwill of $366.3 million was recognized on the balance sheet from this acquisition.

Darden Restaurants maintained a $750.0 million revolving credit facility, with no outstanding balances as of November 25, 2012, although $376.0 million in commercial paper was outstanding and backed by this facility. The company issued new senior notes totaling $450.0 million and entered into a $300.0 million term loan during the period, increasing its long-term debt. Management believes its operating cash flow and available credit facilities are sufficient to fund operations, capital expenditures, and dividends through fiscal 2013.