10-QPeriod: Q3 FY2017

DARDEN RESTAURANTS INC Quarterly Report for Q3 Ended Feb 26, 2017

Filed April 4, 2017For Securities:DRI

Summary

Darden Restaurants, Inc. reported solid financial performance for the third quarter and the first nine months of fiscal year 2017, with year-over-year sales growth driven by a combination of same-restaurant sales increases and the addition of new company-owned restaurants. Net earnings and diluted earnings per share from continuing operations saw significant increases compared to the prior year periods, partly due to the absence of significant one-time charges that impacted the prior year. Strategically, Darden announced a major development with the agreement to acquire Cheddar's Scratch Kitchen for $780 million, signaling a significant expansion effort. The company also maintained a strong liquidity position, with ample cash flow from operations and an undrawn revolving credit facility. Investors should note the ongoing investments in new restaurant development and remodels, alongside a continued commitment to returning capital to shareholders through dividends and share repurchases. The company reiterated its outlook for fiscal year 2017, excluding the Cheddar's acquisition.

Financial Highlights

49 data points
Beta

Revenue

$1.88B

20.4% Gross Margin

Net Income

$165.60M

8.8% Net Margin

EPS (Diluted)

$1.32

Total Assets

$4.68B

Cash & Equivalents

$391.40M

Free Cash Flow

$328.30M

Financial Statements
Beta
Revenue$1.88B
Gross Profit$383.90M
Operating Expenses$1.65B
Operating Income$229.50M
Net Income$165.60M
EPS (Basic)$1.33
EPS (Diluted)$1.32
Shares Outstanding (Basic)124.10M
Shares Outstanding (Diluted)125.90M

Key Highlights

  • 1Total sales increased by 1.7% for the third quarter and 1.8% for the first nine months of fiscal 2017 compared to the prior year.
  • 2Net earnings from continuing operations increased significantly to $166.3 million in Q3 FY17 and $357.1 million in the first nine months, compared to $108.2 million and $219.3 million respectively in the prior year.
  • 3Diluted EPS from continuing operations rose to $1.32 in Q3 FY17 and $2.84 in the first nine months, up from $0.84 and $1.69 in the prior year periods, benefiting from the absence of significant prior year charges.
  • 4Darden announced an agreement to acquire Cheddar's Scratch Kitchen for $780 million in an all-cash transaction, expected to close in Q4 FY17.
  • 5Operating income showed strong growth, increasing by 3.8% in Q3 and 16.1% for the first nine months, driven by sales leverage and expense management.
  • 6The company's balance sheet remained strong, with current assets increasing to $884.9 million and current liabilities to $1.23 billion as of February 26, 2017.
  • 7Cash flow from operations for the first nine months increased to $703.2 million, supporting capital expenditures and shareholder returns.

Frequently Asked Questions

Darden's sales growth is primarily driven by a combination of same-restaurant sales increases and the addition of new company-owned restaurants. For the third quarter of fiscal 2017, same-restaurant sales increased by 0.9%, and ten net new restaurants were added since the prior year period.

The agreement to acquire Cheddar's Scratch Kitchen for $780 million represents a significant strategic move to expand Darden's brand portfolio and market presence. This all-cash transaction is expected to be completed in the fourth quarter of fiscal 2017 and will be funded through new debt and existing cash.

Darden demonstrated effective cost management. For example, food and beverage costs decreased as a percentage of sales due to pricing, cost savings, and deflation. Restaurant labor costs also decreased as a percentage of sales due to sales leverage and productivity improvements, despite some wage inflation. General and administrative expenses decreased as a percentage of sales, largely due to lower bonus expenses and the absence of costs incurred in the prior year for real estate plan implementation.

Excluding the impact of the Cheddar's acquisition, Darden expects same-restaurant sales to increase by approximately 1.5% and total sales from continuing operations to increase by approximately 2.3% for fiscal year 2017. The company also anticipates opening 24 to 28 new restaurants and investing between $310 million and $350 million in capital expenditures.