10-QPeriod: Q3 FY2018

DARDEN RESTAURANTS INC Quarterly Report for Q3 Ended Feb 25, 2018

Filed April 3, 2018For Securities:DRI

Summary

Darden Restaurants, Inc. reported strong financial performance for the nine months ended February 25, 2018, with total sales increasing by 13.6% to $5.95 billion, largely driven by the acquisition of Cheddar's Scratch Kitchen and a 2.3% increase in same-restaurant sales (excluding Cheddar's). Diluted earnings per share from continuing operations saw a significant increase of 19.7% to $3.40. The company benefited from the Tax Cuts and Jobs Act, which reduced its effective tax rate and provided a significant one-time benefit from deferred tax remeasurement. Despite a notable increase in interest expense due to debt retirement costs, the company demonstrated robust operational execution across its segments, particularly in Olive Garden, LongHorn Steakhouse, and Fine Dining, which all saw improved segment profit margins. Darden also continued its strategic capital allocation, investing in new restaurant development and returning capital to shareholders through dividends and share repurchases, while maintaining a strong liquidity position.

Financial Highlights

50 data points
Beta

Revenue

$2.13B

19.8% Gross Margin

Net Income

$217.80M

10.2% Net Margin

EPS (Diluted)

$1.73

Total Assets

$5.45B

Cash & Equivalents

$146.80M

Free Cash Flow

$339.70M

Financial Statements
Beta
Revenue$2.13B
Gross Profit$422.40M
Operating Expenses$1.90B
Operating Income$233.40M
Net Income$217.80M
EPS (Basic)$1.76
EPS (Diluted)$1.73
Shares Outstanding (Basic)123.60M
Shares Outstanding (Diluted)125.70M

Key Highlights

  • 1Total sales from continuing operations increased by 13.6% year-over-year to $5.95 billion for the first nine months of fiscal 2018.
  • 2Diluted earnings per share from continuing operations rose by 19.7% to $3.40 for the first nine months of fiscal 2018.
  • 3The acquisition of Cheddar's Scratch Kitchen contributed significantly to sales growth, adding 151 restaurants.
  • 4Same-restaurant sales (excluding Cheddar's) increased by a combined 2.3% for the first nine months of fiscal 2018.
  • 5The company experienced a significant benefit from the Tax Cuts and Jobs Act, including a reduced corporate tax rate and a $77.3 million one-time adjustment to deferred tax liabilities.
  • 6Interest expense increased substantially due to $102.2 million in costs related to debt retirement.
  • 7Segment profit margins improved for Olive Garden, LongHorn Steakhouse, and Fine Dining, indicating strong operational performance.

Frequently Asked Questions

The primary driver of Darden's sales growth was the acquisition of Cheddar's Scratch Kitchen, which added 151 restaurants to its portfolio. Additionally, same-restaurant sales growth across its established brands and the opening of 37 net new restaurants also contributed significantly.

The Tax Cuts and Jobs Act significantly benefited Darden by reducing the federal corporate income tax rate. This resulted in a lower effective tax rate and a substantial one-time income tax benefit of $77.3 million from the remeasurement of deferred tax liabilities, positively impacting both the quarterly and nine-month earnings from continuing operations.

For fiscal year 2018, Darden expects to open approximately 40 new restaurants (including Cheddar's Scratch Kitchen) and anticipates capital expenditures of approximately $400 million, which will be used for new restaurant construction, remodels, maintenance, and technology initiatives.

Darden retired $310.9 million of long-term debt, incurring $102.2 million in associated costs, including repurchase premiums. This led to a significant increase in interest expense for the period but was undertaken as part of a strategy to manage its debt structure and potentially refinance at lower rates, as evidenced by the issuance of new senior notes.