10-QPeriod: Q2 FY2020

DARDEN RESTAURANTS INC Quarterly Report for Q2 Ended Nov 24, 2019

Filed January 2, 2020For Securities:DRI

Summary

Darden Restaurants, Inc. reported results for the second quarter and first six months of fiscal year 2020, ending November 24, 2019. Total sales increased by 4.2% and 3.9% respectively, driven by a combination of new restaurant openings and a modest same-restaurant sales increase of 2.0% for the quarter. However, net earnings and diluted EPS from continuing operations saw a significant decline compared to the prior year, primarily due to a substantial pension settlement charge of $147.1 million recorded in the current period. This charge significantly impacted profitability, resulting in earnings per diluted share from continuing operations of $0.21 for the quarter, down from $0.92 in the prior year. Despite the earnings drop, the company's operational performance across its brands, particularly Olive Garden and LongHorn Steakhouse, showed resilience in sales growth. The company also reaffirmed its fiscal 2020 outlook, projecting sales growth between 5.3% and 6.3% and continued capital expenditures for new restaurant development. Investors should note the significant impact of the one-time pension settlement charge on reported earnings, while focusing on the underlying sales trends and the company's strategic growth initiatives.

Financial Highlights

47 data points
Beta

Revenue

$2.06B

16.5% Gross Margin

Net Income

$24.70M

1.2% Net Margin

EPS (Diluted)

$0.20

Total Assets

$9.74B

Cash & Equivalents

$157.30M

Free Cash Flow

$49.90M

Financial Statements
Beta
Revenue$2.06B
Gross Profit$339.20M
Operating Expenses$1.90B
Operating Income$160.20M
Net Income$24.70M
EPS (Basic)$0.20
EPS (Diluted)$0.20
Shares Outstanding (Basic)122.20M
Shares Outstanding (Diluted)123.70M

Key Highlights

  • 1Total sales increased by 4.2% to $2.06 billion for the quarter and 3.9% to $4.19 billion for the six-month period, driven by new restaurant openings and same-restaurant sales growth.
  • 2Diluted earnings per share from continuing operations significantly decreased to $0.21 in Q2 fiscal 2020 from $0.92 in Q2 fiscal 2019, largely due to a $147.1 million pension settlement charge.
  • 3Olive Garden and LongHorn Steakhouse demonstrated positive same-restaurant sales growth of 1.5% and 4.7% respectively for the six-month period.
  • 4The company's restaurant portfolio expanded with 37 net new company-owned restaurants added since the prior year's second quarter.
  • 5General and administrative expenses decreased as a percentage of sales for both the quarter and the six-month period.
  • 6The company maintained strong credit ratings (Baa2/BBB/BBB) and had no outstanding balances on its $750 million revolving credit agreement as of November 24, 2019.
  • 7Capital expenditures for new restaurant development and remodels were $256.5 million for the first six months of fiscal 2020, reflecting ongoing investment in growth.

Frequently Asked Questions

The substantial decrease in net earnings and diluted EPS from continuing operations was primarily driven by a one-time pre-tax pension settlement charge of $147.1 million recorded during the quarter ended November 24, 2019. This charge relates to the termination of the company's primary defined benefit pension plan.

Sales performance varied by brand. Olive Garden and LongHorn Steakhouse showed solid growth, with positive same-restaurant sales. Other brands like Cheddar's Scratch Kitchen and Bahama Breeze experienced same-restaurant sales decreases, though overall sales were bolstered by new restaurant openings.

Darden Restaurants expects fiscal 2020 sales from continuing operations to increase between 5.3% and 6.3%. This growth is projected to be driven by the inclusion of a 53rd week in the fiscal year, same-restaurant sales growth of 1.0% to 2.0%, and the opening of approximately 50 new restaurants. Capital expenditures are expected to be between $450 million and $500 million.

The adoption of ASC 842, effective May 27, 2019, required Darden to recognize operating lease liabilities and corresponding right-of-use assets on its balance sheet. This resulted in a significant increase in total assets and liabilities, particularly with the recording of $4.03 billion in operating lease right-of-use assets and $4.31 billion in non-current operating lease liabilities as of November 24, 2019.