Why did Darden's reported sales growth look strong when same-restaurant sales declined?

Total sales growth of 6.8% was driven mainly by the acquisition of 79 Ruth's Chris restaurants and 53 other net new restaurants. Same-restaurant sales, which measure organic performance at comparable locations, fell 1.0% on a blended basis. Ruth's Chris will not be included in same-restaurant sales until it has been owned for 16 months (Q2 fiscal 2025).

What is driving the difference between reported and adjusted EPS?

Reported diluted EPS from continuing operations was $2.60. Adjusted EPS of $2.62 excludes $0.02 of pre-tax transaction and integration costs tied to the Ruth's Chris acquisition ($6.8 million pre-tax in the quarter). Management expects about $55 million pre-tax of such costs for the full fiscal year.

Is the new $1 billion buyback likely to boost near-term share count reduction?

Not necessarily in the near term. Darden repurchased only about $33 million of stock in the quarter, and nine-month repurchases were $356.6 million. The authorization has no expiration and replaces the prior program, so it gives flexibility, but the pace of buybacks will depend on cash flow and the company's leverage after the Ruth's Chris deal. Diluted shares are guided to about 121.0 million for the year.

Are there concerns about Darden's leverage and financing costs?

Yes. Long-term debt rose to $1.37 billion from $885 million after a $500 million issuance, and $158.7 million of short-term debt was added. Net interest expense for the nine months more than doubled to $103.3 million. Cash declined to $243.9 million. Investors should monitor how these higher interest costs and the dividend (about $472 million paid in nine months) are covered by operating cash flow, which was $1.2 billion for the nine months.

What should investors watch in the fiscal 2024 outlook?

Key items include whether same-restaurant sales growth of 1.5%–2.0% is achievable given Olive Garden's decline, the pace of Ruth's Chris integration, and cost pressures. Total inflation is guided to about 3.0%, the effective tax rate to 12.0%–12.5%, and 50–55 new restaurant openings with about $600 million in capital spending. Restaurant labor costs rose about 7% in the quarter, which is a margin risk if they continue to outpace sales.

DRI 8-K: Earnings & Results

01—Abstract

Summary

Summary of the 8-K filed March 21, 2024. Cited figures are marked; the original filing is the authoritative source.

Darden Restaurants (DRI) reported fiscal Q3 2024 results (quarter ended February 25, 2024) with total sales up 6.8% to $2.97 billion^a, driven by the acquisition of 79 Ruth's Chris Steak House restaurants and 53 other net new restaurants, partially offset by a blended same-restaurant sales decline of 1.0%.

Olive Garden same-restaurant sales fell 1.8% and LongHorn Steakhouse rose 2.3%. Reported diluted EPS from continuing operations was $2.60^b, and adjusted EPS (excluding $0.02 of Ruth's Chris transaction and integration costs) was $2.62, up 12.0% year over year. Management said the operating environment was tougher than anticipated, though each segment grew sales and profit.

The company updated its fiscal 2024 outlook, now calling for total sales of about $11.4 billion^c, same-restaurant sales growth of 1.5% to 2.0%, and adjusted diluted EPS of $8.80 to $8.90, excluding roughly $0.35 after-tax of Ruth's Chris costs. The Board declared a quarterly dividend of $1.31 per share and authorized a new $1 billion share repurchase program with no expiration, replacing the prior authorization. Only about $33 million of stock was repurchased in the quarter, so the new authorization is a signal of capital return intent rather than immediate activity.

Balance sheet changes are notable. Long-term debt rose to $1.37 billion^d from $884.9 million after a $500 million issuance, and short-term debt of $158.7 million was added.

Goodwill and trademarks increased sharply following the Ruth's Chris acquisition, which consumed roughly $700 million of cash in the nine months. Net interest expense more than tripled for the nine months ($103.3 million versus $59.2 million), a key margin headwind to watch alongside rising labor costs (restaurant labor up about 7% in the quarter).

02—Key points

Key Highlights

Total Q3 sales rose 6.8% to $2.97 billion, aided by Ruth's Chris (79 restaurants) and 53 other net new restaurants, despite blended same-restaurant sales down 1.0%.
Adjusted diluted EPS from continuing operations was $2.62, up 12.0% year over year; reported EPS was $2.60 (up 11.1%).
Olive Garden same-restaurant sales declined 1.8%, while LongHorn Steakhouse grew 2.3% and Fine Dining fell 2.3%.
Fiscal 2024 outlook updated: sales of about $11.4 billion, same-restaurant sales growth of 1.5%–2.0%, and adjusted EPS of $8.80–$8.90 (excluding about $0.35 after-tax Ruth's Chris costs).
Board declared a $1.31 quarterly dividend (payable May 1, 2024) and authorized a new $1 billion share repurchase program with no expiration.
Net interest expense rose sharply to $103.3 million for the nine months from $59.2 million, reflecting higher debt after a $500 million long-term debt issuance and Ruth's Chris financing.
Total debt increased to roughly $1.53 billion (long-term plus short-term), while cash fell to $243.9 million from $367.8 million at fiscal year-end.

03—Questions

Frequently Asked Questions

Why did Darden's reported sales growth look strong when same-restaurant sales declined?
Total sales growth of 6.8% was driven mainly by the acquisition of 79 Ruth's Chris restaurants and 53 other net new restaurants. Same-restaurant sales, which measure organic performance at comparable locations, fell 1.0% on a blended basis. Ruth's Chris will not be included in same-restaurant sales until it has been owned for 16 months (Q2 fiscal 2025).
What is driving the difference between reported and adjusted EPS?
Reported diluted EPS from continuing operations was $2.60. Adjusted EPS of $2.62 excludes $0.02 of pre-tax transaction and integration costs tied to the Ruth's Chris acquisition ($6.8 million pre-tax in the quarter). Management expects about $55 million pre-tax of such costs for the full fiscal year.
Is the new $1 billion buyback likely to boost near-term share count reduction?
Not necessarily in the near term. Darden repurchased only about $33 million of stock in the quarter, and nine-month repurchases were $356.6 million. The authorization has no expiration and replaces the prior program, so it gives flexibility, but the pace of buybacks will depend on cash flow and the company's leverage after the Ruth's Chris deal. Diluted shares are guided to about 121.0 million for the year.
Are there concerns about Darden's leverage and financing costs?
Yes. Long-term debt rose to $1.37 billion from $885 million after a $500 million issuance, and $158.7 million of short-term debt was added. Net interest expense for the nine months more than doubled to $103.3 million. Cash declined to $243.9 million. Investors should monitor how these higher interest costs and the dividend (about $472 million paid in nine months) are covered by operating cash flow, which was $1.2 billion for the nine months.
What should investors watch in the fiscal 2024 outlook?
Key items include whether same-restaurant sales growth of 1.5%–2.0% is achievable given Olive Garden's decline, the pace of Ruth's Chris integration, and cost pressures. Total inflation is guided to about 3.0%, the effective tax rate to 12.0%–12.5%, and 50–55 new restaurant openings with about $600 million in capital spending. Restaurant labor costs rose about 7% in the quarter, which is a margin risk if they continue to outpace sales.

04—Continue

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