On Thursday morning, Darden Restaurants (DRI) released the firm's fiscal first quarter financial results.
For the three month period ended August 28th, Darden posted GAAP EPS of $1.56 on revenue of $2.446B. The bottom line number is down from $1.76 for the year ago comp and missed expectations by a penny. The top line print was good enough for year over year growth of 6.1%. This number also fell short of Wall Street consensus. This also illustrates consistently decelerating quarter by quarter... year over year growth (+79%, +51%, +37%, +41%, 14%, +6.1%).
While revenue generation increased 6%, operating income dropped 13% to $244.2M. This is as operating costs and expenses increased 8.7% to $2.202B. This extended to net earnings that contracted 16.4% to $193M.
Blended same-store sales increased 4.2%. Broken out, same restaurant sales are as follows: Olive Garden +2.3%, LongHorn Steakhouse +4.2%, Fine Dining +7.6%, Other Businesses +7.6%.
Segment Performance
- Olive Garden saw sales increase 3.7% to $1.131B, while segment profit decreased 14.7% to $216.1M.
- LongHorn Steakhouse saw sales increase 6.7% to $604.6M, while segment profit decreased 14.4% to $92M.
- Fine Dining (Capital Grille, Eddie V's) saw sales increase 8.6% to $183.4M, while segment profit decreased 10.4% to $30M.
- Other Businesses (Cheddar's Scratch Kitchen, Bahama Breeze), saw sales increase 9.9% to $527.4M, while segment profit decreased 14.7% to $72.3M.
Outlook
For the full fiscal year, Darden reaffirmed all aspects of its financial outlook. This includes...
Total sales of $10.2B to $10.4B. Wall Street is at $10.3B on that number.
Same-restaurant sales growth of 4% to 6%.
55 to 60 new restaurant openings.
Total capital spending of $500M to $550M.
Total inflation of roughly 6%.
Effective tax rate of about 13.5%.
GAAP EPS of $7.40 to $8.00. Wall Street is at $7.75.
Balance Sheet
Darden ended the quarter with a net cash position of $377.5M, and current assets of $941M. These entries were down 10.2% and 20.2% over just three months, respectively. Inventories were up slightly to $273.1M. Current liabilities came to $1.825B. This brings the firm's current ratio to 0.52. That in my opinion is problematic. If we did a quick ratio on this firm, which is hard to do to a restaurant chain, it would be a "tough to look at" 0.37.
Total assets amount to $10.015B including $806.3M in "goodwill". At less than 10% of total assets, this is not abusive. Total liabilities less equity adds up to $7.950B, including $895.1M in long-term debt. This balance sheet desperately needs to be worked on. The firm repurchased $199M worth of common stock during the past quarter. Perhaps that cash would be better spent on reducing debt-load or better managing the (current) liabilities side of this balance sheet.
My Thoughts
This is a story of declining margin in an inflationary environment. The firm has not resorted to discounting as of yet. This may be a positive in the long run. Probably something the folks at the FOMC do not like to hear.
Readers will see that DRI broke out of a downtrend in June and entered into a now medium-term uptrend. The stock hit stiff resistance at a precise 38.2% Fibonacci retracement of the entire January through June selloff and now looks to the 50 day SMA ($126.39) to provide support.
I do not like the stock for an investment with a balance sheet like that in an environment where the Fed is making an overt attempt to damage the U.S. consumer. That said, should the 50 day line hold on this pressure, I would be fine with a short-term trade, let's say into Friday's close. No price target, just a target timed exit. This way, the cash deployed is brought home safe and sound for the weekend. If the 50-day line fails. this one is a pass.
