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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended November 23, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ................. to .................
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1-13666
Commission File Number
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DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
FLORIDA 59-3305930
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
5900 LAKE ELLENOR DRIVE,
ORLANDO, FLORIDA 32809
(Address of principal executive offices) (Zip Code)
407-245-4000
(Registrant's telephone number, including area code)
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. [X] Yes [ ] No
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APPLICABLE ONLY TO CORPORATE ISSUERS:
Number of shares of common stock outstanding as of December 11, 1997:
148,561,451 (excluding 11,960,506 shares held in treasury).
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DARDEN RESTAURANTS, INC.
TABLE OF CONTENTS
Page
Part I - Financial Information
Item 1. Financial Statements
Consolidated Statements of Earnings (Loss) 2
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 8
Part II - Other Information
Item 5. Other Information 10
Item 6. Exhibits and Reports on Form 8-K 10
Signatures 11
Index to Exhibits 12
1
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS (LOSS)
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Thirteen Weeks Ended
- --------------------------------------------------------------------------------
November 23, 1997 November 24, 1996
- --------------------------------------------------------------------------------
Sales..................................... $ 745,263 $ 748,757
Costs and Expenses:
Cost of sales:
Food and beverages.................... 241,859 258,105
Restaurant labor...................... 252,929 252,497
Restaurant expenses................... 117,941 119,966
---------- ----------
Total Cost of Sales................. $ 612,729 $ 630,568
Selling, general and administrative..... 84,412 93,315
Depreciation and amortization........... 31,613 35,070
Interest, net........................... 4,723 5,623
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Total Costs and Expenses.......... $ 733,477 $ 764,576
---------- ----------
Earnings (Loss) before Income Taxes....... 11,786 (15,819)
Income Taxes.............................. (4,256) 4,650
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Net Earnings (Loss) ...................... $ 7,530 $ (11,169)
========== ==========
Net Earnings (Loss) per Share............. $ 0.05 $ (0.07)
========== ==========
Average Number of Common Shares
Outstanding............................. 150,300 157,500
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
2
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)
Twenty-Six Weeks Ended
- --------------------------------------------------------------------------------
November 23, 1997 November 24, 1996
- --------------------------------------------------------------------------------
Sales..................................... $ 1,554,594 $ 1,554,312
Costs and Expenses:
Cost of sales:
Food and beverages.................... 507,809 525,797
Restaurant labor...................... 511,946 499,208
Restaurant expenses................... 240,685 243,183
----------- -----------
Total Cost of Sales ................ $ 1,260,440 $ 1,268,188
Selling, general and administrative..... 173,617 192,391
Depreciation and amortization........... 63,085 70,103
Interest, net........................... 9,416 10,556
----------- -----------
Total Costs and Expenses.......... $ 1,506,558 $ 1,541,238
----------- -----------
Earnings before Income Taxes.............. 48,036 13,074
Income Taxes.............................. (16,098) (3,770)
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Net Earnings.............................. $ 31,938 $ 9,304
=========== ===========
Net Earnings per Share.................... $ 0.21 $ 0.06
=========== ===========
Average Number of Common Shares
Outstanding............................. 151,500 157,600
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
3
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
(Unaudited)
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November 23, 1997 May 25, 1997
- --------------------------------------------------------------------------------
ASSETS
Current Assets:
Cash and cash equivalents.................. $ 22,069 $ 25,490
Receivables................................ 19,500 16,333
Refundable income taxes, net............... 11,953 16,968
Inventories................................ 182,834 132,241
Net assets held for disposal............... 57,231 47,471
Prepaid expenses and other current assets.. 12,447 14,709
Deferred income taxes...................... 76,646 84,157
----------- -----------
Total Current Assets..................... $ 382,680 $ 337,369
Land, Buildings and Equipment................ 1,503,356 1,533,272
Other Assets................................. 95,523 93,081
----------- -----------
Total Assets......................... $ 1,981,559 $ 1,963,722
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable........................... $ 132,244 $ 113,087
Short-term debt............................ 62,300 43,400
Current portion of long-term debt.......... 5 5
Accrued payroll............................ 59,464 58,312
Other accrued taxes........................ 23,342 22,180
Other current liabilities.................. 239,145 243,596
----------- -----------
Total Current Liabilities................ $ 516,500 $ 480,580
Long-term Debt............................... 311,442 313,187
Deferred Income Taxes........................ 69,648 70,118
Other Liabilities............................ 18,890 18,624
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Total Liabilities...................... $ 916,480 $ 882,509
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Stockholders' Equity:
Common stock and surplus................... $ 1,272,146 $ 1,268,656
Retained earnings (deficit)................ (15,773) (41,706)
Treasury stock............................. (115,849) (69,184)
Cumulative foreign currency adjustment..... (11,090) (10,037)
Unearned compensation...................... (64,355) (66,516)
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Total Stockholders' Equity............. $ 1,065,079 $ 1,081,213
----------- -----------
Total Liabilities and Stockholders'
Equity............................. $ 1,981,559 $ 1,963,722
=========== ===========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Thirteen Weeks Ended
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November 23, 1997 November 24, 1996
- --------------------------------------------------------------------------------
Cash Flows--Operating Activities:
Net earnings (loss)..................... $ 7,530 $ (11,169)
Adjustments to reconcile net earnings
(loss) to cash flow:
Depreciation and amortization....... 31,613 35,070
Amortization of unearned
compensation and loan costs....... 821 918
Change in current assets and
liabilities....................... (65,498) (51,236)
Change in other liabilities......... 190 (184)
Loss on disposal of land, buildings
and equipment..................... 1,290 1,765
Deferred income taxes............... 5,798 5,683
Other, net.......................... 384 (152)
---------- ----------
Net Cash Used by Operating
Activities.................... $ (17,872) $ (19,305)
---------- ----------
Cash Flows--Investment Activities:
Purchases of land, buildings and
equipment............................. (27,544) (44,448)
Purchases of intangibles................ (524) (449)
(Increase) decrease in other assets..... (721) 1,171
Proceeds from disposal of land,
buildings and equipment (including
net assets held for disposal)......... 4,186 10,722
---------- ----------
Net Cash Used by Investment
Activities.................... $ (24,603) $ (33,004)
---------- ----------
Cash Flows--Financing Activities:
Proceeds from issuance of common stock.. 2,086 114
Income tax benefit credited to equity... 352 21
Dividends paid.......................... (6,005) (6,284)
Purchases of treasury stock............. (24,855) (6,286)
ESOP note receivable repayment.......... 600
Increase in short-term debt............. 62,300 56,600
Repayment of long-term debt............. (3,451)
Proceeds from issuance of equity puts... 311
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Net Cash Provided by Financing
Activities.................... $ 34,189 $ 41,314
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Decrease in Cash and Cash Equivalents..... (8,286) (10,995)
Cash and Cash Equivalents - Beginning of
Period.................................. 30,355 31,602
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Cash and Cash Equivalents - End of Period. $ 22,069 $ 20,607
========== ==========
Cash Flow from Changes in Current Assets
and Liabilities:
Receivables........................... $ (3,281) $ 464
Refundable income taxes, net.......... (5,489) (11,225)
Inventories........................... (60,560) (20,377)
Net assets held for disposal.......... 2,181
Prepaid expenses and other current
assets.............................. 560 (1,270)
Accounts payable...................... 7,784 (9,492)
Accrued payroll....................... 1,256 2,516
Accrued income taxes.................. (10,443)
Other accrued taxes................... (1,894) (423)
Other current liabilities............. (3,874) (3,167)
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Change in Current Assets and
Liabilities..................... $ (65,498) $ (51,236)
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
5
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Twenty-Six Weeks Ended
- --------------------------------------------------------------------------------
November 23, 1997 November 24, 1996
- --------------------------------------------------------------------------------
Cash Flows--Operating Activities:
Net earnings............................ $ 31,938 $ 9,304
Adjustments to reconcile net earnings
to cash flow:
Depreciation and amortization....... 63,085 70,103
Amortization of unearned
compensation and loan costs....... 1,717 1,821
Change in current assets and
liabilities....................... (27,746) (49,267)
Change in other liabilities......... 266 181
Loss on disposal of land, buildings
and equipment..................... 1,551 2,868
Deferred income taxes............... 7,041 8,030
Other, net.......................... 106 81
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Net Cash Provided by Operating
Activities.................... $ 77,958 $ 43,121
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Cash Flows--Investment Activities:
Purchases of land, buildings and
equipment............................. (56,113) (83,400)
Purchases of intangibles................ (871) (529)
(Increase) decrease in other assets..... (3,067) 1,018
Proceeds from disposal of land,
buildings and equipment (including
net assets held for disposal)......... 9,061 12,734
---------- ----------
Net Cash Used by Investment
Activities.................... $ (50,990) $ (70,177)
---------- ----------
Cash Flows--Financing Activities:
Proceeds from issuance of common stock.. 2,496 938
Income tax benefit credited to equity... 579 289
Dividends paid.......................... (6,005) (6,284)
Purchases of treasury stock............. (46,665) (9,192)
ESOP note receivable repayment.......... 1,800 600
Increase in short-term debt............. 18,900 17,700
Proceeds from issuance of long-term
debt.................................. 16,900
Repayment of long-term debt............. (1,805) (3,454)
Proceeds from issuance of equity puts... 311
Payment of loan costs................... (177)
---------- ----------
Net Cash Provided by (Used by)
Financing Activities.......... $ (30,389) $ 17,320
---------- ----------
Decrease in Cash and Cash Equivalents..... (3,421) (9,736)
Cash and Cash Equivalents - Beginning of
Period.................................. 25,490 30,343
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Cash and Cash Equivalents - End of Period. $ 22,069 $ 20,607
========== ==========
Cash Flow from Changes in Current Assets
and Liabilities:
Receivables........................... $ (3,167) $ (4,127)
Refundable income taxes, net.......... 5,015 (11,225)
Inventories........................... (50,593) (19,177)
Prepaid expenses and other current
assets.............................. 2,262 (642)
Accounts payable...................... 19,157 1,462
Accrued payroll....................... 1,152 (398)
Accrued income taxes.................. (12,522)
Other accrued taxes................... 1,162 3,029
Other current liabilities............. (2,734) (5,667)
---------- ----------
Change in Current Assets and
Liabilities..................... $ (27,746) $ (49,267)
========== ==========
- --------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
6
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLAR AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
NOTE 1. BACKGROUND
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These consolidated financial statements do not include certain information
and footnotes required by generally accepted accounting principles for complete
financial statements. However, in the opinion of management, all adjustments
considered necessary for a fair presentation have been included and are of a
normal recurring nature. Operating results for the thirteen and twenty-six weeks
ended November 23, 1997 are not necessarily indicative of the results that may
be expected for the fiscal year ending May 31, 1998.
These statements should be read in conjunction with the consolidated
financial statements and footnotes included in the annual report on Form 10-K of
Darden Restaurants, Inc. (hereinafter called the "Company" or "Darden") for the
year ended May 25, 1997. The accounting policies used in preparing these
consolidated financial statements are the same as those described in the
Company's annual report on Form 10-K.
NOTE 2. CONSOLIDATED STATEMENTS OF CASH FLOWS
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During the thirteen and twenty-six weeks ended November 23, 1997, Darden
paid $0 and $8,194, respectively, for interest (net of amount capitalized) and
$3,691 and $4,071, respectively, for income taxes.
NOTE 3. DERIVATIVE FINANCIAL AND COMMODITY INSTRUMENTS
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On January 31, 1997, the Securities and Exchange Commission (SEC) issued
amended disclosure rules for derivatives and exposures to market risk from
derivative and other financial and certain commodity instruments. Enhanced
accounting policy disclosures in accordance with this SEC release follow.
The Company may, from time to time, use financial and commodities
derivatives in the management of interest rate and commodities pricing risks
that are inherent in its business operations. Such instruments are not held or
issued for trading or speculative purposes.
The Company uses commodities hedging instruments, including forwards,
futures and options, to reduce the risk of price fluctuations related to future
raw materials requirements for commodities such as coffee, soybean oil, and
shrimp. The terms of such instruments generally do not exceed twelve months, and
depend on the commodity and other market factors. Deferred gains and losses are
subsequently recorded as cost of products sold in the statement of earnings when
the inventory is sold. If the inventory is not acquired and the hedge is
disposed of, the deferred gain or loss is recognized immediately in cost of
products sold.
The Company may, from time to time, use interest rate swap and cap
agreements in the management of interest rate exposure. The interest rate
differential to be paid or received is normally accrued as interest rates
change, and is recognized as a component of interest expense over the life of
the agreements. If an agreement is terminated prior to the maturity date and is
characterized as a hedge, any accrued rate differential would be deferred and
recognized as interest expense over the life of the hedged item.
The Company does not have any material risk from any of the above financial
instruments, and the Company does not anticipate any material losses from the
use of such instruments.
7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth selected restaurant operating data as a
percentage of sales for the periods indicated. All information is derived from
the consolidated statements of earnings (loss) for the thirteen and twenty-six
weeks ended November 23, 1997 and November 24, 1996.
Thirteen Weeks Ended Twenty-Six Weeks Ended
- ---------------------------------------------------------------------------------------------------
November 23, November 24, November 23, November 24,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------------------
Sales..................................... 100.0% 100.0% 100.0% 100.0%
Costs and Expenses:
Cost of sales:
Food and beverages................... 32.5 34.5 32.7 33.8
Restaurant labor..................... 33.9 33.7 32.9 32.1
Restaurant expenses.................. 15.8 16.0 15.5 15.7
----- ----- ----- -----
Total Cost of Sales................ 82.2% 84.2% 81.1% 81.6%
Selling, general and administrative.... 11.3 12.5 11.2 12.4
Depreciation and amortization.......... 4.3 4.7 4.0 4.5
Interest, net.......................... 0.6 0.7 0.6 0.7
----- ----- ----- -----
Total Costs and Expenses......... 98.4% 102.1% 96.9% 99.2%
----- ----- ----- -----
Earnings (Loss) before Income Taxes....... 1.6 (2.1) 3.1 0.8
Income Taxes.............................. (0.6) 0.6 (1.0) (0.2)
----- ----- ----- -----
Net Earnings (Loss)....................... 1.0% (1.5)% 2.1% 0.6%
===== ===== ===== =====
- ---------------------------------------------------------------------------------------------------
RESULTS OF OPERATIONS
For the fiscal 1998 second quarter ended November 23, 1997, earnings after
tax were $7.5 million or five cents per share, compared to a net loss of $11.2
million or seven cents per share in the second quarter of fiscal 1997. The
increase in second quarter earnings was primarily attributable to strong same
store sales at The Olive Garden and improved margins at Red Lobster. Sales of
$745.3 million for the quarter, with 75 fewer restaurants at the end of the
quarter, were slightly below last year's second quarter.
For the first six months of fiscal 1998, net earnings were $31.9 million or
21 cents per share, compared to $9.3 million or six cents per share in the same
fiscal 1997 period. Sales approximating $1.6 billion for the first six months of
fiscal 1998 were comparable to last year.
Food and beverage costs for the quarter were 32.5% of sales, compared to
34.5% of sales last year primarily attributable to reduced costs, pricing and
sales mix. Restaurant labor increased to 33.9% of sales compared to last year's
33.7% due to wage rate inflation and higher manager compensation paid in
response to competitive market conditions. Restaurant expenses decreased
modestly to 15.8% of sales compared to 16.0% last year. Restaurant level profit
margin increased to 17.8% of sales in the second quarter compared to 15.8% last
year. The decrease in second quarter selling, general and administrative expense
to 11.3% of sales compared to 12.5% of sales last year was attributable to
reduced marketing expenses. Depreciation and amortization expense declined to
4.3% of sales compared to 4.7% in the prior year. This decline resulted from
restaurant closings and asset impairment write-downs subsequent to fiscal 1997's
second quarter.
The effective tax rate for the second quarter of fiscal 1998 was 36.1%,
compared to 29.4% last year. The estimated effective tax rate for fiscal 1998 is
approximately 33.1% which is up from last year's effective tax rate before
unusual items of 27.9% due to a higher level of expected pre-tax income for the
year.
Food and beverage costs for the first six months of fiscal 1998 were 32.7%
of sales, down from last year's 33.8% and also attributable to reduced costs,
pricing and sales mix. Restaurant labor increased to 32.9% of sales compared to
last year's 32.1%, also due to wage rate inflation and higher manager
compensation paid in response to
8
competitive market conditions. Restaurant expenses were 15.5% of sales, compared
to 15.7% in the prior year. Selling, general and administrative expenses
decreased to 11.2% of sales compared to 12.4% in the prior year, again
attributable to reduced marketing expenses. Depreciation and amortization
expense declined to 4.0% of sales compared to 4.5% in the prior year. This
decline also resulted from restaurant closings and asset impairment write-downs
subsequent to fiscal 1997's second quarter.
DIVISION RESULTS
Red Lobster sales of $417.8 million, with 49 fewer restaurants at the end
of the quarter, was 4.5% below last year's second quarter. Same-store sales in
the U.S. were down 0.2% for the quarter which compares favorably to last year's
strong sales and traffic due to heavy marketing associated with the
repositioning of Red Lobster. Second quarter margins and operating profits
substantially improved over the prior year because of lower restaurant level
costs as a percentage of sales and reduced marketing and depreciation expense.
Through the first six months of fiscal 1998, Red Lobster's sales declined 2.8%
to $887 million and same-store sales in the U.S. increased by 0.9%. The overall
reduction in sales was attributable to units closed subsequent to fiscal 1997's
second quarter.
The Olive Garden continued its positive momentum in the second quarter of
fiscal 1998 with a 4.7% increase in sales to $324.2 million. Same-store sales in
the U.S. increased 9.1%, marking the thirteenth consecutive quarter of
same-store sales increases. Second quarter operating profits were significantly
ahead of last year. Through the first six months of fiscal 1998, The Olive
Garden sales increased 3.4% to $660.1 million and same-store sales in the U.S.
increased by 6.5%.
Darden's newest concept Bahama Breeze continues to report strong sales at
both restaurants. Three more restaurants are currently under development.
The table below details the number of restaurants open at the end of the
second quarter, compared with the number open at the end of May 1997 and the end
of last fiscal year's second quarter.
NUMBER OF RESTAURANTS
- --------------------------------------------------------------------------------
November 23, 1997 May 25, 1997 November 24, 1996
- --------------------------------------------------------------------------------
Red Lobster - USA......... 649 652 681
Red Lobster - Canada...... 35 51 52
----- ----- -----
Total................... 684 703 733
----- ----- -----
Olive Garden - USA........ 460 461 475
Olive Garden - Canada..... 5 16 16
----- ----- -----
Total................... 465 477 491
----- ----- -----
Bahama Breeze............. 2 2 1
----- ----- -----
Grand Total......... 1,151 1,182 1,225
===== ===== =====
- --------------------------------------------------------------------------------
9
PART II
OTHER INFORMATION
ITEM 5. OTHER INFORMATION
On December 12, 1997, the Company named Richard E. Rivera President of Red
Lobster. Mr. Rivera, a 25-year veteran of the casual dining industry, was
elected to the Company's Board of Directors on December 17, 1997.
In other action on December 17, 1997, the Board of Directors authorized the
Company to purchase an additional 15 million shares of the Company's common
stock in its ongoing share repurchase program. During the fiscal 1998 second
quarter, the Company purchased approximately 2.3 million shares of its common
stock for a cumulative total at the end of the quarter of approximately 11.4
million shares purchased under its then current authorization to buy up to 15.8
million shares.
In conjunction with this action, the Board of Directors authorized the
Company to issue up to five million additional put options on its common stock
("puts"). The puts entitle the holder to sell shares of the Company's common
stock to the Company at a specified price on a specified date. The Company's
issuance of puts will continue to be coordinated with its share repurchase
program.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit 11 Determination of Common Shares and Common Share
Equivalents
Exhibit 12 Computation of Ratio of Consolidated Earnings (Loss) to
Fixed Charges
Exhibit 27 Financial Data Schedule
(b) Reports on Form 8-K.
(i) On September 16, 1997, the Company filed a current report on Form
8-K to announce the restructuring of the Company's Canadian
operations and the closing of fifteen (15) Red Lobster
restaurants and eleven (11) The Olive Garden restaurants in
Canada.
(ii) On September 26, 1997, the Company filed a current report on Form
8-K to announce first quarter financial results for fiscal year
1998 and to announce its semi-annual dividend of four cents per
share.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
DARDEN RESTAURANTS, INC.
Dated: December 18, 1997 By: /s/ C.L. Whitehill
-------------------------------------
C.L. Whitehill
Senior Vice President,
General Counsel and Secretary
Dated: December 18, 1997 By: /s/ James D. Smith
-------------------------------------
James D. Smith
Senior Vice President - Finance
(Principal financial and accounting
officer)
11
INDEX TO EXHIBITS
Exhibit
Number Exhibit Title Page
- ------- ------------- ----
11 Determination of Common Shares and Common Share
Equivalents 13
12 Computation of Ratio of Consolidated Earnings (Loss)
to Fixed Charges 14
27 Financial Data Schedule 15
12