Darden Restaurants Reports Strong First Quarter Results

Darden Restaurants, the parent company of popular restaurant chains like Olive Garden, LongHorn Steakhouse, and The Capital Grille, has released its financial results for the first quarter of fiscal year 2025. The report highlights the company’s continued growth and solid financial performance, despite some challenges in the broader industry.

Financial Highlights

• Total sales increased 1.0% to $2.76 billion for the first quarter, driven by 42 new restaurant openings. However, same-restaurant sales declined 1.1% compared to the prior year period.
• Net earnings from continuing operations were $207.6 million, up from $194.8 million in the same quarter last year.
• Reported diluted net earnings per share from continuing operations were $1.74, compared to $1.60 in the prior year quarter.

Outlook and Strategic Initiatives

Looking ahead, Darden expects sales for fiscal year 2025 to be between $11.8 and $11.9 billion, driven by same-restaurant sales growth of 1.0% to 2.0% and the opening of 45 to 50 new restaurants. The company also plans to invest $550 to $600 million in capital expenditures for new restaurant construction, remodeling, and technology initiatives.

Darden recently announced an agreement to acquire Chuy’s Holdings, a Mexican-inspired restaurant chain, for approximately $605 million. This acquisition is expected to be completed in the second quarter of fiscal 2025 and will be funded through debt financing.

Additionally, Darden has entered into an exclusive multi-year delivery partnership with Uber Technologies. This agreement will allow the company’s guests to order on-demand delivery through Darden’s restaurant channels, with delivery handled by Uber’s national network.

Segment Performance

Darden operates its restaurant brands in four reportable segments: Olive Garden, LongHorn Steakhouse, Fine Dining, and Other Business.

Olive Garden

• Sales decreased 1.5%, primarily due to a 2.9% decline in same-restaurant sales, partially offset by revenue from new restaurants.
• The decrease in same-restaurant sales was driven by a 5.6% drop in guest counts, partially offset by a 2.9% increase in average check.

LongHorn Steakhouse

• Sales increased 6.5%, driven by a 3.7% increase in same-restaurant sales and revenue from new restaurants.
• The increase in same-restaurant sales was due to a 3.0% increase in average check and a 0.7% increase in guest counts.

Fine Dining

• Sales increased 2.0%, primarily due to the acquisition of Ruth’s Chris Steak House and revenue from new restaurants, partially offset by a 6.0% decline in same-restaurant sales.
• The decrease in same-restaurant sales was driven by a 9.3% drop in guest counts, partially offset by a 3.7% increase in average check.

Other Business

• Sales decreased 0.7%, primarily due to a 1.8% decline in same-restaurant sales, partially offset by revenue from new restaurants.
• The decrease in same-restaurant sales was driven by a 3.9% drop in guest counts, partially offset by a 2.2% increase in average check.

Cost and Expense Analysis

Darden’s overall operating costs and expenses as a percentage of sales decreased from 90.7% in the prior year quarter to 90.2% in the current quarter. Key changes include:

• Food and beverage costs decreased as a percentage of sales, primarily due to pricing leverage and cost savings, partially offset by unfavorable mix.
• Restaurant labor costs increased as a percentage of sales, primarily due to inflation, partially offset by sales leverage, salary and benefits improvements, and productivity gains.
• Restaurant expenses increased as a percentage of sales, primarily due to inflation.
• Marketing expenses increased as a percentage of sales due to higher marketing and media spending.
• General and administrative expenses decreased as a percentage of sales, primarily due to lower transaction and integration costs related to the Ruth’s Chris acquisition, as well as lower incentive pay and sales leverage.
• Depreciation and amortization expenses increased as a percentage of sales due to the Ruth’s Chris acquisition and brand asset depreciation.
• Impairment and disposal of assets decreased as a percentage of sales due to fewer unplanned closures or early lease terminations.

Liquidity and Capital Resources

Darden’s principal sources of liquidity are cash flows from operations and access to its $1.25 billion revolving credit facility. As of August 25, 2024, the company had no outstanding balances on the revolving credit facility and $955.6 million of available credit.

In September 2024, Darden entered into a $600 million 2-year term loan agreement to help finance the anticipated acquisition of Chuy’s Holdings. The company’s outstanding long-term debt consists primarily of senior notes with maturities ranging from 2027 to 2048.

Darden’s net cash flows provided by operating activities increased to $273.2 million in the first three months of fiscal 2025, up from $269.1 million in the same period last year. Net cash used in investing activities decreased to $149.7 million, compared to $854.2 million in the prior year, primarily due to the acquisition of Ruth’s Chris in fiscal 2024.

The company’s Board of Directors has authorized a new $1 billion share repurchase program, which replaced the previous authorization. During the first quarter of fiscal 2025, Darden repurchased 1.2 million shares of its common stock.

Segment Profit Margins

Darden measures the performance of its segments based on segment profit margin, which is calculated as sales less the costs of food and beverage, restaurant labor, restaurant expenses, and marketing expenses, divided by sales.

• Olive Garden’s segment profit margin decreased to 20.6% from 21.4% in the prior year quarter, primarily due to negative same-restaurant sales, higher restaurant labor costs, and higher restaurant expenses, partially offset by lower food and beverage costs.
• LongHorn Steakhouse’s segment profit margin increased to 17.9% from 17.5%, driven by positive same-restaurant sales, lower food and beverage costs, partially offset by higher restaurant labor and restaurant expenses.
• Fine Dining’s segment profit margin decreased to 13.5% from 14.5%, primarily due to negative same-restaurant sales, higher restaurant labor costs, and higher restaurant expenses, partially offset by lower food and beverage costs.
• Other Business’ segment profit margin remained flat at 15.1%, as lower food and beverage costs were offset by negative same-restaurant sales.

Seasonality and Risks

Darden’s sales volumes fluctuate seasonally, with the highest sales typically in the winter and spring, followed by the summer, and the lowest in the fall. The company’s results can also be impacted by holidays, changes in the economy, severe weather, and other factors.

The report outlines several key risks and uncertainties that could affect Darden’s future performance, including:

• Cost pressures from commodities, labor, healthcare, and utilities
• Macroeconomic conditions and their impact on the restaurant industry
• Challenges in hiring, training, and retaining restaurant staff
• Food safety and supply chain disruptions
• Cybersecurity and data privacy concerns
• Integration risks related to the Chuy’s Holdings acquisition
• Regulatory changes and their impact on operations
• Intense competition and changes in consumer preferences
• Climate change and natural disasters

Conclusion

Darden Restaurants’ first quarter results demonstrate the company’s ability to navigate a challenging operating environment and continue to grow its business. While facing some headwinds in same-restaurant sales, the company’s diversified portfolio of restaurant brands, strategic initiatives, and strong financial position position it well for the future. Investors will be closely watching Darden’s progress as it integrates the Chuy’s Holdings acquisition and leverages new delivery partnerships to drive long-term growth and profitability.