Accounting Darden Restaurants Final Project PDF

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Final project for the course. The final project was to do an analysis on a firm from an accounting perspective....

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FINANCIAL REPORTING PROJECT

DARDEN RESTAURANTS, INC.

Introduction Competition among restaurants can get intense. It is an industry with steady, high demand and no barriers to entry. With emerging dining options, and dominant competitors in the restaurant industry, there is no particular company that has managed to get a large market share of the industry. However, Darden Restaurants, Inc. is one of the companies that stays at the top of the list with its recognizable and profitable brands such as Olive Garden, Yard House, LongHorn Steakhouse, and Cheddar’s Scratch Kitchen, among others. This report will show the financial analysis of this successful company. From the company’s history, to discussing its profit capital and cash flow statement, the analysis on this information will show the company’s profitability, solvency, and liquidity, as well as a further discussion that examines whether Darden Restaurants, Inc. should be considered for investment.

Company Background Darden Restaurants, Inc. is a publicly traded company that operates in the New York Stock Exchange. Darden’s ticker Symbol is $DRI. Darden Restaurants operates 8 casual restaurant dining chains - Olive Garden, LongHorn Steakhouse, Bahama Breeze, Seasons 52, Eddie V's Prime Seafood, The Capital Grille, Yard House and the recently acquired Cheddar's Scratch Kitchen. Each of these brands generates revenue via the sale and servicing of food and beverages. Darden’s fiscal year is from June 1 to May 31. For the 2016-17 fiscal year, Darden closed at 88.93. The company showed a relatively steady upwards trend for the year, closing with a growth of about 31% from the previous fiscal year.

Understanding Profit, Capital, and Cash Flow 1

Darden’s net income in 2017 was $479 million, with $375 million in 2016 and $709.5 million in 2015. This computes to about a 53% decrease in earnings from 2015-2016 and a 27.7% increase from 2016-2017. The decline in net income from the 2015-2016 was mostly due to Darden’s sale of the Red Lobster brand, which accounted for a significant amount of their revenue stream. With the sale, Darden paid off debt and issued a share buyback program. With their buyback program, Darden repurchased outstanding shares of stock from outside shareholders, decreasing the number of shares outstanding. It should be noted that since Darden Restaurants provides services rather than actual goods, the cost of goods sold by Darden Restaurants is $0. Thus, it would not make sense to calculate the gross margin percentage because the percentage calculated wouldn’t have any meaning. Stockholders Equity changed significantly from Darden’s previous fiscal year. In Darden’s 2015-2016 fiscal year, Stockholders Equity was 1,952 million dollars, whereas in Darden’s 2016-2017 fiscal year Stockholders Equity was 2,101.7 million dollars. Darden Restaurants issued 126.7 shares during the 2016-2017 fiscal year. Darden restaurant also had higher net earnings, adding to the stock equity. Net Earnings for Darden’s 2016-2017 fiscal year were 479.1 million dollars, while Cash Flows from operations was 918.2 million dollars. The discrepancy between these two numbers was caused by the fact that the higher net earnings from the continued operations by Darden Restaurants was partially offset by the timing of the accounts payable and the current period activity of taxable differences. 61.82% of Darden’s assets are financed through liabilities, and 38.18% of Darden’s assets are financed through stockholders equity. This suggest that Darden is potentially dangerous to

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invest in, as Darden takes on more debt than stockholder equity. Having high debt ratio can be bad, as it means the company is taking in large amounts of debt that will eventually have to be paid in the future. Also in times of crisis, the company would have to pay the debt before paying the stockholders. However, having a higher debt also shows that a company is expanding and could potentially mean higher growth rate, as the only way to grow a business is through gaining assets through debt. Darden Restaurants received assurance via an audit from KPMG LLP, a public accounting firm. KPMG believes that it is KPMG’s responsibility to express an opinion on the Darden’s internal control over financial reporting and on Darden’s consolidated financial statements. While there were no material issues noted by KPMG, it should be noted Cheddar’s Scratch Kitchen was excluded from the audit process as it was acquired lated into Darden’s 2016-2017 fiscal year.

Analyzing Profitability, Turnover, Solvency, and Liquidity Profitability ratios are used to measure a company’s ability to earn earnings in comparison to the expenses and costs that were incurred in a specific period of time. For most of the ratios included in this category, having a higher ratio to that of a competitor’s, or relative to the previous period, tells us that a company is doing fairly well. Profitability ratios include profit margin. For instance, the ratio shrinks as expenses are recognized, such as operating/nonoperating costs, taxes incurred, and cost of goods sold. Darden’s profit margin is of 0.711, while Bloomin’ Brands is of 0.69, which tells us that Darden has a greater ability to make revenues. Another profitability ratio is Return on Assets, ROA. This ratio is useful as it tells us how successful a company is using its assets to make revenue and profits. A high return on ratio tells

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us that a company has a large amount of assets, which means a high likelihood of generating profits. Darden's ROA is of 0.24, while Bloomin’ Brands is of 0.82.This tells us that Bloomin’ Brands is using its assets more efficiently than Darden and a higher financial strength, but still has inefficiencies in its performance as Darden carries a higher net profit. One last profitability ratio is Return on Equity, or ROE, which concerns a company’s ability to gain income returned based on shareholders equity. Darden’s ratio is of 0.14 while Blooming’ Brand’s is of 0.06. This suggests that Darden can increase its ability to make profit without needing much capital. Based on these profitability ratios, Darden seems like a great option to invest as it carries a higher profit margin and return on equity. As well, the huge difference between Bloomin’ Brands’ ROA and ROE can be a result of debt. The company borrows a large amount of money, which causes a great gap between total assets and total equity, which makes it riskier to invest. The turnover ratios refers to the amount of times a company’s assets or liabilities have been replaced in a specific time period. These ratios help us determine the efficiency in a business using its assets. Hence, the accounts receivable turnover ratio tells us the time it takes for a company to collect accounts receivable. Darden’s receivable turnover ratio is 9.686, while Bloomin’ Brands is 34.31. This shows Bloomin’ Brands is more efficient in collecting issued credit from customers, and that it most likely has a traditional policy regarding credit extension. Darden can improve its collection process and perhaps redetermine its policies regarding extension of credit to increase its ratio. On the other hand. inventory turnover ratio tells us about the quantity of inventory that is bought and sold over a period of time. A low turnover ratio tells us that a company has poor sales and an excess in its inventory. A high ratio tells us that a company has strong sales and potentially large discounts. It is detrimental to understand this ratio as it tells us how fast a company can sell inventory, which is a crucial way of measuring its

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performance. In this case, the turnover ratio for Darden and Bloomin’ Brands would be 0% as the cost of goods sold is 0. This value does not have any meaning, and should not be included in analyzing the company’s performance. Liquidity ratios include the current ratio and the quick ratio, both of which use assets and liabilities to put a number on how well a company can pay its current liabilities. The current ratio measures a company’s ability to pay short term obligations. If this ratio is less than one, the company’s liabilities are bigger than its assets and the company is considered unlikely to be able to pay its obligations. If the current ratio is greater than one, the company’s assets outweigh its liabilities and it is likely to be able to pay off its liabilities. Darden’s current ratio is 0.62. This means that Darden is will struggle to pay off its liabilities. Although Darden’s current ratio is under one, it is not as bad as Bloomin’ Brand’s ratio of 0.42. Much like the current ratio, the quick ratio measures a company’s ability to pay its obligations. However, the quick ratio only measures the most liquid assets such as cash and accounts receivable to its obligations, producing a more conservative number. Darden’s quick ratio is 0.25, meaning they are even more unlikely to pay off their liabilities with liquid assets than they are with all of their assets. Here, Bloomin’ Brands does have a better ratio, 0.28, although not by much. It is interesting to see that such large and successful companies still struggle to pay off their obligations. Solvency ratios help show a company’s ability to pay off its total obligations. The lone solvency ratio here is the Debt to Equity ratio. This specific ratio is used to see how much debt a company is using to finance its assets relative to the value of shareholders’ equity. Higher Debt to Equity ratios mean that firms rely heavily on financing debt to fund specific projects which means this company has a higher risk. Darden’s Debt to Equity ratio is 1.62 which is an extremely small number compared to their competitor, Bloomin’ Brands, whose Debt to Equity

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Ratio is 50.98. Bloomin’ Brands finances a lot of debt and are a much more risky investment than Darden. The Earnings Per share, EPS, ratio tells us about the profitability of a company. It is considered to be a crucial, and perhaps the most important ratio, in determining the price of a share. Using this ratio, investors can understand the market value of the share before buying it. For instance, a high earnings per share ratio indicates high profitability. Darden’s EPS ratio is of 3.80, while Bloomin’ Brand has an EPS ratio of 4.88. This tells us that Bloomin’ Brands is making a large amount of money for its shareholders, as an effect of not only alterations in profit, but the issuance of shares as well. Rather than just looking at this numbers alone, it is important to look at a company’s EPS ratio on a trend lookout. And in some cases, even though a company has a relative increase in their EPS ratio, they may not pay dividends since they invest in the company to trigger further growth. It is advised to not compare companies solely on the EPS ratio. Overall, Bloomin’ Brands is more highly valued, but that doesn’t mean investors shouldn’t take Darden into consideration. As it still has a greater profit margin, new acquisitions and substantial room to grow. The Times Interest Earned ratio is another ratio that measures a company’s ability to pay debt obligations. Specifically, Time Interest Earned uses income before interest and taxes and measures how many times it can pay off its interest obligations. Darden’s Times Interest Earned ratio is 16.77 meaning they can pay of their interest liabilities almost 17 times over with pre-tax earnings. This is a healthy number compared to Bloomin’ Brands’ Times Interest Earned ratio of 9.13. Overall, Darden is a much more reliable company in terms of paying off interest debt. The Price to Earnings ratio is helpful to investors as it indicates how much they are willing to pay for each dollar of earnings. A high P/E ratio tells us that investors can expect

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profits and an increase in earnings compared to other companies. For instance, Darden has a P/E ratio of 15.51 while Bloomin’ Brands has a ratio of 8.85. This suggests that Darden can expect large growth in its future. However, the P/E ratios carries many limitations, so we also need to consider their different growth rates and other variables. Because Darden and Bloomin’ Brands are part of the same industry, it’s viable to compare the ratios of these two and conclude investors are betting on Darden’s success. Overall, Darden is performing better than Bloomin’ Brand. It has high profitability and a steady market value, along with expected growth. Looking at Darden’s market summary over the last five years, there is an increasing growth trend. However, it’s important to take into consideration that in the last 3 months of the 2018 year, Darden has been performing not so well due to a decrease in sales, which can be attributed to variances and seasonality. Regardless, investment in Darden Restaurants is highly encouraged due to its positive earnings history, upside in shares–in 2017 Darden’s stock value increased almost as twice more than the dining industry itself–, growth expectations through the acquisition of Cheddar’s Scratch Kitchen, and other macroeconomic factors such as a rise in employment, lower fuel prices and larger disposable income. Darden Restaurants are highly efficient in using assets to generate profit, increasing without depending heavily on financial debt, and keeping strong sales along with a steady demand curve. Besides comparing Darden’s exceptional performance to Bloomin’ Brands, we are convinced that investing in Darden is a profitable option as the company is taking many steps to be a top competitor such as moving towards eating healthier and occupying a unique, niche target market.

Recommendations

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Although Darden Restaurants performs better than Bloomin’ Brands, a competitor, in almost every category, Darden still shows signs of struggling to repay short term obligations. Due to small liquidity and solvency ratios, it is recommended that creditors should not loan money to Darden Restaurants in the short-run. Creditors should loan money to Darden Restaurants in the long-term. Although Darden’s may show signs of struggle to pay back loans quickly, they have no problem paying them back in the long-run. Especially with extreme potential for both growth and revenues, Darden is a company worth loaning money to in the long-run. Compared to Darden’s competitor, Bloomin’ Brands, Darden is performing extremely well. Bloomin’ Brands suffers financially and this can be shown in most of their profitability, turnover, liquidity, and solvency ratios and while Darden recently experienced an 11.5% drop in stock price, there is an abundance of evidence pointing towards positive growth. For those who are looking to invest in Darden, buy the stock. For those who already have investments in Darden, hold the stock. Darden’s current stock price is at $87.72 so invest quickly because this number is very likely to gain back the recent 11.5% loss and more.

Works Cited

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Darden Restaurants, Inc. Form 10-K 2017, 2017. Web. 21 July 2017

“Darden Restaurants Reports Fiscal 2018 Third Quarter Results And Increases Financial Outlook For The Full Fiscal Year.” The Wall Street Journal, 22 Mar. 2018.

Kenneth. “Investors Alert on Darden Restaurants, Inc. .” Wallstreet Morning, 17 Apr. 2018.

Persinos, John. “Here's Why Darden Restaurants Stock Belongs in Your Investment Portfolio.” TheStreet, TheStreet, 24 Mar. 2016.

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