Grade: F — Major Red Flags
Framework: Schilit *Financial Shenanigans* + Beneish M-Score + forensic accounting principles
Data: SEC EDGAR 10-K (Filed 2025-07-18) + Yahoo Finance
Auditor: KPMG LLP — Clean opinion (unqualified)
One-line verdict: Darden is the largest full-service restaurant company in the United States, operating 2,159 restaurants (including Olive Garden, LongHorn Steakhouse, Cheddar's, Chuy's, Ruth's Chris, and others) plus 154 franchised locations, with $12.1B in revenue. Two red flags: cash of $240M covers only 4% of $6.2B in debt, and goodwill+intangibles of $3.1B represent 134% of equity — driven by the acquisitions of Ruth's Chris and Chuy's. But the operating metrics are clean: CFFO/NI of 1.62, FCF of $1.0B (0.98x net income), an M-Score of -2.75, and a negative accruals ratio of -5.2%. The goodwill concentration is the substantive concern; the cash-vs-debt ratio is partially structural from operating lease capitalization.
| Metric | Result |
|---|---|
| Red Flags | **2** |
| Watch Items | **0** |
| Checks Completed | **18/18** |
| Beneish M-Score | **-2.75** (below -2.22 — clean) |
| F-Score (Fraud Probability) | **0.55** (0.20% probability) |
| Altman Z-Score | **0.28** (distress zone — structural) |
| Auditor | KPMG LLP — Unqualified opinion |
| Fiscal Year | 2025 (52 weeks ended May 25, 2025) |
| Report Date | 2026-04-05 |
The Business: Full-Service Restaurant Leader
The 10-K states: "Darden Restaurants, Inc. is a full-service restaurant company, and as of May 25, 2025, we owned and operated 2,159 restaurants through subsidiaries in the United States and Canada under the Olive Garden, LongHorn Steakhouse, Cheddar's Scratch Kitchen, Chuy's, Yard House, Ruth's Chris Steak House, The Capital Grille, Seasons 52, Eddie V's Prime Seafood, Bahama Breeze, and The Capital Burger trademarks."
Darden also had "154 restaurants operated by independent third parties pursuant to area development and franchise agreements." The company "operates on a 52/53-week fiscal year, which ends on the last Sunday in May."
The filing emphasizes sustainability: "The sustainability of our food sources and restaurant operations is a key component of providing great service and food to our guests."
Profitability: Steady Growth
| Metric | FY2022 | FY2023 | FY2024 | FY2025 | Trend |
|---|---|---|---|---|---|
| Revenue | $9,630M | $10,488M | $11,390M | $12,077M | +6.0% YoY |
| Gross Profit | $1,995M | $2,109M | $2,435M | $2,643M | +8.5% |
| Gross Margin | 20.7% | 20.1% | 21.4% | **21.9%** | Improving |
| Net Income | $953M | $982M | $1,028M | $1,050M | +2.1% |
| Net Margin | 9.9% | 9.4% | 9.0% | **8.7%** | Slight decline |
| ROE | 43.3% | 44.6% | 45.8% | **45.4%** | Stable |
Revenue grew 6.0% to $12.1B, driven by same-restaurant sales growth and the additions of Chuy's and continued expansion. Gross margin improved to 21.9%. Net margin dipped slightly to 8.7% — likely reflecting integration costs from recent acquisitions. ROE remains strong at 45.4%.
Cash Flow: Consistent Quality
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Operating Cash Flow | $1,256M | $1,546M | $1,612M | $1,699M |
| Net Income | $953M | $982M | $1,028M | $1,050M |
| **CFFO / Net Income** | **1.32** | **1.57** | **1.57** | **1.62** |
| CapEx | -$402M | -$594M | -$628M | -$672M |
| Free Cash Flow | $854M | $951M | $984M | $1,027M |
Cash flow quality is excellent and improving. The CFFO/NI ratio has increased from 1.32 to 1.62 over four years. FCF of $1.03B nearly equals net income (0.98x). The accruals ratio of -5.2% is negative and healthy. The gap between CFFO and NI is primarily depreciation and amortization from the restaurant asset base and recent acquisitions.
The Acquisition-Driven Goodwill Load
Darden's goodwill of $1,659M and intangibles of $1,444M total $3.1B — 134% of shareholders' equity. This is the most significant concern. The goodwill primarily reflects:
The filing notes the company "manages energy and water conservation within our restaurant operations" and has been integrating Chuy's (200+ locations) into its portfolio.
The 18% YoY growth in goodwill+intangibles (check E2) passed the screening but confirms active acquisition activity. Any impairment of these intangibles — from brand deterioration, same-store sales declines, or integration failures — would directly hit equity.
The 18-Point Screening
| # | Check | Result | Detail |
|---|---|---|---|
| A1 | DSO Change | PASS | DSO 1 day, change -0 days YoY. Near-zero |
| A2 | AR vs Revenue Growth | PASS | AR growth 1.0% vs revenue growth 6.0% |
| A3 | Revenue vs CFFO | PASS | Revenue +6.0%, CFFO +5.4%. Cash follows revenue |
| B1 | Inventory vs COGS | PASS | Inventory +7.3% vs COGS +5.3%. Normal |
| B2 | CapEx vs Revenue | PASS | CapEx +6.9% vs revenue +6.0%. Normal |
| B3 | SG&A Ratio | PASS | SG&A/Gross Profit = 26.1%. Excellent (<30%) |
| B4 | Gross Margin | PASS | Gross margin 21.9%, +0.5pp. Improving |
| C1 | CFFO vs Net Income | PASS | CFFO/NI = 1.62. Strong cash backing |
| C2 | Free Cash Flow | PASS | FCF $1.0B, FCF/NI = 0.98 |
| C3 | Accruals Ratio | PASS | Accruals ratio = -5.2%. Negative — healthy |
| C4 | Cash vs Debt | **FAIL** | Cash $240M covers only 4% of debt $6.2B |
| D1 | Goodwill + Intangibles | **FAIL** | Goodwill+Intangibles $3.1B = 134% of equity |
| D2 | Leverage | PASS | Debt/EBITDA = 3.3x. Interest coverage 8.0x |
| D3 | Soft Asset Growth | PASS | Other assets +7.3% vs revenue +6.0%. Normal |
| D4 | Asset Impairment | PASS | Write-offs normal |
| E1 | Serial Acquirer FCF | PASS | FCF after acquisitions positive |
| E2 | Goodwill Surge | PASS | Goodwill+Intangibles +18% YoY. Normal |
| F1 | Beneish M-Score | PASS | M-Score = -2.75 (< -2.22). Clean |
Beneish M-Score Component Breakdown:
| Component | Value | What It Measures | Concern? |
|---|---|---|---|
| DSRI | 0.952 | Days Sales in Receivables — declining | Good |
| GMI | 0.977 | Gross Margin Index — margins improved | Good |
| AQI | 1.053 | Asset Quality Index — slight shift to soft assets | Normal |
| SGI | 1.060 | Sales Growth Index — 6% growth | Normal |
| DEPI | 0.970 | Depreciation Index — accelerating | Normal |
| SGAI | 1.044 | SG&A Index — slight increase | Normal |
| TATA | -0.052 | Total Accruals to Assets — negative | Good |
| LVGI | 1.099 | Leverage Index — slight increase | Watch (acquisitions) |
Key Risks from the 10-K
1. Acquisition Integration Risk
Darden has been an active acquirer (Ruth's Chris, Chuy's, Cheddar's). The filing notes risks from "the integration of acquired businesses" including brand management, operational standardization, and achieving projected synergies.
2. Goodwill Impairment Exposure
Goodwill+intangibles at 134% of equity creates significant impairment risk. If any acquired brand underperforms, write-downs would directly reduce shareholders' equity.
3. Labor Costs and Availability
The filing describes risks from "the unpredictability of the impact on the United States economy" and notes that "market volatility has contributed to and may continue to contribute to fluctuations in the Company's equity-based compensation." As a labor-intensive business, Darden faces persistent wage pressure.
4. Consumer Spending Sensitivity
Full-service dining is discretionary. The filing warns of risks from "macroeconomic conditions, geopolitical concerns" affecting consumer confidence and spending.
5. Environmental and Regulatory Compliance
The 10-K describes the company's climate strategy and sustainability focus: "Darden manages energy and water conservation within our restaurant operations." Evolving environmental regulations could increase compliance costs.
Key Financial Trends (4-Year)
| Metric | FY2022 | FY2023 | FY2024 | FY2025 |
|---|---|---|---|---|
| Revenue | $9,630M | $10,488M | $11,390M | $12,077M |
| Net Income | $953M | $982M | $1,028M | $1,050M |
| Gross Margin | 20.7% | 20.1% | 21.4% | 21.9% |
| Net Margin | 9.9% | 9.4% | 9.0% | 8.7% |
| ROE | 43.3% | 44.6% | 45.8% | 45.4% |
| CFFO | $1,256M | $1,546M | $1,612M | $1,699M |
| CFFO/NI | 1.32 | 1.57 | 1.57 | 1.62 |
| FCF | $854M | $951M | $984M | $1,027M |
| Cash | $421M | $368M | $195M | $240M |
| Total Debt | $4,887M | $4,794M | $5,428M | $6,230M |
| Restaurants | ~1,900 | ~2,000 | ~2,050 | 2,159 |
Summary
Grade: F. Two red flags — goodwill concentration from acquisitions and insufficient cash coverage.
Darden's operating earnings quality is excellent. CFFO/NI of 1.62 (improving every year), FCF of $1.03B nearly equaling net income, SG&A/Gross Profit at an excellent 26.1%, and an M-Score of -2.75 all signal clean, conservative accounting. Every operational check passes. The 1-day DSO confirms the cash-register business model collects revenue immediately.
The F grade is driven by two balance sheet concerns. First, goodwill+intangibles at $3.1B (134% of equity) represents concentrated acquisition risk. If any of the acquired brands — particularly Ruth's Chris or Chuy's — underperform expectations, impairment charges could materially erode equity. Second, cash of $240M covers only 4% of $6.2B in debt, though Debt/EBITDA of 3.3x and interest coverage of 8.0x confirm the debt is serviceable from operations.
The Altman Z-Score of 0.28 (distress zone) reflects the capital structure — high operating leases, goodwill from acquisitions, and minimal cash reserves — rather than imminent distress. Darden's consistent $1.7B annual CFFO easily services the debt. The key risk is whether the acquired brands justify their goodwill values.
**Disclaimer**: This report is based on Darden Restaurants' fiscal year 2025 10-K filed with the SEC on July 18, 2025. This is NOT investment advice.
**About EarningsGrade**: We screen earnings reports for financial red flags using an 18-point forensic framework. Grade F means major red flags were detected — in this case, acquisition-driven goodwill concentration and balance sheet leverage.