10-QPeriod: Q3 FY2003

DARDEN RESTAURANTS INC Quarterly Report for Q3 Ended Feb 23, 2003

Filed April 9, 2003For Securities:DRI

Summary

Darden Restaurants, Inc. reported financial results for the third quarter ended February 23, 2003. Sales increased by 5.1% year-over-year to $1.181 billion, driven by same-restaurant sales growth and an increase in company-owned restaurants. However, net earnings saw a 6.7% decline to $61.8 million, or $0.35 per diluted share, compared to $66.2 million, or $0.36 per diluted share, in the prior year's quarter. This decrease was attributed to rising restaurant expenses and depreciation, particularly impacting Red Lobster and Olive Garden operations, as well as increased marketing and pre-opening expenses. For the first nine months of fiscal year 2003, net earnings rose by 3.8% to $171.2 million, or $0.96 per diluted share, compared to $164.8 million, or $0.90 per diluted share, in the same period last year. This growth was supported by increased sales at Red Lobster and Olive Garden, alongside improved cost management in food and beverage and selling, general, and administrative expenses. The company continued its expansion, with a net increase of 61 company-owned restaurants year-over-year. Darden's liquidity remains strong, supported by operating cash flows and available credit facilities, with capital expenditures focused on new restaurant development and remodels.

Key Highlights

  • 1Total sales for the third quarter increased by 5.1% to $1.181 billion, driven by comparable restaurant sales and an expansion of the restaurant base.
  • 2Net earnings for the third quarter decreased by 6.7% to $61.8 million, impacting diluted EPS to $0.35 from $0.36 year-over-year.
  • 3For the first nine months, net earnings increased by 3.8% to $171.2 million, with diluted EPS rising to $0.96 from $0.90.
  • 4Red Lobster reported a 2.3% increase in sales and a 1.2% increase in U.S. same-restaurant sales, marking its 21st consecutive quarter of comparable sales gains.
  • 5Olive Garden saw a 5.7% increase in sales and a 0.3% increase in U.S. same-restaurant sales, extending its streak to 34 consecutive quarters.
  • 6The company added a net of 61 company-owned restaurants compared to the prior year's third quarter.
  • 7Capital expenditures for the nine-month period were $321 million, primarily for new restaurant openings and equipment.
  • 8Operating cash flow remained robust, providing a significant source of liquidity.

Frequently Asked Questions

The primary driver for the decline in net earnings during the third quarter was an increase in restaurant expenses and depreciation and amortization expenses as a percentage of sales at both Red Lobster and Olive Garden. Additionally, higher-than-expected utility expenses, increased marketing spend, and higher incremental pre-opening expenses due to more new restaurant openings also contributed to the decline.

In the third quarter, food and beverage costs decreased due to lower product costs and pricing changes. Restaurant labor costs also decreased due to lower bonus costs and favorable sales volume, partially offset by wage increases. For the first nine months, food and beverage costs decreased, and selling, general, and administrative expenses also decreased as a percentage of sales, contributing to earnings growth.

Darden Restaurants is pursuing growth through the opening of new restaurants. During the nine months ended February 23, 2003, they opened 61 net new company-owned restaurants. The company has plans to continue expanding, with Smokey Bones, in particular, planning to more than double its restaurant count.

The company relies on cash flows generated from operating activities as a significant source of liquidity. They also utilize a combination of long-term and short-term borrowings, including a $300 million credit facility. Capital expenditures are primarily funded by operating cash flows and are focused on building new restaurants and remodeling existing ones. They expect internal cash generation and available borrowings to be sufficient to finance operations through fiscal 2003.