10-QPeriod: Q2 FY2005

DARDEN RESTAURANTS INC Quarterly Report for Q2 Ended Nov 28, 2004

Filed January 7, 2005For Securities:DRI

Summary

Darden Restaurants, Inc. reported a strong second quarter and first half of fiscal year 2005, demonstrating robust sales growth and improved profitability. Sales increased by 7.6% for the quarter and 4.4% for the six-month period, driven by strong same-restaurant sales at Olive Garden and Red Lobster, along with the addition of new company-owned restaurants. Net earnings saw a significant jump of 43.0% for the quarter and 17.0% for the six months, with diluted EPS growing accordingly. This performance was supported by effective cost management, particularly in food and beverage and restaurant expenses, as well as strategic initiatives like the 'Endless Shrimp' promotion at Red Lobster. The company also addressed a significant accounting restatement related to lease accounting and depreciation policies, which was identified in late 2004. While this restatement impacted historical retained earnings, its effect on current financial performance was minimal. Darden continued to expand its restaurant footprint, particularly with Smokey Bones, and maintained a strong liquidity position, with ample cash flow from operations and available credit facilities to fund its growth and capital expenditure plans.

Key Highlights

  • 1Significant year-over-year sales growth: 7.6% for the quarter and 4.4% for the six-month period.
  • 2Strong earnings improvement: Net earnings increased by 43.0% for the quarter and 17.0% for the six months, with diluted EPS showing similar strong growth.
  • 3Olive Garden and Red Lobster were key drivers of same-restaurant sales growth, with Olive Garden achieving its 41st consecutive quarter of growth.
  • 4Effective cost management: Reductions in food and beverage, restaurant labor, and restaurant expenses as a percentage of sales contributed to improved profitability.
  • 5Company is undertaking a restatement of prior financial statements related to lease accounting and depreciation policies, with an impact on historical retained earnings but minimal impact on current cash flows or operations.
  • 6Expansion continues with a focus on Smokey Bones, which plans to open 30-40 new restaurants in fiscal year 2005.
  • 7Solid liquidity and financial position, with strong operating cash flows and access to a $400 million credit facility.

Frequently Asked Questions

The primary drivers of sales growth are increased U.S. same-restaurant sales, particularly at Olive Garden and Red Lobster, and the opening of new company-owned restaurants. Olive Garden demonstrated consistent performance with its 41st consecutive quarter of same-restaurant sales growth, while Red Lobster saw a rebound in its second quarter.

Darden Restaurants is restating certain prior financial statements due to a review of its lease accounting and leasehold depreciation policies. This involves recognizing rent expense over the expected lease term, including cancelable option periods. While this restatement reduced historical retained earnings, management states it had no impact on previously reported cash flows, sales, same-restaurant sales, or compliance with debt covenants. For investors, it means historical financial figures have been adjusted, but the current operational and cash flow performance remains the focus.

The company is effectively managing costs through various initiatives. Food and beverage costs decreased as a percentage of sales due to favorable promotional mix, reduced waste, and cost-saving initiatives, partially offset by rising commodity costs. Restaurant labor also improved as a percentage of sales due to sales leverage, and restaurant expenses decreased due to lower pre-opening costs and improved workers' compensation claims. These cost efficiencies, combined with sales growth, have directly contributed to improved operating profit and net earnings.

Darden is pursuing growth through both same-restaurant sales increases at established brands like Olive Garden and Red Lobster, and through expansion of newer concepts. Smokey Bones is a particular focus for expansion, with plans to open 30-40 new restaurants in fiscal year 2005, and the company is testing national advertising for this brand. Bahama Breeze is showing improved financial performance despite fewer locations, and Seasons 52 continues to operate as a single unit.