10-QPeriod: Q3 FY2005

DARDEN RESTAURANTS INC Quarterly Report for Q3 Ended Feb 27, 2005

Filed April 7, 2005For Securities:DRI

Summary

Darden Restaurants, Inc. reported strong financial performance for the third quarter and the first nine months of fiscal year 2005, ending February 27, 2005. Sales increased by 10.8% in the quarter and 6.6% for the nine-month period, driven by robust same-restaurant sales growth at Olive Garden and Red Lobster, along with the addition of new company-owned restaurants. Net earnings saw a significant increase of 20.2% for the quarter and 18.4% for the nine months, demonstrating effective cost management and operational efficiencies across its key brands. The company also provided updates on operational highlights, including the continued strong performance of Olive Garden and the improving trends at Red Lobster. While expansion efforts at Smokey Bones contributed to an increased operating loss in the quarter, the brand is expected to become accretive to earnings in the fourth quarter. Darden's financial position remains solid, supported by strong operating cash flows and a well-managed debt structure, with ample liquidity to fund ongoing operations, capital expenditures, and share repurchase programs.

Key Highlights

  • 1Sales increased by 10.8% in Q3 FY2005 and 6.6% in the first nine months of FY2005 compared to the prior year periods.
  • 2Net earnings grew by 20.2% in Q3 FY2005 and 18.4% in the first nine months of FY2005, indicating improved profitability.
  • 3Olive Garden reported its 42nd consecutive quarter of U.S. same-restaurant sales growth with a 10.5% increase in Q3 FY2005.
  • 4Red Lobster showed a positive turnaround with 5.1% U.S. same-restaurant sales growth in Q3 FY2005, its second consecutive quarter of growth.
  • 5The company successfully managed costs, with total costs and expenses decreasing as a percentage of sales in Q3 FY2005.
  • 6Darden repurchased 3.7 million shares of common stock in Q3 FY2005 as part of its ongoing share repurchase program.
  • 7The company expects Smokey Bones to become accretive to earnings in the fourth quarter of fiscal year 2005.

Frequently Asked Questions

Sales growth was primarily driven by strong U.S. same-restaurant sales increases at Olive Garden (10.5%) and Red Lobster (5.1%), along with the addition of 57 new company-owned restaurants compared to the prior year's third quarter.

Darden restated certain prior financial statements due to a review of lease accounting and leasehold depreciation policies. This resulted in an increase in deferred rent liability and a decrease in retained earnings as of May 30, 2004. However, the restatement had no impact on reported cash flows, sales, or same-restaurant sales, nor did it affect covenant compliance.

Darden demonstrated effective cost management, with total costs and expenses decreasing as a percentage of sales in Q3 FY2005. Initiatives like cost savings at Red Lobster and Bahama Breeze, favorable promotional mix, reduced waste, and ongoing safety programs for workers' compensation contributed to this efficiency.

While Smokey Bones' expansion and advertising tests led to an increased operating loss in Q3 FY2005, the company expects the brand to become accretive to earnings in the fourth quarter of fiscal year 2005.