10-QPeriod: Q2 FY2006

DARDEN RESTAURANTS INC Quarterly Report for Q2 Ended Nov 27, 2005

Filed January 5, 2006For Securities:DRI

Summary

Darden Restaurants, Inc. reported strong performance for the second quarter and first six months of fiscal year 2006, ending November 27, 2005. Sales increased by 7.8% and 9.0% respectively, driven by comparable restaurant sales growth at Olive Garden and Red Lobster, alongside the addition of 55 new company-owned restaurants. Net earnings saw a significant increase of 28.1% for the quarter and 23.3% for the six-month period, with diluted EPS rising to $0.35 and $0.89 respectively. This growth was fueled by operational efficiencies, including lower food and beverage costs and restaurant expenses as a percentage of sales, particularly at Olive Garden and Red Lobster, which offset rising labor costs. The company also highlighted its expansion efforts, noting a growing portfolio of restaurants across its brands, and robust liquidity, supported by operating cash flows and a substantial credit facility. Management expressed confidence in its ability to fund future capital expenditures, dividends, and stock repurchases through existing resources.

Key Highlights

  • 1Sales increased 7.8% for the quarter and 9.0% for the six-month period, driven by same-restaurant sales growth at Olive Garden and Red Lobster and new restaurant openings.
  • 2Net earnings grew by 28.1% year-over-year for the quarter and 23.3% for the six-month period.
  • 3Diluted EPS rose to $0.35 for the quarter and $0.89 for the six-month period.
  • 4Olive Garden achieved its 45th consecutive quarter of U.S. same-restaurant sales growth (6.4% for the quarter).
  • 5Red Lobster reported its fifth consecutive quarter of U.S. same-restaurant sales growth (2.7% for the quarter).
  • 6Total costs and expenses as a percentage of sales decreased, reflecting improved operational efficiencies.
  • 7The company repurchased approximately 1.8 million shares of common stock during the quarter for $55 million.

Frequently Asked Questions

Sales growth was primarily driven by two factors: increased same-restaurant sales at key brands like Olive Garden and Red Lobster, and the net addition of 55 company-owned restaurants since the prior year's comparable period. Olive Garden showed particularly strong performance with 6.4% same-restaurant sales growth in the quarter, marking its 45th consecutive quarter of growth.

Darden demonstrated improved operational efficiencies. Total costs and expenses as a percentage of sales decreased. This was achieved through lower food and beverage costs and reduced restaurant expenses as a percentage of sales, particularly at Olive Garden and Red Lobster. These savings helped to offset the impact of higher restaurant labor costs and increased wage and benefit expenses.

The company reported a strong financial position with healthy cash flows generated from operating activities. Liquidity is further supported by a $500 million credit facility. Darden has confidence in its ability to finance its capital expenditures, dividend payments, and share repurchase program through its internal cash generation and available credit, indicating a stable outlook for the near future.

Darden is involved in several legal proceedings, primarily class-action lawsuits concerning wage and hour violations and employee classification. While the company believes it is properly classified employees and provided required breaks, it has settled some cases and intends to vigorously defend others. Management believes that the final disposition of all current proceedings will not have a material adverse effect on its financial position, results of operations, or liquidity.