10-QPeriod: Q3 FY2006

DARDEN RESTAURANTS INC Quarterly Report for Q3 Ended Feb 26, 2006

Filed April 6, 2006For Securities:DRI

Summary

Darden Restaurants, Inc. (DRI) reported solid financial results for the third quarter and nine months ended February 26, 2006. Total sales increased by 7.1% in the quarter and 8.4% for the nine-month period, driven by a combination of same-restaurant sales growth, particularly at Olive Garden and Red Lobster, and the addition of new company-owned restaurants. Net earnings saw a significant increase of 13.7% for the quarter and 19.0% for the nine months, with diluted EPS growing by 19.6% and 23.8%, respectively. The company demonstrated improved cost management, with food and beverage costs as a percentage of sales decreasing due to cost-saving initiatives and a favorable brand mix. While restaurant labor costs as a percentage of sales increased, this was partly offset by sales leverage and brand mix. Legal settlements related to employee classification and Smokey Bones impairments impacted selling, general, and administrative expenses, but overall, the company managed its expenses effectively. The effective income tax rate also decreased due to tax credits and favorable resolutions of prior year tax matters, contributing to the bottom-line improvement. Darden's strong cash flow from operations supports its capital allocation strategies, including share repurchases and dividends.

Key Highlights

  • 1Total sales increased 7.1% year-over-year for the third quarter to $1.47 billion and 8.4% for the nine months to $4.21 billion, driven by same-restaurant sales growth and new restaurant openings.
  • 2Net earnings rose 13.7% in the third quarter to $105.3 million and 19.0% for the nine months to $245.9 million, demonstrating strong profitability.
  • 3Diluted Earnings Per Share (EPS) increased significantly by 19.6% in the third quarter to $0.67 and by 23.8% for the nine months to $1.56.
  • 4Olive Garden achieved its 46th consecutive quarter of U.S. same-restaurant sales growth (5.7% in Q3), supported by a growing guest count and average check.
  • 5Red Lobster also reported its sixth consecutive quarter of U.S. same-restaurant sales growth (1.6% in Q3), with improvements in guest satisfaction and record profit margins.
  • 6The effective income tax rate decreased to 24.3% for the quarter and 29.3% for the nine months, primarily due to FICA tax credits and favorable resolution of prior year tax matters.
  • 7The company continues to actively manage its capital structure, with $150.6 million and $338.9 million spent on share repurchases in the third quarter and nine months, respectively.

Frequently Asked Questions

Sales growth was primarily driven by increased U.S. same-restaurant sales at Olive Garden and Red Lobster, coupled with a net increase of 48 Company-owned restaurants since the third quarter of the prior year. Olive Garden's same-restaurant sales grew by 5.7%, and Red Lobster's grew by 1.6%.

Darden showed improved cost management. Food and beverage costs as a percentage of sales decreased due to product cost savings and better waste management. Restaurant labor costs as a percentage of sales increased due to wage rates and FICA taxes but were partially offset by sales leverage. Selling, general, and administrative expenses were impacted by legal settlements and impairments, but overall expense control contributed to profitability.

Olive Garden plans to open 30-35 new restaurants in fiscal 2007 and is introducing two new prototypes to reduce capital investment and improve efficiencies. For Smokey Bones, the pace of new openings is expected to slow to approximately 10-15 in fiscal 2007 due to recent sales softening, with a focus on areas demonstrating sales strength.

The company is involved in several class-action lawsuits related to wage and hour violations and employee classification. Settlements were reached for some cases, totaling approximately $9.5 million for meal/rest breaks and a tentative $11.0 million for employee classification. While these represent significant expenses, the company believes the ultimate disposition will not have a material adverse effect on its financial position, results of operations, or liquidity.