10-QPeriod: Q1 FY2007

DARDEN RESTAURANTS INC Quarterly Report for Q1 Ended Aug 27, 2006

Filed October 4, 2006For Securities:DRI

Summary

Darden Restaurants, Inc. reported a 3.3% increase in sales to $1.46 billion for the first quarter of fiscal 2007, compared to $1.41 billion in the prior year period. This growth was driven by strong same-restaurant sales at Olive Garden and Bahama Breeze, alongside the addition of 39 new company-owned restaurants. Net earnings saw a 3.5% increase to $89 million, translating to a 11.3% rise in diluted earnings per share to $0.59. The company continues its expansion, particularly with Olive Garden, while addressing challenges at brands like Red Lobster and Smokey Bones. Key financial developments include the adoption of SFAS No. 123(R) impacting stock-based compensation expense, which led to a reduction in diluted EPS by $0.02 for the quarter. Darden also completed a sale-leaseback transaction for its Restaurant Support Center, generating $45.25 million and recording a deferred gain to be recognized over four years. The company reaffirmed its liquidity position, expecting sufficient cash flows and borrowing capacity to fund operations, capital expenditures, and shareholder returns.

Key Highlights

  • 1Total sales increased by 3.3% to $1.46 billion for the quarter ended August 27, 2006.
  • 2Net earnings rose by 3.5% to $89 million, with diluted EPS increasing by 11.3% to $0.59.
  • 3Olive Garden reported its 48th consecutive quarter of U.S. same-restaurant sales growth.
  • 4Darden adopted SFAS No. 123(R), resulting in $9 million in stock-based compensation expense and a $0.02 reduction in diluted EPS for the quarter.
  • 5The company completed a sale-leaseback of its Restaurant Support Center for $45.25 million.
  • 6Total costs and expenses as a percentage of sales slightly increased from 90.9% to 91.0%.
  • 7Capital expenditures increased to $96 million, primarily for new restaurant development and equipment.

Frequently Asked Questions

Sales growth was primarily driven by increased U.S. same-restaurant sales at Olive Garden and Bahama Breeze, complemented by the addition of 39 net new company-owned restaurants since the prior year's first quarter.

The adoption of SFAS No. 123(R) requires the recognition of stock-based compensation expense based on grant date fair value. This resulted in $9 million in total stock-based compensation expense for the quarter, an increase from the prior year, and reduced diluted net earnings per share by $0.02.

Darden believes its internal cash generation, a $500 million credit facility, and an available shelf registration for unsecured debt securities will be sufficient to fund capital expenditures, dividends, stock repurchases, and other operating activities through fiscal year 2007. The company is not aware of any trends or events that would materially affect its capital requirements or liquidity.

The company is involved in ongoing legal proceedings, including a proposed FTC settlement related to gift card dormancy fees, which could potentially involve significant monetary relief. However, Darden believes its gift card marketing practices comply with applicable laws and is continuing to negotiate. The company also settled five California class-action lawsuits regarding employee classification for up to $11 million. Management believes the final disposition of all current legal matters will not have a material adverse effect on its financial position, results of operations, or liquidity.