10-QPeriod: Q2 FY2007

DARDEN RESTAURANTS INC Quarterly Report for Q2 Ended Nov 26, 2006

Filed January 4, 2007For Securities:DRI

Summary

Darden Restaurants, Inc. reported solid financial results for the quarter and six months ended November 26, 2006. Sales saw a notable increase, driven by same-restaurant sales growth, particularly at Olive Garden, and the addition of new company-owned restaurants. Net earnings and diluted earnings per share also showed positive year-over-year growth, reflecting improved operational efficiencies and favorable commodity costs. The company's balance sheet indicates a healthy financial position, with growth in total assets primarily due to an increase in inventories, likely seasonal. While current liabilities also rose, this was largely attributed to increased short-term debt to manage seasonal inventory purchases and desired debt leverage targets. The company continues to invest in its property and equipment, supporting its growth strategy. Darden also highlighted its commitment to shareholder returns through increased dividends and ongoing share repurchase programs.

Key Highlights

  • 1Total sales increased by 4.5% for the quarter and 3.9% for the six-month period, reaching $1.39 billion and $2.84 billion, respectively.
  • 2Net earnings grew 12.0% to $61.7 million for the quarter and 6.9% to $150.2 million for the six-month period.
  • 3Diluted earnings per share increased by 17.1% to $0.41 for the quarter and 12.4% to $1.00 for the six-month period.
  • 4Olive Garden continues its strong performance with its 49th consecutive quarter of U.S. same-restaurant sales growth (2.9%).
  • 5The company adopted SFAS No. 123(R) for stock-based compensation, leading to an increase in recognized stock-based compensation expense.
  • 6Total costs and expenses as a percentage of sales remained stable, with improvements in food and beverage costs more than offsetting increases in labor and SG&A expenses.
  • 7Darden is actively managing its capital structure, including a $500 million credit facility, share repurchases, and a recently increased dividend payment.

Frequently Asked Questions

Sales growth was primarily driven by increased U.S. same-restaurant sales, particularly at Olive Garden, and the net addition of 45 company-owned restaurants since the prior year's second quarter.

The adoption of SFAS No. 123(R) required Darden to recognize stock-based compensation expense based on the grant date fair value. This resulted in an increase in reported stock-based compensation expense for the quarter and six months ended November 26, 2006, compared to the prior year. This also led to a reclassification of excess tax benefits from operating to financing cash flows.

Darden expects its internal cash generation, combined with its credit facility and shelf registration for debt securities, to be sufficient to fund capital expenditures, dividends, and share repurchases through fiscal 2007. The company maintains a strong liquidity position and access to short-term financing through its commercial paper program.

The company is subject to routine lawsuits and claims arising in the ordinary course of business, including wage and hour allegations and gift card marketing inquiries from the FTC. While these matters are being addressed, Darden believes their final disposition will not materially adversely affect its financial position, results of operations, or liquidity. The company also faces various other risks common to the restaurant industry as detailed in the Risk Factors section.