10-QPeriod: Q2 FY2008

DARDEN RESTAURANTS INC Quarterly Report for Q2 Ended Nov 25, 2007

Filed January 4, 2008For Securities:DRI

Summary

Darden Restaurants, Inc. reported its financial results for the second quarter and first six months ended November 25, 2007. The period was significantly impacted by the acquisition of RARE Hospitality International, Inc. (RARE) on October 1, 2007, for approximately $1.27 billion. This acquisition contributed significantly to the increase in sales, with total sales for the quarter rising 17.2% to $1.52 billion and for the six-month period by 12.5% to $2.99 billion. Despite the topline growth, net earnings from continuing operations saw a decrease. For the quarter, net earnings fell 34.8% to $44.1 million, and diluted EPS from continuing operations decreased 33.3% to $0.30. This decline was primarily attributed to approximately $20.5 million in acquisition-related fees and integration costs, along with increased legal and food/beverage costs. For the six-month period, net earnings from continuing operations decreased 6.3% to $150.7 million, and diluted EPS fell 3.8% to $1.03. The company also continued its strategy of divesting underperforming assets, with the sale of a significant portion of its Smokey Bones restaurants nearing completion. The balance sheet reflects the impact of the RARE acquisition, with substantial increases in goodwill and intangible assets, alongside a significant rise in long-term debt used to finance the transaction.

Key Highlights

  • 1Acquisition of RARE Hospitality International, Inc. (RARE) completed on October 1, 2007, for approximately $1.27 billion, significantly boosting sales.
  • 2Total sales increased by 17.2% to $1.52 billion for the quarter and 12.5% to $2.99 billion for the six-month period, driven by RARE and same-restaurant sales growth at Olive Garden.
  • 3Net earnings from continuing operations decreased significantly by 34.8% to $44.1 million for the quarter and by 6.3% to $150.7 million for the six months.
  • 4Diluted EPS from continuing operations declined 33.3% to $0.30 for the quarter and 3.8% to $1.03 for the six months.
  • 5Acquisition and integration costs related to RARE, along with higher legal and food/beverage costs, were the primary drivers for the decline in profitability.
  • 6The company is in the process of selling its Smokey Bones business, with a significant portion of the sale completed by December 31, 2007.
  • 7Long-term debt increased substantially due to financing for the RARE acquisition, impacting the company's leverage.

Frequently Asked Questions

The primary driver of Darden's sales growth was the acquisition of RARE Hospitality International, Inc. (RARE), which was completed on October 1, 2007. The acquired brands, particularly LongHorn Steakhouse and The Capital Grille, contributed significantly to the reported sales figures.

Net earnings and EPS decreased primarily due to significant acquisition-related costs and integration expenses associated with the RARE acquisition, which amounted to approximately $20.5 million. Additionally, increased legal costs and higher food and beverage costs also negatively impacted profitability.

Darden has divested a substantial portion of its Smokey Bones restaurants. As of the filing date, 62 out of 73 operating Smokey Bones restaurants were sold for approximately $70.0 million. The remaining 11 are expected to close as ownership transfer conditions are met.

The RARE acquisition significantly increased Darden's assets, particularly with the addition of $520.3 million in goodwill and $455.0 million in trademarks. Correspondingly, long-term debt increased substantially, from $491.6 million to $1,635.4 million, to finance the acquisition.