10-QPeriod: Q3 FY2008

DARDEN RESTAURANTS INC Quarterly Report for Q3 Ended Feb 24, 2008

Filed March 28, 2008For Securities:DRI

Summary

Darden Restaurants Inc. reported solid revenue growth for the nine months ended February 24, 2008, primarily driven by the significant acquisition of RARE Hospitality International, Inc. This acquisition substantially increased the company's asset base, including goodwill and trademarks, and expanded its brand portfolio with LongHorn Steakhouse and The Capital Grille. While revenue saw a substantial increase of 16.9% year-over-year for the nine-month period, net earnings from continuing operations saw a slight decrease of 4.5%, and diluted EPS from continuing operations declined by 1.6%. This performance was impacted by integration costs and purchase accounting adjustments related to the RARE acquisition, alongside increased food and beverage costs, wage rates, and interest expenses. Despite these integration challenges, Darden demonstrated resilience. The company successfully divested its Smokey Bones Barbeque & Grill operations, recognizing a gain on sale. Furthermore, key brands like Olive Garden continued to show positive same-restaurant sales growth, underscoring the underlying strength of its core business. Investors should monitor the integration progress of RARE and the impact of ongoing cost pressures on profitability, while recognizing the strategic expansion achieved through the acquisition.

Key Highlights

  • 1Revenue increased by 16.9% to $4.80 billion for the nine months ended February 24, 2008, largely due to the acquisition of RARE Hospitality International, Inc.
  • 2Net earnings from continuing operations decreased by 4.5% to $266.2 million for the nine months ended February 24, 2008, compared to $278.6 million in the prior year, impacted by acquisition-related costs and rising expenses.
  • 3Diluted earnings per share from continuing operations decreased by 1.6% to $1.83 for the nine months ended February 24, 2008, compared to $1.86 in the prior year.
  • 4The acquisition of RARE added $519.9 million in goodwill and $455.0 million in trademarks to the balance sheet.
  • 5The company generated $575.8 million in net cash from operating activities for the nine months ended February 24, 2008.
  • 6Divestiture of Smokey Bones Barbeque & Grill restaurants generated a gain of $19.3 million included in discontinued operations.
  • 7Total assets significantly increased to $4.73 billion at February 24, 2008, up from $2.88 billion at May 27, 2007, primarily due to the RARE acquisition.

Frequently Asked Questions

The primary driver for the substantial increase in revenue was the acquisition of RARE Hospitality International, Inc. on October 1, 2007. This acquisition brought LongHorn Steakhouse and The Capital Grille brands into Darden's portfolio, significantly boosting overall sales.

The decrease in net earnings from continuing operations was mainly attributed to integration costs and purchase accounting adjustments related to the RARE acquisition, which amounted to approximately $31.0 million for the nine-month period. Additionally, increased food and beverage costs, higher wage rates, and rising interest expenses also impacted profitability.

Darden is in the process of divesting its Smokey Bones Barbeque & Grill and Rocky River Grillhouse restaurants. The company has completed the sale of most of these locations, recognizing a gain on sale, and expects to complete the sale of the remaining restaurant, subject to landlord consent.

The acquisition of RARE significantly impacted the balance sheet. Total assets increased substantially, driven by the addition of $519.9 million in goodwill and $455.0 million in trademarks. Long-term debt also increased to finance the acquisition.