10-QPeriod: Q1 FY2009

DARDEN RESTAURANTS INC Quarterly Report for Q1 Ended Aug 24, 2008

Filed September 24, 2008For Securities:DRI

Summary

Darden Restaurants, Inc. reported a 20.9% increase in sales to $1.77 billion for the quarter ended August 24, 2008, primarily driven by the acquisition of RARE Hospitality International, Inc. (RARE) and the expansion of Olive Garden. However, net earnings from continuing operations decreased by 22.7% to $82.4 million, resulting in diluted EPS from continuing operations of $0.58, down from $0.73 in the prior year period. The decline in profitability was attributed to a decrease in blended same-restaurant sales across key brands (Olive Garden, Red Lobster, LongHorn Steakhouse), integration and purchase accounting costs related to the RARE acquisition, and increased expenses, particularly in food and beverage, restaurant expenses, and interest costs. Despite these challenges, the company maintained its investment-grade credit rating and demonstrated consistent operating cash flow.

Key Highlights

  • 1Total sales increased by 20.9% to $1.77 billion, largely due to the acquisition of RARE and Olive Garden's expansion.
  • 2Net earnings from continuing operations decreased by 22.7% to $82.4 million, impacting diluted EPS, which fell to $0.58 from $0.73 year-over-year.
  • 3Same-restaurant sales showed a mixed performance, with Olive Garden experiencing growth while Red Lobster and LongHorn Steakhouse saw declines.
  • 4Costs and expenses rose significantly as a percentage of sales, from 89.7% to 93.6%, driven by higher food and beverage, restaurant, and interest expenses, as well as integration costs from the RARE acquisition.
  • 5The company continued to invest in growth, with capital expenditures increasing to $135.4 million for new restaurants and a new Restaurant Support Center.
  • 6Darden maintained a strong liquidity position, with operating cash flow remaining stable at approximately $161.4 million.
  • 7The company repurchased 2.1 million shares of its common stock for $68.4 million during the quarter as part of its ongoing share repurchase program.

Frequently Asked Questions

The primary driver for the significant increase in sales was the acquisition of RARE Hospitality International, Inc. (RARE) in the second quarter of fiscal 2008, which added LongHorn Steakhouse and The Capital Grille to Darden's portfolio. Additionally, the expansion of the Olive Garden brand through new restaurant openings contributed to sales growth.

Net earnings and diluted EPS decreased due to several factors. These include integration and purchase accounting adjustments from the RARE acquisition, a decline in blended same-restaurant sales across key brands like Olive Garden and Red Lobster, and increased operating expenses such as higher food and beverage costs, restaurant expenses, and interest expenses. These increased costs and the impact of the acquisition outweighed the sales growth.

Darden maintains a $750 million revolving credit facility and had $175 million outstanding under it as of August 24, 2008, supporting its commercial paper program. The company aims to maintain an investment-grade credit rating for flexible financing access. Operating cash flows remain a significant source of liquidity, sufficient to cover capital expenditures, dividends, and share repurchases. The company also engaged in interest rate hedging activities to manage its exposure to interest rate fluctuations on its debt.

The company is reporting losses from discontinued operations related to Smokey Bones and Rocky River Grillhouse restaurants. For the quarter ended August 24, 2008, these losses, net of tax, were $0.3 million, which had a minimal impact on the overall net earnings. These operations are being wound down or sold.