10-QPeriod: Q2 FY2009

DARDEN RESTAURANTS INC Quarterly Report for Q2 Ended Nov 23, 2008

Filed January 2, 2009For Securities:DRI

Summary

Darden Restaurants, Inc. (DRI) reported solid sales growth for the quarter ending November 23, 2008, driven by the acquisition of RARE Hospitality and organic expansion of its Olive Garden and LongHorn Steakhouse brands. While overall sales increased, the company faced headwinds in same-restaurant sales declines at LongHorn Steakhouse and The Capital Grille, and a decrease at Bahama Breeze. Profitability saw a notable increase in diluted net earnings per share from continuing operations year-over-year for the quarter, largely due to the prior year's quarter being impacted by significant integration costs from the RARE acquisition. However, for the six-month period, net earnings and EPS from continuing operations declined compared to the prior year, impacted by a slight decrease in blended same-restaurant sales and increased operating costs such as food and beverage, and interest expenses. The company also highlighted ongoing efforts to manage its debt structure and maintain its investment-grade credit rating, despite some challenges with a revolving credit facility lender. Investors should note the company's proactive approach to potential goodwill impairment testing due to economic uncertainty, and its continued focus on managing costs and strategic growth initiatives, including share repurchases and dividend payouts, while navigating a challenging economic environment.

Key Highlights

  • 1Sales from continuing operations increased by 9.6% year-over-year for the quarter, reaching $1.67 billion, driven by acquisitions and new restaurant openings.
  • 2Diluted net earnings per share from continuing operations rose by 40.0% to $0.42 for the quarter, aided by lower integration costs compared to the prior year's quarter.
  • 3Despite overall sales growth, same-restaurant sales declined at LongHorn Steakhouse (-5.7%) and The Capital Grille (-8.7%), and Bahama Breeze (-8.0%) for the quarter.
  • 4For the six-month period, net earnings from continuing operations decreased by 6.5% to $140.9 million, and diluted EPS from continuing operations fell by 2.9% to $1.00.
  • 5The company reported an increase in food and beverage costs as a percentage of sales, primarily due to rising commodity prices and the impact of the RARE acquisition.
  • 6Darden Restaurants is actively managing its debt and financial covenants, with $437.9 million outstanding under its revolving credit facility and $24.3 million in commercial paper as of the period end.
  • 7Potential goodwill impairment was assessed for LongHorn Steakhouse and The Capital Grille; however, no impairment charges were required at this time, though sensitivity analyses indicated potential risks under certain stress scenarios.

Frequently Asked Questions

For the quarter ended November 23, 2008, Darden Restaurants reported a 9.6% increase in sales to $1.67 billion. Diluted net earnings per share from continuing operations saw a significant increase of 40.0% to $0.42, largely due to lower integration costs compared to the prior year's quarter.

The sales growth was primarily driven by the acquisition of RARE Hospitality International, Inc., a net increase of 42 Olive Garden restaurants and 19 LongHorn Steakhouse restaurants since the prior year's second quarter, and positive U.S. same-restaurant sales growth at Olive Garden and Red Lobster.

The company noted a decrease in net earnings and EPS from continuing operations for the six-month period, impacted by slightly declining blended same-restaurant sales and increased operating costs, particularly food & beverage and interest expenses. Additionally, the company is actively monitoring its goodwill and intangible assets for potential impairment due to economic uncertainty, although no charges were recorded in this period. The company also disclosed a reduction in its ability to borrow under its revolving credit facility due to a lender filing for bankruptcy.

Darden Restaurants is focused on managing costs, as evidenced by efforts to control labor and SG&A expenses as a percentage of sales. The company also aims to maintain an investment-grade credit rating and manages its debt through its revolving credit facility and other long-term debt instruments, including hedging interest rate risk.