Darden Q1 net beats forecast, despite Red Lobster woes

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Darden Restaurants Reports First Quarter Diluted Net Earnings Per Share of 44 Cents

Darden Restaurants, Inc. (NYSE: DRI) today reported sales of $1.28 billion for the first quarter ended August 29, 2004, and quarterly diluted net earnings per share of 44 cents, up 10% from prior year.

"We are pleased with this quarter's improved results," said Joe Lee, Chairman and Chief Executive Officer of Darden Restaurants. "Despite the adverse effects of Hurricane Charley and the Summer Olympics, we achieved solid earnings growth. Olive Garden continues to perform well, Red Lobster and Bahama Breeze are making progress in important areas and Smokey Bones continues its successful expansion. We're focused on sustained brilliance with the basics. That means providing outstanding service, great tasting food and a clean, comfortable and inviting atmosphere in our restaurants. We know operating excellence and strong leadership teams are what it takes to be the best in casual dining."

Highlights for the quarter ended August 29, 2004, include the following:
* Net earnings in the first quarter were $72.1 million, or 44 cents per
diluted share, on sales of $1.28 billion. Last year, net earnings were
$68.6 million, or 40 cents per diluted share, on sales of $1.26 billion.
* Total sales of $1.28 billion represent a 1.5% increase over prior year.
* Olive Garden reported its 40th consecutive quarter of U.S. same-
restaurant sales growth with a 2.8% increase.
* On August 11, the Company announced that Clarence Otis, Jr. would
succeed Joe Lee as Darden's CEO in December 2004. Lee will remain as
Chairman of the Board until his planned retirement in December 2005,
when Otis is expected to become Chairman.
* The Company also announced that Drew Madsen, now President of Olive
Garden, will become Darden's President and Chief Operating Officer in
December 2004.
* The Company continued its share repurchases, buying back 2.9 million
shares of its common stock in the quarter.

Operating Highlights

OLIVE GARDEN'S first quarter sales of $580.5 million were 6.0% above prior year, driven by revenue from 18 net new restaurants in operation versus last year and a U.S. same-restaurant sales increase of 2.8%. This is the 40th consecutive quarter of same-restaurant sales growth for Olive Garden and builds on a 3.9% increase in the first quarter of last year. The company's increased sales, combined with lower restaurant expenses and selling, general and administrative expenses as a percentage of sales, more than offset increased labor costs, resulting in a record quarterly profit that also represents a strong double-digit operating profit increase over last year.

"This was a strong quarter for Olive Garden," said Drew Madsen, President of Olive Garden. "Our financial results in the areas of operating profit and return on sales were outstanding. We've delivered 10 straight years of same- restaurant sales growth, and our goal is to deliver that kind of sustained excellence well into the future. To accomplish that, our teams will continue to focus on delighting our guests with a genuine Italian dining experience."

RED LOBSTER'S first quarter sales of $594.8 million were 6.2% below prior year, reflecting a U.S. same-restaurant sales decrease of 7.6% that was partially offset by revenue from an additional five net new restaurants in operation versus last year. Profit margins per guest improved, as this year's lower food and beverage costs and restaurant expenses more than offset higher labor costs and selling, general and administrative expenses as a percent of sales. Operating profits were slightly lower than last year, as expected.

"Red Lobster's new 'Simply Great' operational discipline is having a positive impact," said Kim Lopdrup, President of Red Lobster. "We achieved record guest satisfaction scores during the quarter. We also earned higher profit margins per guest because of greater efficiencies and reduced waste. While we have a great deal more work to do, we are pleased that the operating performance of our restaurants is improving rapidly. I am also delighted with how quickly our senior leaders have become an effective team."

BAHAMA BREEZE continued to deliver strong sales improvement, driven by the addition of the lunch daypart in most of the restaurants and in spite of operating two fewer restaurants than in the first quarter of the prior year.

SMOKEY BONES operated 32 more restaurants than the prior year, including seven restaurants that were opened during the first quarter. For the full fiscal year, 30 to 40 new restaurants are expected to open.

Other Actions

Darden continued the buyback of its common stock, purchasing 2.9 million shares in the first quarter. Since commencing its share repurchases in December 1995, the Company has repurchased a total of 112.2 million shares under authorizations totaling 115.4 million shares.

August 2004 U.S. Same-Restaurant Sales Results

Darden reported same-restaurant sales for the four-week fiscal August ended August 29, 2004. This period is the last month of Darden's fiscal 2005 first quarter.

Same-restaurant sales at Olive Garden were down 2% to 3% for fiscal August as expected, impacted by the company's decision not to advertise during the final two weeks of the month during the Olympics. The decline reflected a 5% to 6% decrease in guest counts and a 2% to 3% increase in check average. The check average increase was a result of a 2% to 3% increase in pricing and a 0% to 1% increase from menu mix changes. Last year, Olive Garden had an approximate 6% increase in same-restaurant sales during fiscal August. The company estimates that the 2004 Summer Olympics in August and the decision not to advertise during the final two weeks of fiscal August adversely affected Olive Garden's same-restaurant sales by approximately 2% to 3%.

Heavily affected by a shift in promotional strategy compared to last year, same-restaurant sales at Red Lobster were down approximately 16% for fiscal August. This reflected a 14% to 15% decline in guest counts and a 1% to 2% decline in check average. The check average decrease was a result of approximately a 0% to 1% increase in pricing and a 1% to 2% decline from menu mix changes. Last year, Red Lobster had an 11% to 12% increase in same- restaurant sales during fiscal August.

The Company estimates that Hurricane Charley, which occurred in fiscal August, adversely affected August same-restaurant sales results at both Red Lobster and Olive Garden by approximately 0.5% for a total sales impact at Darden of $1.5 to $2.0 million.

Darden Restaurants, Inc., headquartered in Orlando, FL, owns and operates over 1,300 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones and Seasons 52 restaurants with annual sales of $5.0 billion.

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Date Listed: 2004-09-22

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Industry: Restaurants
Category: Financial
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