The Company estimates that integration costs and purchase accounting adjustments related to the October 2007 acquisition of RARE Hospitality International, Inc. (RARE) reduced diluted net earnings per share by approximately three cents in the first quarter. Excluding the estimated integration costs and purchase accounting adjustments of approximately three cents, net earnings from continuing operations were 61 cents per diluted share in the first quarter. First quarter sales from continuing operations were $1.77 billion, compared to $1.47 billion in the first quarter last year, a 21% increase, which reflects sales from the LongHorn Steakhouse and The Capital Grille brands added as part of the RARE acquisition, as well as meaningful new and same-restaurant sales growth at Olive Garden.
"Economic and consumer dynamics were much weaker this quarter than we had anticipated," said Clarence Otis, Chairman and Chief Executive Officer of Darden. "As a result, we fell short of our sales and earnings targets for the quarter. While there has been some recent improvement in energy prices, which are an important factor in consumer spending levels, our sales building and cost management initiatives and outlook for the balance of the year assume that consumers will remain under pressure. Our outlook also reflects our continued progress integrating RARE and capturing the related cost synergies. And we remain confident our brands will continue to deliver for our guests and strengthen their already solid competitive positions as we navigate this demanding consumer environment."
Highlights for the quarter ended August 24, 2008 include the following:
• Net earnings from continuing operations for the first quarter were $82.4 million, or 58 cents per diluted share on sales of $1.77 billion. Excluding estimated integration costs and purchase accounting adjustments of approximately three cents, net earnings from continuing operations were 61 cents per diluted share for the first quarter. In last year's first quarter, net earnings from continuing operations were $106.6 million, or 73 cents per diluted share, on sales of $1.47 billion.
• Total first quarter sales from continuing operations of $1.77 billion represent a 21% increase over the prior year. This includes an incremental $270 million of sales from the LongHorn Steakhouse and The Capital Grille brands added with the acquisition of RARE.
• The Company's effective tax rate in the first quarter was lower than last year's rate due primarily to an increase in federal tax credits.
• In the first quarter, Olive Garden's U.S. same-restaurant sales increased 2.4%, its 56th consecutive quarter of same-restaurant sales growth, while Red Lobster's U.S. same-restaurant sales decreased 3.7% and LongHorn Steakhouse's same-restaurant sales decreased 4.9%. These results compare to an estimated decrease of 3.7% for the first quarter in The Knapp-Track(TM) benchmark of U.S. same-restaurant sales for casual dining chains (excluding Darden). On a blended basis, same- restaurant sales for Olive Garden, Red Lobster and LongHorn Steakhouse were down 1.0% compared to prior year.
• The Company purchased 2.1 million shares of its common stock during the first quarter.
• The Company's Board of Directors declared a quarterly dividend of 20 cents per share.
Operating Highlights
OLIVE GARDEN'S first quarter sales of $811 million were 8.1% above prior year, driven by its U.S. same-restaurant sales increase of 2.4% and revenue from 41 net new restaurants. For the quarter, on a percentage of sales basis, the company's food and beverage expenses, restaurant expenses, selling, general and administrative expenses and depreciation expenses increased and were partially offset by lower restaurant labor expenses. Operating profit decreased for the quarter due to higher operating costs.
RED LOBSTER'S first quarter sales of $646 million were 3.5% below prior year, including a U.S. same-restaurant sales decrease of 3.7%. For the quarter, on a percentage of sales basis, lower food and beverage expenses and selling, general, and administrative expenses were more than offset by the company's increased restaurant labor expenses, restaurant expenses and depreciation expenses, resulting in a decrease in operating profit.
LONGHORN STEAKHOUSE'S first quarter sales of $216 million were 4.2% above the same period included in RARE's prior year results, driven by revenue from 25 net new restaurants, partially offset by a same-restaurant sales decrease of 4.9%. For the quarter, on a percentage of sales basis, the company's increased food and beverage expenses, restaurant expenses, selling, general, and administrative expenses and depreciation expenses were partially offset by lower restaurant labor expenses. Restaurant expenses, selling, general, and administrative expenses and depreciation and amortization expenses were adversely affected by integration-related costs and purchase accounting adjustments.
THE CAPITAL GRILLE'S first quarter sales of $54 million were 6.7% above the same period included in RARE's prior year results, driven by the addition of five net new restaurants, partially offset by a same-restaurant sales decrease of 8.6%.
BAHAMA BREEZE'S first quarter sales of $36 million were 3.7% below prior year's sales from continuing operations, driven by a same-restaurant sales decrease of 3.7%.
"Despite the challenging environment this quarter, our brands produced results that were competitively strong given year-ago same-restaurant comparisons that were well above industry averages," said Drew Madsen, President and Chief Operating Officer of Darden. "Olive Garden delivered especially strong performance and achieved its 56th consecutive quarter of same-restaurant sales growth while also adding nine net new restaurants this quarter. Red Lobster's same-restaurant sales results were in-line with the Knapp-Track(TM) industry benchmark despite a higher than industry average check, demonstrating their strength in this challenging environment. And, while LongHorn Steakhouse's same-restaurant sales results were below the Knapp-Track(TM) industry benchmark results for the geographic regions in which it operates, it has a proven track record of success. With competitively strong brands and a brand support platform that is even more effective and efficient following the RARE acquisition, we remain optimistic and excited about our long-term growth potential."
Other Actions
Darden's Board of Directors declared a quarterly cash dividend of 20 cents per share on the Company's outstanding common stock. The dividend is payable on November 3, 2008 to shareholders of record at the close of business on October 10, 2008.
Darden continued the buyback of its common stock, purchasing 2.1 million shares in the first quarter. Since commencing its repurchase program in December 1995, the Company has purchased over 149 million shares for $2.85 billion under authorizations totaling 162.4 million shares. The Company's current expectation is that it will repurchase approximately $200 million to $225 million of its common stock in fiscal 2009.
Fiscal June, July and August 2008 U.S. Same-Restaurant Sales Results
Darden reported U.S. same-restaurant sales for the fiscal months of June, July and August as follows:
Olive Garden June July August
Same-Restaurant Sales 3% to 4% 0% to 1% 2%
Same-Restaurant Traffic 1% -1% to -2% 0% to 1%
Pricing 2% to 3% 2% to 3% 2% to 3%
Menu-mix 0% to 1% Flat -1%
Red Lobster June July August
Same-Restaurant Sales -3% to -4% -5% to -6% -2% to -3%
Same-Restaurant Traffic -4% to -5% -7% to -8% -5%
Pricing 2% to 3% 3% 3% to 4%
Menu-mix -1% -1% -1%
LongHorn Steakhouse June July August
Same-Restaurant Sales -5% -3% to -4% -6% to -7%
Same-Restaurant Traffic -6% to -7% -6% -9% to -10%
Pricing 2% 2% 3%
Menu-mix 0% to -1% Flat Flat
Fiscal 2009 Financial Outlook
Darden reiterated that it expects combined U.S. same-restaurant sales growth in fiscal 2009 of approximately 0% to 1% for Red Lobster, Olive Garden and LongHorn Steakhouse, and that it expects to open approximately 75 to 80 net new restaurants in fiscal 2009. As a result, the Company expects total sales growth of between 12% and 13% in fiscal 2009, compared to reported sales from continuing operations of $6.63 billion in fiscal 2008. This total sales growth includes the two percentage point impact of a 53rd week in fiscal 2009, excluding the 53rd week, the expected total sales growth would be approximately 10% to 11%.
The Company also affirmed that it now anticipates reported diluted net earnings per share growth from continuing operations of 5% to 10% in fiscal 2009, which includes the impact of the 53rd week. This compares to reported diluted net earnings per share from continuing operations of $2.55 in fiscal 2008. The additional week is expected to contribute approximately two percentage points, or $0.05 per diluted share, of growth in fiscal 2009. Excluding the estimated integration costs and purchase accounting adjustments of approximately 19 cents in fiscal 2008, net earnings from continuing operations were $2.74 per diluted share. In fiscal 2009, these costs and adjustments are estimated to be approximately seven cents per diluted share. Excluding the impact of these costs and adjustments for both fiscal 2008 and fiscal 2009, the Company expects diluted net earnings per share growth of 0% to 5% on a 53-week basis.
Darden Restaurants, Inc., (NYSE:DRI) headquartered in Orlando, Fla., is the world's largest company-owned and operated full-service restaurant company with almost $6.7 billion in annual sales and approximately 180,000 employees. The Company owns and operates over 1,700 restaurants including Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Seasons 52.
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