Darden Restaurants, Inc. (
DRI)
Q4 2009 Earnings Call Transcript
June 24, 2009 8:30 a.m. ET
Executives
Matthew Stroud – Vice President of Investor Relations
Brad Richmond - Chief Financial Officer
Andrew H. Madsen - President, Chief Operating Officer, Director
Gene Lee - President, Specialty Restaurant Group
Clarence Otis - Chairman of the Board, Chief Executive Officer
Analysts
Jeffrey Omohundro – Wachovia Capital Markets
Matthew DiFrisco – Oppenheimer & Co
David Tarantino - Robert W. Baird
John Glass - Morgan Stanley
Jeffrey Bernstein - Barclays Capital
Mitchell Speiser - Buckingham Research
Brad Luddington - KeyBanc Capital Markets
Lawrence Miller - RBC Capital Markets
John Ivankoe - J.P. Morgan
Joseph Fisher - Goldman Sachs
Joseph Buckley - Banc of America
Stephen Anderson - MKM Partners
Robert Wyler for Nicole Miller - Piper Jaffray
Presentation
Operator
Ladies and gentlemen, we’d like to thank you for standing by and welcome to the Darden Restaurants fourth quarter earnings release teleconference call. (Operator Instructions) At this time all participants are in a listen-only mode. Later we’ll conduct a question-and-answer session and instructions will be given at that time. At the time of the Q&A session please limit yourself to one question and one follow up and then re-queue if necessary. As a reminder, today’s conference call will be recorded. I would now like to turn the conference over to your host, Mr. Clarence Otis. Please go ahead, sir.
Matthew Stroud – Vice President of Investor Relations
Good morning. This is Matthew Stroud. I’m going to kick off the call this morning. With me today are Clarence Otis, Darden''s Chairman and CEO; Drew Madsen, Darden''s President and COO; Brad Richmond, Darden''s CFO; and Gene Lee, President of Darden''s Specialty Restaurant Group. We welcome those of you joining us by telephone or the Internet.
During the course of this conference call, Darden Restaurants’ officers and employees may make forward-looking statements concerning the company’s expectations, goals, or objectives. These forward-looking statements could address future economic performance, restaurant openings, various financial parameters, or similar matters. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to materially differ from those anticipated in the statements. We wish to caution investors not to place undue reliance on any such forward-looking statements. Any forward-looking statements speak only as to the date of which those statements are made and we undertake no obligation to update such statements to reflect events or circumstances arising after such date. The most significant of these uncertainties are described in Darden''s Form 10-K, Form 10-Q, and Form 8-K reports, including all amendments to those reports.
These risks and uncertainties include the impact of intense competition, changing economic or business conditions, the price and availability of food, ingredients, and utilities, supply interruptions, labor and insurance costs, the loss of or difficulties in recruiting key personnel, information technology failures, increased advertising and marketing costs, higher-than-anticipated costs to open or close restaurants, litigation, unfavorable publicity, a lack of suitable locations, government regulations, a failure to achieve growth objectives through the opening of new restaurants or the development or acquisition of new dining concepts, weather conditions, risks associated with Darden''s plans to expand Darden''s newer concepts, Bahama Breeze and Seasons 52, achieve synergies and develop new LongHorn Steakhouse and The Capital Grille restaurants, risks associated with incurring substantial additional debt, a failure of our internal controls over financial reporting, disruptions in the financial markets, possible impairment of goodwill or other assets, volatility in the market value of the derivatives and other factors and uncertainties discussed from time to time in reports filed by Darden with the Securities and Exchange Commission.
A copy of our press release announcing our earnings, the Form 8-K used to furnish the release to the Securities and Exchange Commission, and any other financial and statistical information about the period covered in the conference call, including any information required by Regulation G, is available under the heading Investor Relations on our website at darden.com. By way of information, we plan to release fiscal 2010 first quarter earnings and same-restaurant sales for fiscal June, July, and August 2010 on Tuesday, September 29th after the market close. We released fourth quarter and fiscal year earnings yesterday afternoon. These results were available on PR Newswire, First Call, and other wire services. Let’s begin by updating you on our fourth quarter and fiscal year earnings.
Fourth quarter net earnings from continuing operations were $122.8 million and diluted net EPS from continuing operations was $0.87, representing a 21% increase in diluted net earnings per share from continuing operations. This includes the integration costs and purchase accounting adjustments related to the October 2007 acquisition of RARE Hospitality International Incorporated, which reduced diluted net earnings per share by approximately $0.03 in the fourth quarter of fiscal 2009, and approximately $0.06 in the fourth quarter of fiscal 2008. Excluding the estimated integration costs and purchase accounting adjustments, net earnings from continuing operations for the fourth quarter of fiscal 2009 were $0.90 per diluted share, or 15% increase from prior year.
On an annual basis, we reported net earnings from continuing operations of $371.8 million, and diluted net EPS from continuing operations of $2.65, representing a 4% increase in diluted net earnings per share from continuing operations. This includes the integration costs and purchase accounting adjustments related to the RARE acquisition, which reduced diluted net earnings per share by approximately $0.10 in fiscal 2009 and approximately $0.19 in fiscal 2008. Excluding estimated integration costs and purchase accounting adjustments, net earnings from continuing operations for fiscal 2009 were $2.75 per diluted share, which was up $0.01 to prior year. Fourth quarter diluted net earnings per share, including discontinued operations, were $0.87 compared to diluted net earnings per share of $0.71 in the prior year. And on an annual basis, diluted net earnings per share, including discontinued operations, were $2.65 compared to $2.60 in the prior year.
Brad will now provide additional detail about our financial results for the fourth quarter and our fiscal year. Drew will discuss Olive Garden, Red Lobster, and LongHorn Steakhouse. Gene will discuss the specialty restaurant group. Brad will then review our fiscal 2010 plans and he will be followed by Clarence who will have some final comments, and we will then respond to your questions. Brad.
Brad Richmond – Chief Financial Officer
Thank you, Matthew and good morning. Darden''s total sales from continuing operations increased 8% in the fourth quarter to $1.98 billion, driven by new restaurant sales growth at Olive Garden, LongHorn Steakhouse, Red Lobster, and an additional operating week. The additional operating week increased sales growth by almost 7 percentage points in the fourth quarter. Let’s review the same-restaurant component of that total sales growth. As a reminder, our same-restaurant sales results are calculated on a 13-week versus 13 basis, while total sales results are calculated on a reported basis or 14-weeks versus 13 weeks. For context, industry same-restaurant sales as measured by Knapp-Track and excluding Darden are estimated to be down 6.7% for the quarter. Olive Garden''s same-restaurant sales were down 0.6% for the quarter and total sales increased 11.5%. Red Lobster also had a same-restaurant sales decrease of 0.6% for the quarter and its total sales increased 6.8%. LongHorn Steakhouse same-restaurant sales decreased 6.5% for the quarter, while its total sales increased 6.5%. The Capital Grille had a same-restaurant sales decrease of 22.1% for the quarter and its total sales decreased 9.9%. Bahama Breeze had a same-restaurant sales decrease of 4.3% for the quarter and its total sales increased 7.6%. What these numbers demonstrate is that in a difficult environment, relative to the industry as measured by Knapp-Track, our three large brands performed very well regarding same-restaurant sales with Olive Garden and Red Lobster outperforming the Knapp-Track benchmark by an estimated 600 basis points and LongHorn exceeding the industry by an estimated 20 basis points.
When you combined these same-restaurant sales with our total sales growth excluding the 53rd week, we are taking significant market share and as I’ll explain in a moment, we’re doing so without sacrificing profitability. But first, let’s discuss the margin analysis for the fourth quarter. Here too we are comparing our year-over-year results on a reported basis, or 14 weeks versus 13 weeks. The additional week leverages restaurant expenses, selling, general, administrative expenses, and depreciation expenses as some of these expenses are incurred or amortized on a monthly or 52-week basis. So let’s begin by reviewing our results for the fourth quarter.
Food and beverage expenses were 86 basis points lower than last year on a percentage of sales basis as a result of reduced food costs. As you may remember, commodity costs were peaking 12 months ago and we have benefited from declining prices in the second half of this fiscal year. Fourth quarter restaurant expenses were 9 basis points higher than last year on a percentage of sales basis due primarily to wage rate inflation, which was almost entirely offset by reduced turnover levels and decreases in group insurance and other benefit costs. Restaurant expenses in the quarter were 59 basis points lower than last year on a percentage of sales basis because of sales leveraging from the additional operating week, favorable workers compensation and public liability costs developments, and lower utility costs. Selling, general and administrative expenses were 73 basis points higher as a percentage of sales for the fourth quarter because of increased media and marketing expense related to Red Lobster’s lunch advertising, Olive Garden''s national Spanish language television advertising, and expenses associated with certain employee benefits that are hedged on an after-tax basis, although the additional expense is offset by related reduction in income tax expense for the quarter.
