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Article Excerpt
Original Source: FD (FAIR DISCLOSURE) WIRE
OPERATOR: Welcome to the second quarter earnings release conference call. At this time, all participants are in a listen only mode. Later we will conduct a question and answer session. Instructions will be given at that time. (OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded. I would now like to turn the conference over to our host, of Investor Relations, Mr. Matthew Stroud. Please go ahead.
MATTHEW STROUD, VP, IR, DARDEN RESTAURANTS: Thank you. Good morning, everyone. 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. In addition to webcasting the audio portion of this presentation we are also webcasting a PowerPoint presentation discussing our second quarter results and other financial information. You can access this presentation by visiting our website and following the instructions there that allow you to view the webcast.
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. 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, supplies interruptions and labor insurance costs, 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 to newer concepts, Bahama Breeze and Seasons 52, the closure and disposition of certain Smokey Bones restaurants and the anticipated sale of the remaining Smokey Bones restaurant, our ability to combine and integrate the business of RARE Hospitality International Inc., risks associated with incurring substantial additional debt 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.
We plan to release fiscal 2008 third quarter earnings and same restaurant sales for fiscal December, January, and February 2008 on Tuesday, March 8, after the market close. In addition, we will hold an analyst and investor meeting in New York City on February 12, 2008, starting at 8:00 a.m. Additional details will soon follow.
We released second quarter earnings results yesterday afternoon. These results were available on PR Newswire, First Call and other wire services. Let's begin by updating you on our second quarter earnings. Second quarter net earnings were $43.5 million and diluted net EPS was $0.30. This includes the effect of the acquisition of RARE Hospitality which closed on October 1, 2007, as well as other items. More specifically in the second quarter, integration and purchasing accounting adjustments related to the RARE acquisition reduced diluted net earnings per share by approximately $0.09. Incremental financing costs, net of operating contribution and tax benefits from the acquisition decreased net earnings per share by approximately $0.01 and litigation charges related to the settlement of certain legal issues in California reduced diluted net earnings per share by approximately $0.02. In aggregate these items adversely affected diluted net earnings per share by approximately $0.12 in the second quarter. We reported diluted net earnings per share of $0.41 in the prior year second quarter.
In this years second quarter diluted net earnings per share from discontinued operations were $0.00 compared to diluted net earnings per share from discontinued operations of $0.04 in the prior year. As you'll recall on May 5, 2007, we closed 54 Smokey Bones and two Rocky River Grillhouse Restaurants and announced our intent to sell the remaining 73 Smokey Bones Restaurants. Additionally we closed nine Bahama Breeze Restaurants on April 28, 2007, to position the brand for future growth. The Smokey Bones results and the related impairments and costs are classified as discontinued operations as are the results and related impairments and cost for the nine closed Bahama Breeze Restaurants.
Brad will now provide additional detail about our financial results for the second quarter and our revised fiscal year outlook. Drew will discuss the business results of Olive Garden, Red Lobster and Longhorn Steakhouse. Gene will discuss the specialty restaurant group followed by Clarence with some final remarks. We will then respond to your questions.
BRAD RICHMOND, CFO, DARDEN RESTAURANTS: Thank you, Matthew, and good morning. Darden's total sales from continuing operations increased 17% in the second quarter to $1.52 billion driven by the addition of Longhorn Steakhouse and the Capital Grille and meaningful new and same restaurant sales growth at Olive Garden. The incremental sales from Longhorn Steakhouse and the Capital Grille totaled $163 million for the fiscal months of October and November. Excluding the acquisition, sales growth for the quarter would have been 4.6%. At Olive Garden, same restaurant sales were up 3.2% for the quarter, its 53rd consecutive quarter of same restaurant sales growth and its total sales increased 8.2%. Red Lobster reported same restaurant sales increase of 0.1% for the quarter and total sales increased 0.6%.
Longhorn Steakhouse same restaurant sales decreased 3.9% for October and November only, and decreased 2.5% for the periods of September, October, and November. The Capital Grille had same restaurant sales increase of 0.7% for October and November only. And same restaurant sales increased 1.2% for the September, October, and November period.
Bahama Breeze had same restaurant sales increase of 0.1% for the quarter. For context, industry same restaurant sales as measured by Knapp-Track and excluding Darden were down approximately 2% for the quarter. Thus, relative to the industry, you can see then, aggregate Darden performed favorably.
Now, let's discuss the margin analysis of the second quarter, which is complicated by the acquisition of RARE Hospitality. To offer more charity and an apples-to-apples comparison, of our year-over-year results, we are comparing results from continuing operations this year and last year, adjusted to include Rare Hospitality's October and November operating results for fiscal 2007. Thus, the results from Smokey Bones and closed Bahama Breeze Restaurants are not included for either fiscal 2007 or fiscal 2008, but the results of the acquisition of RARE Hospitality are included for the months of October and November in both fiscal 2007 and fiscal 2008.
So let's begin by reviewing our results for the second quarter which are shown here on this slide labeled fiscal 2008 Q2 results. The left and middle columns show our reported results for this year and last year. I'd like to draw your attention to the right column of the slide, which is highlighted for you. This column represents our second quarter results adjusted for the impact of transaction and integration related costs and the impact of purchase accounting adjustments related to the acquisition of RARE Hospitality. In other words, this represents second quarter results excluding the various costs and adjustments associated with the acquisition.
More specifically, when compared with our reported second quarter results shown in the left column, you see the various acquisition related adjustments. One, adversely impacted restaurant expenses by approximately 10 basis points. They adversely impacted selling, general, and administrative expenses by approximately 120 basis points and adversely impacted depreciation and amortization cost by approximately 10 basis points.
In sum, the various acquisition, integration and purchase accounting a adjustments adversely impacted our second quarter results by approximately 130 basis points, roughly $21 million which equates to diluted net earnings per share of $0.09. We anticipate additional acquisition integration and purchase accounting adjustments in the third and fourth quarter of approximately $0.03 per diluted share and $0.02 per diluted share respectively, which includes approximately $0.01 per diluted share each quarter for purchase accounting adjustments.
On this next slide, labeled fiscal 2008 Q2 results adjusted, we show our second quarter results in fiscal 2008 adjusted for the various acquisition related costs I just mentioned. And compare that to second quarter results last year and fiscal 2007 adjusted to include the operating results of RARE Hospitality, for October and November 2006. While these results were unaudited, we believe they offer a better understanding of the year-over-year performance. This information was included in last nights press release.
I will discuss the margin analysis for the second quarter based on this presentation of results. Food and beverage expenses were approximately 30 basis points higher than last year on a percentage of sales basis, adjusted for the inclusion of the RARE brands, primarily because of commodity cost inflation and most significant inflation was on dairy, bread, and some seafood products. Menu exchanges at Red Lobster also contributed to higher cost of sales.
As many of you know, the cost of dairy and wheat in particular has increased dramatically in recent months, especially in October and November. We are not able to effectively hedge our dairy usage and so there, we operate with market risk. We do, however, hedge our wheat related products primarily with contracts on bread and pasta, but had to remove some of our contracts on those products during the quarter at higher than expected year-over-year prices. Bread in particular was a major contributor to our food and beverage and favorability this quarter. We have taken pricing to offset some of the expected cost inflation this year and will take more pricing if we believe there is a structural change in the commodity cost environment. Rarely will an increase in any single one of these product categories have a major effect on the business but unfortunately, this quarter we see a significant combined rise in their cost.
Second quarter restaurant labor expenses were 60 basis points higher than last year on a percentage of sales basis adjusted to include the RARE brands. Due primarily to wage rate inflation of about 5%, which was near our expectation and driven mostly by minimum wage increases. We also chose to carry additional managers at Red Lobster and Olive Garden that were transferred from the Smokey Bones Restaurants we closed in May 2007. The cost of these additional managers was approximately 10 basis points or $0.01 on an earnings per share basis in the second quarter; however, we expect these costs to be offset late in the year by lower manager hiring and training costs.
Restaurant expenses in the quarter were 50 basis points higher than last year...
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