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Here’s the entire text of the prepared remarks from Darden Restaurants’ (ticker: DRI) fiscal Q2 2006 conference call. The Q&A is here. We recognize that this transcript may contain inaccuracies - if you find any, please post a comment below and we’ll incorporate your corrections. And please note: this conference call transcript is a Seeking Alpha product, so feel free to link to it but reproduction is not permitted without the explicit permission of Seeking Alpha.

Executives:

Matthew Stroud, Vice President, Investor Relations

Linda Dimopoulos, SVP and Chief Financial Officer

Andrew Madsen, President and Chief Operating Officer

Clarence Otis, Chairman and Chief Executive Officer

Analysts:

David Palmer, UBS

Mark Kalinowski, Buckingham Research

Robert Derrington, Morgan Keegan

John Glass, CIBC World Markets

Steven Kron, Goldman Sachs

Jason Whitmer, FTN Midwest

Mark Wiltamuth, Morgan Stanley

Jeffrey Omohundro, Wachovia

Michael Smith, Oppenheimer

Lawrence Miller, Prudential

Joseph Buckley, Bear Stearns

Andrew Barish, Banc of America

John Ivankoe, JP Morgan

Jeffrey Bernstein, Lehman Brothers

Jonathan Waite, KeyBanc Capital Markets

Operator

Good morning ladies and gentlemen. Thank you for standing by and welcome to Darden Restaurant Second Quarter Earnings Release Conference Call. At this time all lines are in the listen only mode. Later there will be an opportunity for your question. Instructions will be given at that time. If you should require assistance during the conference press “*” and then “0” and as a reminder today’s conference is been recorded. And I will turn the conference over to Vice President of Investor Relations Mr. Matthew Stroud. Please go ahead sir.

Matthew Stroud, Vice President, Investor Relations

Good morning thank you Barbara. Good morning everybody. With me today are Clarence Otis, Darden’s Chairman and CEO, Andrew Madsen, Darden’s President and COO and Linda Dimopoulos, Darden’s CFO. We welcome those who joining us by telephone or the internet. During the course of this conference call Darden Restaurant’s officers and employees may make forward-looking statements concerning the company’s “expectations”, “goals”, “objectives”. These forward-looking statements could address future economic performance, restaurant openings, various financial parameters or similar matters. By the nature forward-looking statements involve risks and uncertainties that could cause actual results to materially differ from those anticipated in the statement. These risks and uncertainties include the impact of intense competition, change in economic or business conditions, the price and availability of food, ingredients and utilities, labor and insurance cost increased advertising and marketing cost higher than anticipated cost to open or close restaurants, litigation and favorable publicity, a lack of suitable locations, government regulation are favorable to achieve growth objectives, whether conditions and other risk and uncertainties discussed in the company’s SEC fillings. Because of these numerous variables you are caution against place and undo reliance and any forward looking statements they buy are on behalf of the company. A copy of our press release announcing the earnings the Form 8-K is to file the release with the Securities & Exchange Commission and any other financial and fiscal information about the period covered in the conference call including net information required by regulation G is available under the heading Investor Relations on our website at darden.com. We plan to release the same-restaurant sale was also fiscal December 2006 during the week beginning January 2nd. We plan to release same-restaurant sales results for fiscal January 2006 during the week beginning January 30th. And we plan to release fiscal 2006 third quarter earnings and same-restaurant sales for fiscal February 2006 on Tuesday, March 21st after the market close. We released second quarter earnings yesterday afternoon, results were available on FirstCall PRNewswire and other new sources.

Let’s begin with some highlights from the second quarter. Second quarter net earnings were $55.1 million and diluted net EPS was $0.35. This represents a 35% increase in diluted net earnings per share compared to last year. Olive Garden and Red Lobster had an outstanding quarter with strong operating profit growth at both companies, led by industry-leading same-restaurant sales growth at Olive Garden. Bahama Breeze made good progress as well, posting solid same-restaurant sales growth.

Smokey Bones had a more challenging quarter as same-restaurant sales fell short of our expectations. Also, yesterday we revised upward our guidance for sales and earnings growth this fiscal year. We now expect diluted net earnings per share growth for fiscal 2006 in the 15% to 20% range and that is based on our new expectation of combined US same-restaurant sales growth of roughly 4% to 5% for Red Lobster and Olive Garden. And we expect new unit growth of approximately 4% for fiscal 2006. Linda will now provide detail about our financial results for the quarter, Drew will discuss the operating company’s business performance and then Clarence will offer some final comments, will then respond your questions. Linda

Linda Dimopoulos, SVP and Chief Financial Officer

Thanks Matthew. Darden’s total sales increased 7.8% in the second quarter as a result of its strong same-restaurant sales growth at Olive Garden and Red Lobster that Matthew mentioned and our operation of 55 more restaurants in second quarter of the prior year. Olive Garden’s same-restaurant sales growth for the quarter was 6.4% and this was its 45th consecutive quarter of increasing same-restaurant sales. This is well above second quarter Knapp-Track estimate of 0.8% which excludes Garden concept. Olive Garden’s total sales increased 9.6% in second quarter, and as a result of strong sales leverage and cost management, Olive Garden had a record second quarter operating profit, representing a double-digit rate of increase over last year. Red Lobster had a same-restaurant sales increase of 2.7% for the quarter and total sales increase of 3.4%. Red Lobster also had strong sales leverage and cost management which drove a strong double-digit percentage increase in operating profits over last year. Bahama Breeze reported a solid increase, 1.9%, in same-restaurant sales. And we continue to expect Bahama Breeze to be roughly breakeven to earnings in fiscal 2006 as they continue to invest in positioning the business for successful renewed growth. Smokey Bones opened seven restaurants during the quarter, and we expect to open between 25 and 30 restaurants in fiscal 2006. While Smokey Bones had modestly higher restaurant earnings compared to the prior year at the restaurant level, that’s excluding SG&A and D&A, earnings increased 40%. Same-restaurant sales were much weaker than we anticipated. We now believe that Smokey Bones’ brand positioning needs further refinement to make it relevant for more dining occasions. Given the unexpected sales weakness, we now anticipate only a modest contribution to Darden’s overall earnings growth coming from improvement in Smokey Bones’ operating results this fiscal year. In terms of margin analysis in second quarter, food and beverage expenses were 54 basis points better than last year on a percentage of sales basis. Cost savings on various products, notably seafood, and better waste management contributed to savings. In fiscal 2006, we expect food and beverage costs as a percent of sales to be slightly favorable to fiscal 2005. Second quarter restaurant labor expenses were 68 points higher than last year on a percentage of sales basis, with sales leverage at Olive Garden and Red Lobster offset by increased benefits cost, wage rate inflation, and higher restaurant level bonuses. FICA taxes on reported tips were also higher but these were significantly offset as credits at the income tax line. Restaurant expenses in second quarter were 22 basis points better than last year on a percentage of sales bases. Sales leverage and favorable workers’ comp and general liability costs were partially offset by higher utility expense and increased pre-opening expenses at Olive Garden and Red Lobster.

Selling, general and administrative expenses were lower as a percentage of sales by 66 basis points, due primarily to sales leverage at Olive Garden and Red Lobster and are net of a roughly $2 million contribution that are mostly hurricane-related. The effective tax rate for the second quarter 31.9% was slightly below our previous annual guidance of approximately 33%. Primarily due to the increased FICA tax credit on reported tips that I mentioned in the labor discussion. For fiscal 2006, we are now estimating an effective tax rate for the year of approximately 32%. During the quarter, we repurchased over 1.7 million shares of our common stock, leaving approximately 11 million shares in our current repurchase authorization.

As Matthew mentioned, for fiscal 2006, we now expect combined same-restaurant sales growth for Red Lobster and Olive Garden of between 4 and 5%. Probably closer to the low end of this range than the higher and of course depending on weather winter, which we have already felt some impact from, but this is an increase from our previous guidance of 2% to 4% same-restaurant sales growth. And we are targeting a net new restaurant increase of approximately 4% in 2006. With these same-restaurant sales and new restaurant growth expectations, we revised upward our diluted net EPS growth goal to be in the 15% to 20% range for fiscal 2006. And I will turn it over to Drew to comment on operating company.

Andrew Madsen, President and Chief Operating Officer

We were delighted with the operating results and the strategic progress that we achieved this quarter. Olive Garden led the way with another quarter of exceptional performance. Their sales and operating profit results were very strong as Linda already mentioned and in addition to that, their operating returns put them in the top decile of casual dining and the top quartile compared to the S&P 500. Now the key drivers of this performance have been in place for some time and we’ve talked about them before, a powerful combination of brand management excellence, restaurant operations excellence, and a superior business model. As we look ahead the second half, Olive Garden will further strengthen their guest experience with a particular emphasis on improving pace of meal and server attentiveness. They’ve also done a great job of developing and testing a strong pipeline of exciting new promotional dishes and new advertising. Obviously, Olive Garden started wrapping on some big year-ago numbers this month, but we’re confident that plans are in place to deliver solid same-restaurant growth going forward. Olive Garden has also made good progress developing a stronger pipeline of high-quality sites and a portfolio of new prototypes that will help them accelerate new restaurant growth. Two of these new prototype designs will open in fourth quarter this year. Olive Garden plans to open 25 to 30 new restaurants next year, which is an increase of 10 versus this year.

Red Lobster also had another quarter of strong performance. Same-restaurant guest counts increased nearly 1.5%. And same-restaurant sales were up approximately 3% and this is the fifth consecutive quarter that both measures have exceeded our Knapp Track competitive average. Red Lobster also delivered very strong double-digit increase in operating profit. Red Lobster’s momentum over the last several quarters has been driven by their simply great operating discipline which has really helped them improve the consistency of their execution while also improving operating efficiency and the benefits of that focus can be seen in several areas, most notably in record guest satisfaction, profitable guest count growth, and record profit margins. The improving performance trend at Red Lobster also demonstrates the inherent strength in what their brand stands for and what their business model is capable of delivering as their top line continues to grow.

Looking ahead, Red Lobster has the opportunity for further growth in guest counts that returns to them to their historic norms, roughly 10% above where they are today. And as they do that, their profit growth opportunity is also very significant given how efficiently they are operating. To sustain profitable guest count growth, Red Lobster will further strengthen the appeal of their brand by excelling at what consumers want most from a seafood restaurant, Fresh delicious seafood, Friendly welcoming service and an exceptionally clean restaurant.

Smokey Bones same-restaurant sales were much softer than we anticipated this quarter as Linda and Matthew already said. Comps for the preceding four quarters had been nearly flat, so we were surprised by the 8.5% decline that we experienced during second quarter. Now while it was a difficult economic environment, these results further emphasize our need to broaden the appeal of Smokey Bones. As we’ve discussed in the past, the Smokey Bones team has been working to broaden the appeal of their menu beyond barbecue.

Several new items were introduced this month after successful in-restaurant testing to help do just that, including a new Mahi-Mahi sandwich, Portobello Chicken entree, Oregon Pear and Spinach Salad plus a Kansas City Flat Iron steak. We also recognize the need to examine other key elements of the guest experience, beyond the menu, more fully in the future.

Given the absolute level of our business results entering this year at Smokey Bones combined with this recent sales softening, we’ve reevaluated our new restaurant opening strategy. More specifically, we will focus future openings in areas where we have demonstrated business strength in order to ensure that we deliver an appropriate return on capital while we work to broaden the appeal of Smokey Bones. That means our pace of new restaurant openings will slow down from 25 to 30 this fiscal year to approximately 10 to 15 new restaurants in fiscal 2007. Fortunately, we start with very strong guest satisfaction among our current guests at Smokey Bones that still ranks at the top of all Darden brands. We need to build on this foundation in a way that broadens our occasion relevance and visit frequency beyond what is today too barbecue-centric and we will.

Finally, Bahama Breeze delivered same-restaurant sales growth of 1.9% during second quarter. Key business fundamentals including same-restaurant sales have begun to improve since we began our focus on delighting guests with a more approachable Caribbean escape last year. Improving guest satisfaction and several new approachable but distinctive dishes introduced over the last few months like Fresh Fish Havana, Oak-Grilled Pork Chops, Coconut Shrimp and Margarita Chicken will help maintain the same-restaurant sales trend. At the same time, Bahama Breeze continues to eliminate cost and complexity from their business model that does not add value to their guests. While more progress is required before we are prepared to restart new restaurant growth, Bahama Breeze looks to be on the right path. Clarence.

Clarence Otis, Chairman and Chief Executive Officer

Thanks Drew. You heard Matthew say it, you heard Linda say it, you heard Drew say it, but I am going to say it again, I mean, we’re delighted with the results that we had in second quarter. 35% our earnings per share growth in an environment that we all know is a little mixed is just terrific and it really reflects strong operating momentum across most of our businesses, good industry-leading sales growth at Red Lobster and Olive Garden, good progress at Bahama Breeze, although as Drew mentioned, we do have more work to do at Smokey Bones. We think the key to it all really starts with a strong foundation. We’ve got great people throughout our organization at every level. And we also have great culture and it’s grounded in strong values, it’s grounded in a motivating shared purpose and we take that and we apply it with an approach to the business that we have a great deal of confidence in, Drew mentioned it. And it’s really about combining brand management, excellence, and the restaurant operating excellence and Olive Garden really best reflects the power of that combination when you look at its results.

At Red Lobster, they’ve got great leadership, strong operations and they’re improving the brand and that brand development, as Drew mentioned, means real good upside potential on the guest front and then that approach, that proven approach is really what we’re applying at both Bahama Breeze and Smokey Bones and so we have great confidence in our ability to get those brands to where they need to be, but I’d sum it up by just saying, we’ve got great momentum going into second half. That is what’s driving us to increase our annual earnings guidance. We believe that when you put it all together we’ve got a business that’s well positioned to thrive in this environment and really in any environment and we know that that’s critical in our business because it’s a very dynamic business, but it all comes down to just a terrific team. We’ve got the right people working on the right things. And with that we will take your questions.

Question-and-Answer Session

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Source: Full Transcript of Darden Restaurants’ F2Q06 (Qtr Ending Nov 27, 2005) Conference Call - Prepared Remarks (DRI)
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