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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934

For the Quarterly Period Ended March 27, 2005

Commission file number 0-19924

RARE Hospitality International, Inc.
(Exact name of registrant as specified in its charter)

(770) 399-9595
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

  XX   Yes         No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

  XX   Yes         No

As of May 3, 2005, there were 34,299,728 shares of common stock of the Registrant outstanding.

RARE Hospitality International, Inc. and Subsidiaries

Index

RARE Hospitality International, Inc. and Subsidiaries
Consolidated Balance Sheets
(In thousands)
(Unaudited)

See accompanying notes to consolidated financial statements

RARE Hospitality International, Inc. and Subsidiaries
Consolidated Statements of Operations
(In thousands, except per share data)
(Unaudited)

See accompanying notes to consolidated financial statements

RARE Hospitality International, Inc. and Subsidiaries
Consolidated Statement of Shareholders’ Equity
For the quarter ended March 27, 2005
(In thousands, unaudited)

See accompanying notes to consolidated financial statements

RARE Hospitality International, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(In thousands, unaudited)

See accompanying notes to consolidated financial statements

RARE Hospitality International, Inc.
Notes to Consolidated Financial Statements
(Unaudited)

1. Basis of Presentation

The consolidated financial statements of RARE Hospitality International, Inc. and subsidiaries (the “Company”) as of March 27, 2005 and December 26, 2004 and for the quarters ended March 27, 2005 and March 28, 2004 have been prepared by the Company, pursuant to the rules and regulations of the Securities and Exchange Commission. The information furnished herein reflects all adjustments (consisting of normal recurring accruals and adjustments), which are, in the opinion of management, necessary to fairly present the operating results for the respective periods. Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. These financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 26, 2004.

The Company records revenues for normal recurring sales upon the performance of services. Revenues from the sale of franchises are recognized as income when substantially all of the Company’s material obligations under the franchise agreement have been performed. Continuing royalties, which are a percentage of net sales of franchised restaurants, are accrued as income when earned.

The Company operates on a 52 or 53 week fiscal year ending on the last Sunday in December. The fiscal quarters ended March 27, 2005 and March 28, 2004 each contained 13 weeks and are referred to hereafter as the first quarter of 2005 and the first quarter of 2004, respectively.

Certain prior period amounts in the accompanying Consolidated Balance Sheet and Condensed Consolidated Statement of Cash Flows have been reclassified to conform to the presentation in fiscal 2005.  These reclassifications had no effect on the Company’s Consolidated Statements of Operations.

2. New Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board issued Statement of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment,” (SFAS 123R). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock Based Compensation.” Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and requires companies to recognize the cost of awards of equity instruments granted in exchange for employee services received, based on the grant date fair value of those awards, in the financial statements. The effective date of SFAS 123R was the first interim period beginning after June 15, 2005; however, on April 14, 2005, the Securities and Exchange Commission announced that the effective date of SFAS 123R was postponed until the first annual period beginning after June 15, 2005.

SFAS 123R permits companies to adopt its requirements using either a “modified prospective” method, or a “modified retrospective” method. Under the “modified prospective” method, compensation cost is recognized in the financial statements beginning with the effective date, based on the requirements of SFAS 123R for all share-based payments granted after that date, and based on the requirements of SFAS 123 for all unvested awards granted prior to the effective date of SFAS 123R. Under the “modified retrospective” method, the requirements are the same as under the “modified prospective” method, but this method also permits entities to restate financial statements of previous periods based on proforma disclosures made in accordance with SFAS 123.

The Company currently utilizes the Black-Scholes option-pricing model to measure the fair value of stock options granted to employees. While SFAS 123R permits entities to continue to use this model, the standard also permits the use of a “lattice” model. SFAS 123R also requires that the benefits associated with the tax deductions in excess of recognized compensation cost be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net operating cash flows and increase net financing cash flows in periods after the effective date. These future amounts cannot be estimated because they depend on, among other things, when employees exercise stock options.

As disclosed in Note 3, compensation cost for stock options for which the requisite future service has not yet taken place is disclosed as a proforma expense by applying the provisions of SFAS 123. The proforma application of SFAS 123 had a dilutive effect of approximately $0.03 per diluted share in the first quarter of 2005 and is expected to have a proforma dilutive effect of approximately $0.03 to $0.04 per diluted share in each of the remaining quarters of 2005. Compensation cost for stock options vesting beginning in fiscal 2006, and all restricted stock, will be expensed in accordance with the provisions of SFAS 123R, which will be effective for the Company at the beginning of fiscal 2006. Management is currently analyzing the implementation alternatives and requirements and is evaluating the impact of the adoption of this Standard on the Company’s consolidated financial statements.

3. Shareholders’ Equity and Stock Based Compensation

The Company has stock option plans that provide for the granting of incentive and non-qualified stock options to employees, officers, directors, consultants, and advisors. Under the plans, options are granted at an exercise price equal to the fair market value of the underlying common stock on the date of grant. The Company applies APB Opinion No. 25 and related interpretations in accounting for its stock option plans as permitted under SFAS 123 and SFAS 148. Accordingly, no compensation cost has been recognized for the Company’s stock option plans. Had the compensation cost for the Company’s stock option plans been determined based on the fair value at the grant dates for awards under those plans consistent with the fair value methodology of SFAS 123, the Company’s net income and earnings per share would have been as follows (in thousands, except per share data):

4. Long-Term Debt

At March 27, 2005, no borrowings were outstanding under the Company’s $100.0 million revolving credit agreement, and the Company was in compliance with all of its debt covenant provisions. Interest expense is reported net of $256,000 and $119,000 of interest income in the first quarter of 2005 and 2004, respectively. Interest capitalized in the first quarter of 2005 and 2004 was $343,000 and $417,000, respectively.

5. Income Taxes

Income tax expense for the first quarter of 2005 has been provided for based on an estimated 33.25% effective tax rate expected to be applicable for the full 2005 fiscal year. The effective income tax rate differs from applying the statutory federal income tax rate of 35% to pre-tax earnings primarily due to employee FICA tip tax credits and work opportunity tax credits (both are a reduction in income tax expense) partially offset by state income taxes.

6. Earnings Per Share

Basic earnings per common share equals net earnings divided by the weighted average number of common shares outstanding and does not include the dilutive effect of stock options or restricted stock. Diluted earnings per common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options and restricted stock. A reconciliation between basic and diluted weighted average shares outstanding and the related earnings per share calculation is presented below (in thousands, except per share amounts):

7. Comprehensive Income

For the quarters ended March 27, 2005 and March 28, 2004, there was no difference between the Company’s net earnings and comprehensive income.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

Results of Operations

First quarter 2005 compared to first quarter 2004

Revenues

The Company currently derives all of its revenues from restaurant sales and franchise revenues. Total revenues increased 14.3% to approximately $230.0 million for the first quarter of 2005 compared to approximately $201.1 million for the first quarter of 2004.

Same store sales comparisons for each of the Company’s restaurant concepts for the first quarter of 2005, consist of sales at restaurants opened prior to June 30, 2003.

LongHorn Steakhouse:

Sales in the LongHorn Steakhouse restaurants increased 13.8% to approximately $165.2 million for the first quarter of 2005 compared to approximately $145.2 million for the first quarter of 2004. The increase reflects a 12.5% increase in restaurant operating weeks in the first quarter of 2005 as compared to the same period of the prior year, resulting from an increase in the restaurant base from 194 LongHorn Steakhouse restaurants at the end of the first quarter of 2004 to 217 at the end of the first quarter of 2005. Average weekly sales for all LongHorn Steakhouse restaurants in the first quarter of 2005 were $59,294, a 1.2% increase as compared to $58,602 for the first quarter of 2004. Same store sales for the comparable LongHorn Steakhouse restaurants increased 1.8% in the first quarter of 2005, as compared to the same period in 2004, due to approximately equal increases in guest counts and average check.

The Capital Grille:

Sales in The Capital Grille restaurants increased 28.7% to approximately $38.4 million for the first quarter of 2005, compared to approximately $29.8 million for the same period in 2004. The increase reflects a 17.6% increase in restaurant operating weeks in the first quarter of 2005 as compared to the same period of the prior year, resulting from an increase in the restaurant base from 17 The Capital Grille restaurants at the end of the first quarter of 2004 to 20 at the end of the first quarter of 2005. Average weekly sales for all The Capital Grille restaurants in the first quarter of 2005 were $147,662, a 9.4% increase, as compared to $135,008 for the comparable period in 2004. Same store sales for the comparable The Capital Grille restaurants increased 5.7% in the first quarter of 2005 as compared to the same period in 2004 primarily due to an increase in average check and, to a lesser extent, an increase in guest counts.

Bugaboo Creek Steak House:

Sales in the Bugaboo Creek Steak House restaurants increased 1.4% to approximately $24.6 million for the first quarter of 2005, compared to approximately $24.3 million for the same period in 2004. The increase reflects an 8.1% increase in restaurant operating weeks in the first quarter of 2005 as compared to the prior year, resulting from the increase in the restaurant base from 26 Bugaboo Creek Steak House restaurants at the end of the first quarter of 2004 to 28 at the end of the first quarter of 2005. The sales increase from the additional restaurants was partially offset by a 6.2% decrease in average weekly sales for all Bugaboo Creek Steak House restaurants in the first quarter of 2005 to $68,240, from average weekly sales of $72,713 for the comparable period of 2004. Same store sales for the comparable Bugaboo Creek Steak House restaurants in the first quarter of 2005 decreased 4.5% as compared to the same period in 2004 due to a decrease in customer counts and, to a lesser extent, decreases in average check.

Franchise Revenue:

Franchise revenues decreased slightly to $97,000 for the first quarter of 2005, from $99,000 for the same period in 2004.

Costs and Expenses

Cost of restaurant sales as a percentage of restaurant sales increased to 36.4% for the first quarter of 2005 from 36.1% for the same period of 2004. Increased contract pricing on commodities in 2005, particularly higher pricing with respect to new beef contracts, was partially offset by a 2% to 3% increase in menu prices. The Company is currently under fixed price contracts with respect to approximately 85% to 90% of its protein products for the remainder of 2005 and into early 2006. The Company expects its cost of restaurant sales as a percentage of restaurant sales in 2005 to be higher than the comparable quarter of 2004 by 0.1% to 0.2% for the last three quarters of 2005. Many of the food products, other than protein products, purchased by the Company are affected by commodity pricing and are, therefore, subject to price volatility caused by weather, production problems, delivery difficulties and other factors, which are outside the control of the Company.

Restaurant operating expense as a percentage of restaurant sales increased to 43.6% for the first quarter of 2005 as compared to 42.6% for the same period of 2004. This increase, as a percentage of restaurant sales, was primarily due to greater labor costs, which include the impact of higher unemployment taxes and increases in minimum wage rates, higher utility costs as a percentage of sales, and operating inefficiencies due to more extreme winter weather as compared to the first quarter of 2004.

Restaurant depreciation was approximately 3.6% of restaurant sales in both the first quarter of 2005 and 2004.

Pre-opening expense for the first quarter of 2005 increased slightly to $1,627,000, from $1,594,000 in the same period of the prior year. The amounts charged to pre-opening expense in any period are dependent upon the number of restaurants to be opened and the restaurant concept.

General and administrative expenses as a percentage of total revenues decreased to 5.4% for the first quarter of 2005 as compared to 5.8% for the corresponding period of the prior year. This decrease is primarily associated with lower management bonus accruals and, to a lesser extent, by greater leverage of fixed and semi-fixed expenses resulting from increased sales at existing restaurants.

As a result of the relationships between revenues and expenses discussed above, the Company’s operating income increased to approximately $23.5 million for the first quarter of 2005 from approximately $22.4 million for the corresponding period of the prior year.

Interest expense, net increased to $257,000 in the first quarter of 2005 from $116,000 in the same period of the prior year. The increase in interest expense, net is primarily due to the interest expense associated with new capital lease obligations partially offset by an increase in the dollar amount of interest income. This offset in 2005 was higher than in 2004 due to an increase in interest income earned on investments.

Minority interest expense increased to $126,000 for the first quarter of 2005 from $109,000 for the same period of the prior year.

Income tax expense for the first quarter of 2005 was 33.25% of earnings before income taxes, based on the effective tax rate expected to be applicable for the full 2005 fiscal year. This compares to 33.25% of earnings before income taxes for the first quarter of 2004. The Company’s effective income tax rate differs from applying the statutory federal income tax rate of 35% to pre-tax income, primarily due to employee FICA tip tax credits and work opportunity tax credits partially offset by state income taxes.

Net earnings increased to $15.5 million for the first quarter of 2005 from net earnings of $14.8 million for the first quarter of 2004, reflecting the net effect of the items discussed above.

Outlook for Future Operating Results

The Company expects 2005 diluted earnings per common share in a range of $1.53 to $1.57. This level of earnings per common share assumes same store sales increases for the full year of 2005 in a range of 3% to 4% for LongHorn Steakhouse, 4% to 5% for The Capital Grille and 0% to 1% for Bugaboo Creek Steak House, stock-based compensation expense of $0.02 per diluted share related to the Company’s recently adopted restricted stock plan, and the projected restaurant openings discussed below.

Liquidity and Capital Resources:

The Company requires capital primarily for the development of new restaurants, the remodeling of existing restaurants and selected acquisitions. During the first quarter of 2005, the Company’s principal sources of working capital were cash provided by operating activities ($7.8 million), an increase in checks outstanding ($2.0 million) and proceeds from the exercise of employee stock options ($1.7 million). For the first quarter of 2005, the principal use of working capital was capital expenditures ($17.8 million) for new and improved facilities.

The Company intends to open 26 or 27 LongHorn Steakhouse restaurants, three The Capital Grille restaurants and three Bugaboo Creek Steak House restaurants in fiscal year 2005. The Company estimates that its capital expenditures for fiscal year 2005 will be approximately $95 to $105 million. During the first quarter of 2005, the Company opened seven LongHorn Steakhouse restaurants. Management believes that available cash, cash provided by operations, and available borrowings under the Company’s $100.0 million revolving credit facility will provide sufficient funds to finance the Company’s expansion plans through the year 2006.

Since substantially all sales in the Company’s restaurants are for cash, and accounts payable are generally due in seven to 30 days, the Company operates with little or negative working capital.

Forward-Looking Statements

Statements contained in this report concerning liquidity and capital resources and future operating results contain certain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements include statements regarding the intent, belief or current expectations of the Company and members of its management team, as well as assumptions on which such statements are based. All forward-looking statements in this Form 10-Q are based upon information available to the Company on the date of this report. Forward-looking statements involve a number of risks and uncertainties, and in addition to the factors discussed elsewhere in this Form 10-Q, other factors that could cause actual results, performance or developments to differ materially from those expressed or implied by those forward-looking statements include the following: failure of facts to conform to necessary management estimates and assumptions regarding financial and operating matters; the Company’s ability to identify and secure suitable locations for new restaurants on acceptable terms, open the anticipated number of new restaurants on time and within budget, achieve anticipated rates of same store sales, hire and train additional restaurant personnel and integrate new restaurants into its operations; the continued implementation of the Company’s business discipline over a large and growing restaurant base; unexpected increases in cost of sales or employee, pre-opening or other expenses; the economic conditions in the new markets into which the Company expands and possible uncertainties in the customer base in these areas; fluctuations in quarterly operating results; seasonality; unusual weather patterns or events; changes in customer dining patterns; the impact of any negative publicity or public attitudes related to the consumption of beef; unforeseen increases in commodity pricing; disruption of established sources of product supply or distribution; competitive pressures from other national and regional restaurant chains; legislation affecting the restaurant industry; business conditions, such as inflation or a recession, or other negative effect on dining patterns, or some other negative effect on the economy, in general, including (without limitation) war, insurrection and/or terrorist attacks on United States soil; growth in the restaurant industry and the general economy; changes in monetary and fiscal policies, laws and regulations; and the risks identified from time to time in the Company’s SEC reports, including the Company’s Annual Report on Form 10-K for 2004, registration statements and public announcements. The Company undertakes no obligation to update or revise forward-looking statements to reflect changed assumptions, the occurrence of unanticipated events or changes to future operating results over time.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

The Company may be exposed to market risk from changes in interest rates on debt.

As of March 27, 2005, the Company had no borrowings outstanding under its $100.0 million revolving credit facility. Amounts outstanding under such credit facility bear interest at LIBOR plus a margin of 1.25% to 1.75% (the “applicable margin” depending on the Company’s leverage ratio), or the administrative agent’s prime rate of interest at the Company’s option. Accordingly, the Company may be exposed to the impact of interest rate movements. To achieve the Company’s objective of managing its exposure to interest rate changes, the Company may from time to time use interest rate swaps.

Investment Portfolio

The Company invests portions of its excess cash, if any, in highly liquid investments. At March 27, 2005, the Company had $8.7 million in high-grade overnight repurchase agreements, and $43.4 million in short-term investments in the form of federal, state, and municipal bonds. As of March 27, 2005, the Company has classified all short-term investments as trading securities. The market risk on such investments is minimal due to their short-term nature.

Item 4. Controls and Procedures

In accordance with the Securities Exchange Act Rule 13a-15, the Company’s management, under the supervision of the Chief Executive Officer and Chief Financial Officer, conducted an evaluation of the effectiveness of the design and operation of the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, the Company’s Chief Executive Officer and Chief Financial Officer concluded that the design and operation of the Company’s disclosure controls and procedures were effective. To ensure that the information required to be disclosed by the Company in this Quarterly Report on Form 10-Q was recorded, processed, summarized and reported within the time periods specified in SEC rules and instructions for Form 10-Q. During the Company’s last fiscal quarter, there were no changes in internal controls over financial reporting or in other factors that has materially affected, or is reasonably likely to materially affect internal controls over financial reporting.

Part II — Other Information

Item 1. Legal Proceedings

None

Item 2. Changes in Securities, Use of Proceeds and Issuer Repurchases of Equity Securities

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission of Matters to a Vote of Securities Holders

None

Item 5. Other Information

None

Item 6. Exhibits and Reports on Form 8-K

           (a)     Exhibits Filed.

                                            (1)     These exhibits are deemed to accompany this report and are not “filed” as part of the report.

           (b)     Reports filed on Form 8-K. None

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EXHIBIT 31.1

CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, Philip J. Hickey, Jr., certify that:

EXHIBIT 31.2

CERTIFICATION PURSUANT TO
SECTION 302 OF THE
SARBANES-OXLEY ACT OF 2002

I, W. Douglas Benn, certify that:

EXHIBIT 32.1

CERTIFICATION PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

In connection with the quarterly report of RARE Hospitality International, Inc. (the “Registrant”) on Form 10-Q for the quarterly period ended March 27, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, Philip J. Hickey, Jr., Chief Executive Officer of the Registrant, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge:

EXHIBIT 32.2

CERTIFICATION PURSUANT TO
RULE 13a-14(b) OF THE SECURITIES EXCHANGE ACT OF 1934
AND 18 U.S.C. SECTION 1350

In connection with the quarterly report of RARE Hospitality International, Inc. (the “Registrant”) on Form 10-Q for the quarterly period ended March 27, 2005 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I, W. Douglas Benn, Executive Vice President, Finance and Chief Financial Officer of the Registrant, certify, in accordance with Rule 13a-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C. Section 1350, that to the best of my knowledge: