Red Lobster 2004 Annual Report Download

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DARDEN฀RESTAURANTS
Leadership฀Defined
2004 Annual Report

Table of contents

  • Page 1
    DARDEN฀RESTAURANTS Leadership฀Defined 2004 Annual Report

  • Page 2
    ...฀ great฀experiences,฀not฀just฀great฀menu฀offerings.฀Our฀goal฀is฀to฀establish฀ and฀sustain฀the฀industry's฀very฀highest฀service฀and฀hospitality฀standards฀as฀ defined฀by฀casual฀dining฀guests.฀This฀year฀we฀focus฀on฀a฀third฀strategic...

  • Page 3
    ... the closing of six Bahama Breeze restaurants and the write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant, and one Red Lobster restaurant, were $254.5 million, or $1.50 per diluted share, on 53-week sales of $5.0 billion. 53 Weeks Ended May 30, 2004...

  • Page 4
    ... market leader in the seafood casual dining segment since 1968. Today, Red Lobster has 649 restaurants in the United States and 31 in Canada. Red Lobster's fiscal 2004 sales were $2.4 billion and average annual sales per restaurant were $3.6 million (on a 52-week basis). Olive฀Garden Olive Garden...

  • Page 5
    ...the stories of six individuals who we believe personify leadership at its best. They should give you a good idea of how we define leadership at Darden, as well as how leadership creates value for all of our stakeholders - guests, investors, employees, vendors and the community. Darden Restaurants 5

  • Page 6
    ...positioning of the brand, while achieving sustainable and profitable growth. • Olive Garden's total sales were a record $2.21 billion, up 11.1 percent from last year. Operating profit also reached new record levels, with a double-digit increase versus last year. Average annual sales per restaurant...

  • Page 7
    ...in operation at the end of the fiscal year. Average annual sales per restaurant, excluding the closed restaurants, were $5.2 million in fiscal 2004 (on a 52-week basis). • Smokey Bones' total sales were $174 million, an 87 percent increase from last year, as the company nearly doubled in size this...

  • Page 8
    ... as my successor as Chief Executive Officer, and Olive Garden President Drew Madsen as Darden President and Chief Operating Officer effective December 2004. I will continue to serve as Chairman until my retirement in December 2005. Our succession plan is the result of years of planning by our Board...

  • Page 9
    ...฀inspiration฀ motivation฀trust฀passion฀vision฀innovation฀inspiration฀motivation฀trust฀ passion฀vision฀innovation฀inspiration฀motivation฀trust฀passion฀vision฀ innovation฀inspiration฀motivation฀trust฀passion฀vision฀innovation 9 Darden Restaurants

  • Page 10
    ... same-restaurant sales growth on a year-over-year basis, a remarkable feat in the competitive casual dining segment. In fact, Olive Garden's annual sales increased by 11.1 percent in fiscal 2004, with record total sales topping $2.2 billion, and record annual operating profit. 10 Darden Restaurants

  • Page 11
    ... operators in casual dining. Olive Garden also continues to outpace the industry benchmark in same-restaurant guest count growth, and leads the industry in topof-mind brand awareness among consumers. With 19 net new restaurants opened during fiscal 2004 and plans to continue opening new restaurants...

  • Page 12
    ... as an "open-book test." Given its growth to date - Smokey Bones has nearly doubled its number of restaurants every year - we believe Smokey Bones has the potential to one day become as large as Darden's pioneering Red Lobster and Olive Garden concepts, serving as one of the Company's major growth...

  • Page 13
    ... investment cost. The Bahama Breeze business plan also has evolved to include lunch as a dining option. The move has helped expand the brand's presence among a new group of diners and boosted same-restaurant sales growth in fiscal 2004. 13 Darden Restaurants Tim฀O'Brien General฀Manager Bahama...

  • Page 14
    ...in the world's largest casual dining seafood restaurant company? Build a cohesive team. Set clear expectations. Communicate constantly. And, lead by example - consistently. "You say what you do and you do what you say," advises Edward Bermudez, General Manager of the Red Lobster in Wayne, New Jersey...

  • Page 15
    ...-loss statement is a general manager. It is imperative to have the right person with the right training in order to get the right results." Red Lobster's commitment to training and professional development at every level has helped the company grow into a market leader in the casual dining industry...

  • Page 16
    ... manager. Within just two years, he has risen to Director of Bakery Purchasing at Darden's Restaurant Support Center in Orlando, Florida. "I buy the breadsticks!" he jokes. His responsibilities include developing and maintaining good relationships with approximately 40 suppliers at any given time...

  • Page 17
    ... atmosphere and wine bar has Darden poised to build a leadership position in yet another segment of casual dining. It's an effort that is well underway with the expansion of the Seasons 52 test to two new Florida locations in the coming months. 17 Darden Restaurants Darden Restaurants 17 James...

  • Page 18
    ... volunteer hours into the communities in which we operate. We use a multi-pronged philanthropic approach that combines the financial resources of the Darden Restaurants Foundation with the hands-on work of thousands of Darden volunteers across the country. We're also committed to funding programs...

  • Page 19
    ..., as well as jobs in software design, facilities management, finance, accounting, and other restaurant-related support jobs." The event has attracted hundreds of young people to the industry. "Showcase of the Stars gives students a wonderful chance to experience a world of opportunities in this...

  • Page 20
    ... other acts of community service. Here are a few other examples: •What started with several Ohio-area Olive Garden and Red Lobster restaurant teams shipping much-requested coffee to the 1485th Army National Guard unit in Dover, OH, became a whole lot more on New Year's Day, 2004. The soldiers, who...

  • Page 21
    ... Review 2004 Leadership Defined 2004 Financial฀Review Management's Discussion and Analysis of Financial Condition and Results of Operations Report of Management Responsibilities Report of Independent Registered Public Accounting Firm Consolidated Statements of Earnings Consolidated Balance...

  • Page 22
    ... average guest check can be impacted by menu price changes and by the mix of menu items sold. For each concept, OVERVIEW OF OPERATIONS Our business operates in the casual dining segment of the restaurant industry, primarily in the United States. At May 30, 2004, we operated 1,325 Red Lobster, Olive...

  • Page 23
    ... increase in average check. Average annual sales per restaurant for Red Lobster were $3.6 million in fiscal 2004 (on a 52-week basis). RESULTS OF OPERATIONS FOR FISCAL 2004,2003 AND 2002 The following table sets forth selected operating data as a percentage of sales for the 53-week period ended...

  • Page 24
    Financial Review 2004 Management's Discussion and Analysis of Financial Condition and Results of Operations Olive Garden sales of $2.21 billion were 11.1 percent above last year. U.S. same-restaurant sales for Olive Garden increased 4.6 percent due to a 3.0 percent increase in average check and a ...

  • Page 25
    ... fiscal 2004, certain changes were made at Bahama Breeze to improve its sales, financial performance, and overall long-term potential, including the addition of lunch at most restaurants and introduction of a new dinner menu. The decision to close certain Bahama Breeze restaurants and write down...

  • Page 26
    ... during fiscal 2004 related to the closing of six Bahama Breeze restaurants and write-down of another four Bahama Breeze restaurants, one Olive Garden restaurant, and one Red Lobster restaurant. Net earnings were also impacted by decreases in food and beverage costs as a percent of sales, which were...

  • Page 27
    ... rates for state and local income taxes, and the tax deductibility of certain other items. Our estimates are based on the best available information at the time that we prepare the provision. We generally file our annual income tax returns several months after our fiscal year-end. Income tax returns...

  • Page 28
    ... short-term borrowings to fund our capital needs. We manage our business and our financial ratios to maintain an investment grade bond rating, which allows flexible access to financing at reasonable costs. Currently, our publicly issued long-term debt carries "Baal" (Moody's Investors Service), "BBB...

  • Page 29
    ... the terms of the guarantees. As disclosed in Exhibit 12 to our Annual Report on Form 10-K, our fixed-charge coverage ratio, which measures the number of times each year that we earn enough to cover our fixed charges, amounted to 5.8 times and 6.0 times for the fiscal years ended May 30, 2004 and...

  • Page 30
    ... benefit plans' expected long-term rate of return on plan assets decreased earnings before income taxes by approximately $2 million in fiscal 2004. At May 30,2004, our expected health care cost trend rates ranged from 11.0 percent to 12.0 percent for fiscal 2005, depending on the medical service...

  • Page 31
    Financial Review 2004 could differ from the assumptions used. A quarter percentage point change in the defined benefit plans' discount rate and the expected long-term rate of return on plan assets would increase or decrease earnings before income taxes by $0.8 million and $0.4 million, respectively....

  • Page 32
    ...-looking. Examples of forward-looking statements include, but are not limited to, projections regarding: our growth plans and the number and type of expected new restaurant openings,same-restaurant sales growth for Red Lobster and Olive Garden,diluted net earnings per share growth in fiscal 2005...

  • Page 33
    ...proper financial reporting. These formally stated and regularly communicated policies set high standards of ethical conduct for all employees. The Audit Committee of the Board of Directors meets at least quarterly to determine that management, internal auditors, and the independent registered public...

  • Page 34
    Financial Review 2004 Consolidated฀Statements฀ of Earnings Fiscal฀฀ Year฀Ended (In฀thousands,฀except฀per฀share฀data)฀ May฀30,฀2004฀ $5,003,355฀ ฀ ฀ 1,526,875฀ 1,601,258฀ 767,584 3,895,717฀฀ 472,109฀ 210,004฀ 43,659฀ 41,868฀ $4,663,357฀ 339,998...

  • Page 35
    Financial Review 2004 Consolidated฀ Balance Sheets (In฀thousands)฀ May฀00,2004 May฀30,฀2004฀ May฀25,฀2003 ASSETS฀฀ Current฀assets:฀ ฀ Cash฀and฀cash฀equivalents฀ ฀ Receivables฀ ฀ Inventories฀ ฀ Prepaid฀expenses฀and฀other฀current฀assets฀...

  • Page 36
    ...Income฀tax฀benefits฀credited฀to฀equity฀ Purchases฀of฀common฀stock฀for฀treasury฀(8,972฀shares)฀ Issuance฀of฀treasury฀stock฀under฀Employee฀฀ ฀ Stock฀Purchase฀Plan฀and฀other฀plans฀(290฀shares)฀ Issuance฀of฀officer฀notes,฀net฀ Balance...

  • Page 37
    ... ฀ Accrued฀payroll฀ ฀ Accrued฀income฀taxes฀ ฀ Other฀accrued฀taxes฀ ฀ Unearned฀revenues฀ ฀ Other฀current฀liabilities Change฀in฀current฀assets฀and฀liabilities฀ See฀accompanying฀notes฀to฀consolidated฀financial฀statements. Darden Restaurants 37

  • Page 38
    ... are both short-term and highly liquid in nature and are typically converted to cash within three days of the sales transaction. Inventories Inventories are valued at the lower of weighted-average cost or market. Land, Buildings, and Equipment Land, buildings, and equipment are recorded at cost less...

  • Page 39
    ... been sold but not yet redeemed and are recorded at their expected redemption value. When the gift cards and certificates are redeemed, we recognize restaurant sales and reduce unearned revenues. Food and Beverage Costs Food and beverage costs include inventory, warehousing, and related purchasing...

  • Page 40
    ... associated with opening new restaurants are expensed as incurred. Advertising Production costs of commercials are charged to operations in the fiscal period the advertising is first aired. The costs of programming and other advertising, promotion, and marketing programs are charged to operations...

  • Page 41
    ... May 30, 2004, we operated 1,325 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill and Seasons 52 restaurants in North America as part of a single operating segment. The restaurants operate principally in the U.S. within the casual dining industry, providing similar products to...

  • Page 42
    ... and distribution companies to transfer ownership and risk of loss prior to delivery of the inventory to our restaurants. We reacquire these items when the inventory is subsequently delivered to our restaurants. These transactions do not impact the consolidated statements of earnings. Receivables...

  • Page 43
    ... write-down of the carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant, and one Red Lobster restaurant, which continued to operate. We also recorded a restructuring charge of $1,112 primarily related to severance payments made to certain restaurant employees and exit...

  • Page 44
    ...our debt rating. The credit facility supports our commercial paper borrowing program. We are required to pay a facility fee of 12.5 basis points per annum on the average daily amount of loan commitments by the consortium. The amount of interest and the annual facility fee are subject to change based...

  • Page 45
    ... in offsetting the variability of the hedged cash flows, changes in the fair value of the swaps are not included in current earnings but are reported as other comprehensive income. The accumulated gain or loss at the swap settlement date will be amortized into earnings as an adjustment to interest...

  • Page 46
    ... 75 percent of the value of the stock purchased. The stock purchased is held on deposit with us until the loan is repaid. The interest rate for loans under the Loan Program is fixed and is equal to the applicable federal rate for mid-term loans with semi-annual compounding for the month in which the...

  • Page 47
    ...planning strategies in making this assessment. At May 30, 2004, and May 25, 2003, no valuation allowance has been recognized for deferred tax assets because we believe that sufficient projected future taxable income will be generated to fully utilize the benefits of these deductible amounts. Darden...

  • Page 48
    ... years of service and compensation factors, and for a group of hourly employees, in which a fixed level of benefits are provided. Pension plan assets are primarily invested in U.S., international, and private equities, long duration fixed income securities, and real assets. Our policy is to fund...

  • Page 49
    ... reported for defined benefit pension plans. A quarter percentage point change in the defined benefit plans' discount rate and the expected long-term rate of return on plan assets would increase or decrease earnings before income taxes by $769 and $357, respectively. The assumed health care cost...

  • Page 50
    ...defined contribution plan includes an Employee Stock Ownership Plan (ESOP). This ESOP originally borrowed $50,000 from third parties, with guarantees by us, and borrowed $25,000 from us at a variable interest rate. The $50,000 third party loan was refinanced in 1997 by a commercial bank's loan to us...

  • Page 51
    ... weighted-average fair value of stock options granted during fiscal 2004, 2003, and 2002 was $6.83, $9.01, and $6.05, respectively. 15 STOCK฀PLANS We maintain three active stock option and stock grant plans under which new awards may still be issued: the Stock Option and Long-Term Incentive Plan...

  • Page 52
    ... Review 2004 Notes฀to฀ Consolidated Financial Statements Stock option activity during the periods indicated was as follows: Options฀ Exercisable฀ Weighted-Average฀ Exercise฀Price฀ Per฀Share฀ ฀ Options฀ Exercisable฀ Weighted-Average Exercise฀Price Per฀Share Balance...

  • Page 53
    ... arise in the ordinary course of our business. These matters typically involve claims from guests, employees, and others related to operational issues common to the restaurant industry. A number of these lawsuits, proceedings, and claims may exist at any given time. We do not believe that the final...

  • Page 54
    ... Breeze฀restaurants฀and฀the฀write-down฀of฀the฀carrying฀value฀of฀four฀other฀Bahama฀Breeze฀restaurants,฀one฀Olive฀Garden฀restaurant,฀and฀one฀Red฀Lobster฀restaurant,฀which฀฀ continued฀to฀operate.฀฀Earnings฀before฀income฀taxes฀also...

  • Page 55
    ...฀ Capital฀expenditures฀ Dividends฀paid฀ Dividends฀paid฀per฀share฀ Advertising฀expense฀ Stock฀price: ฀ ฀ High฀ ฀ ฀ Low฀ ฀ ฀ Close฀ Number฀of฀employees฀ Number฀of฀restaurants฀ ฀ 1,526,875฀ ฀ 1,601,258฀ ฀ 767,584฀ $฀ 3,895,717...

  • Page 56
    ... our Web site at www.darden.com. Annual reports, SEC filings, press releases, and other Company news are readily available on the Web site. Our Web Site also includes corporate governance information, including our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and board...

  • Page 57
    ... Vice President, Corporate Controller Senior Vice President, Chief Financial Officer Kim฀Lopdrup Senior Vice President; President, Red Lobster Daniel฀M.฀Lyons Senior Vice President, Human Resources Andrew฀Madsen Senior Vice President; President, Olive Garden Barry฀Moullet Senior...

  • Page 58
    ® Darden฀Restaurants,฀Inc. 5900฀Lake฀Ellenor฀Drive Orlando,฀Florida฀฀32809 (407)฀245-4000 www.darden.com