Red Lobster 2004 Annual Report Download - page 25

Financial Review 2004
Selling, general, and administrative expenses increased $40 mil-
lion, or 9.4 percent, from $432 million to $472 million in fiscal
2004 compared to fiscal 2003. Selling, general, and administrative
expenses increased $15 million, or 3.5 percent, from $417million
to $432 million in fiscal 2003 compared to fiscal 2002. As a percent
of sales, selling, general, and administrative expenses increased
in fiscal 2004 primarily due to increased employee benefit costs,
an increase in the amount contributed to the Darden Restaurants,
Inc. Foundation, and an increase in litigation related costs, which
were only partially offset by the favorable impact of higher sales
volumes. As a percent of sales, selling, general, and administrative
expenses in fiscal 2003 were less than fiscal 2002 primarily as a
result of decreased bonus costs and the favorable impact of higher
sales volumes, which were partially offset by increased marketing
expense incurred in response to the challenging economic and
competitive environment.
Depreciation and amortization expense increased $ 19 million,
or 9.8 percent, from $ 191 million to $210 million in fiscal 2004
compared to fiscal 2003. Depreciation and amortization expense
increased $25 million, or 15.3 percent, from $166 million to
$191 million in fiscal 2003 compared to fiscal 2002. As a percent
of sales, depreciation and amortization increased in fiscal 2004 and
2003 primarily as a result of new restaurant and remodel activities,
which were only partially offset by the favorable impact of higher
sales volumes.
Net interest expense increased $1 million, or 2.5 percent, from
$43 million to $44 million in fiscal 2004 compared to fiscal 2003.
Net interest expense increased $6 million, or 16.4 percent, from
$37 million to $43 million in fiscal 2003 compared to fiscal 2002.
As a percent of sales, net interest expense in fiscal 2004 was compa-
rable to fiscal 2003, reflecting lower interest income in fiscal 2004,
offset by the favorable impact of higher sales volumes. As a per-
cent of sales, net interest expense in fiscal 2003 was comparable
to fiscal 2002 primarily because increased interest expense associ-
ated with higher average debt levels in fiscal 2003 was offset by the
favorable impact of higher sales volumes.
After a comprehensive analysis performed during the fourth quarter
of fiscal 2004 that examined restaurants not meeting our minimum
return-on-investment thresholds and other operating performance
criteria, we recorded a $36.5 million pre-tax ($22.4 million after-
tax) charge for long-lived asset impairments associated with 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, which
continued to operate. We also recorded a $ 1.1 million pre-tax
($0.7 million after-tax) restructuring charge primarily related
to severance payments made to certain restaurant employees and
exit costs associated with the closing of the six Bahama Breeze
restaurants. During 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 the
carrying value of others was based on our on-going review of
each individual restaurant's performance against our expectations
and their ability to successfully implement these changes. Based on
our review of the other 28 Bahama Breeze restaurants, we believe
their locations and ability to execute these and future initiatives will
minimize the likelihood that additional impairment charges will
be required. The write-down of the carrying value of one Olive
Garden restaurant and one Red Lobster restaurant was a result of
less-than-optimal locations. We will continue to evaluate all of our
locations to minimize the risk of future asset impairment charges.
In addition to the fiscal 2004 fourth quarter action, we recognized
asset impairment charges in the amount of $5.7 million and
$4.9 million in fiscal 2004 and 2003, respectively, related to the
relocation and rebuilding of certain restaurants. Asset impairment
credits related to the sale of assets that were previously impaired
amounted to $1.4 million and $0.6 million in fiscal 2004 and 2003,
respectively. Pre-tax restructuring credits of $0.4 million and
$2.6 million were recorded in fiscal 2003 and 2002, respectively.
The credits resulted from lower than projected costs of lease ter-
minations in connection with our fiscal 1997 restructuring. All fiscal
1997 restructuring actions were completed as of May 25,2003.
INCOME TAXES
The effective income tax rates for fiscal 2004, 2003, and 2002 were
31.9 percent, 33.2 percent, and 34.6 percent, respectively. The
rate decrease in fiscal 2004 and fiscal 2003 was primarily a result
of favorable resolutions of prior year tax matters and an increase in
FICA tax credits for employee-reported tips.
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