Red Lobster 2005 Annual Report Download

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DARDEN
RESTAURANTS
2005 Annual Report
Introduction 1
Letter to Shareholders 14
Board of Directors 20
Financial Review 21
Shareholder Information 61
Business Description
Darden Restaurants, Inc. is the largest publicly traded casual dining restaurant company in the
world, based on market share and revenues from company-owned restaurants. We serve more
than 300 million meals annually at 1,381 restaurants in 49 states and Canada. Our four distinct
restaurant concepts together generate annual sales of more than $5.2 billion. Red Lobster® and
Olive Garden®, our flagship brands, are the market share leaders in their casual dining segments.
Each produces sales of $2.4 billion annually, making Darden the only casual dining restaurant
company with two restaurant concepts of this scale. Our emerging brands are Bahama Breeze®
and Smokey Bones Barbeque & Grill®, and another concept, Seasons 52®, is in the test phase.
Based in Orlando, Florida, we employ more than 150,000 people, and our Company trades on
the New York Stock Exchange under the symbol DRI.
The Name?
2005 Annual Report
What’s Behind
Darden Restaurants, Inc.
5900 Lake Ellenor Drive
Orlando, Florida 32809
(407) 245-4000
www.darden.com
Darden Restaurants, Inc. 2005 Annual Report
®
®
®

Table of contents

  • Page 1
    ...New York Stock Exchange under the symbol DRI. ® Introduction Letter to Shareholders ® 1 14 20 21 61 ® Darden Restaurants, Inc. 5900 Lake Ellenor Drive Orlando, Florida 32809 (407) 245-4000 www.darden.com DARDEN RESTAURANTS 2005 Annual Report Board of Directors 2005 Annual Report Financial...

  • Page 2
    ... required annual Chief Executive Officer certification to the New York Stock Exchange.   New Business Development  Seasons 52, the newest test concept developed by Darden's New Business team, cele brates living well by offering a seasonally inspired and healthier dining option...

  • Page 3
    ... Vice President, Strategic Marketing Darden Restaurants The Experience Is What Matters Good food and service make a good business, but providing a total dining experience can transform a good restaurant into a great brand that endures for generations. The experience is why Red Lobster is not...

  • Page 4
    ...-year history. As pioneers in the casual dining segment, Red Lobster and Olive Garden helped write the book on casual dining advertising and promotion, and these efforts are also steeped in research and testing. For example, both operating companies use a fivestep process for creating and marketing...

  • Page 5
    ...inbrandmanagement." - Drew Madsen, Chief Operating Officer Darden Restaurants Though brand management is sometimes thought of as more art than science, we believe all great brands start at the same point - with a motivating promise to deliver something specific and unique. To be successful, that...

  • Page 6
    ... Italian dining (and develop new recipes that often are added to the menu in our restaurants throughout North America). Closer to home, Olive Garden restaurants across the country have held "family reunion" dinners, in which the restaurant staff provides a worthy local family or group with a special...

  • Page 7
    ...by one operating company across all of our restaurants. Olive Garden, for instance, developed a highly disciplined process for creating promotions that deliver increased guest counts and satisfaction levels. Red Lobster recently adapted the process for its own promotional programs. This type of best...

  • Page 8
    ... as Red Lobster grew to more than 600 restaurants, Darden's seafood supply chain evolved into a global network. Also, consumers are certainly more health conscious now than they were 30 years ago. So, while fried favorites will always have a place on the menu, Red Lobster also offers a full range of...

  • Page 9
    ... share increased 16 percent and 21 percent, respectively. • Red Lobster's total sales of $2.44 billion were equal to fiscal 2004. However, excluding sales of $41 million from the additional operating week in fiscal 2004, annual sales in fiscal 2005 increased 1.7 percent. Average annual sales...

  • Page 10
    Bill Darden, our Company's namesake, and a team that included Joe Lee, our Chairman, who was a manager at the first Red Lobster restaurant that opened in Lakeland, Florida, in 1968. Today, casual dining is a significant industry with $63 billion in sales and over 124,000 restaurants. It is also an ...

  • Page 11
    ... 90 percent of recipients earn their four-year degree. A Darden Restaurants Foundation matching grant challenge in Dallas, TX, and Orlando, FL, is helping expand the funds available for those communities. "Darden is just an extraordinary community partner in the way they not only give, but do it in...

  • Page 12
    ... of the Board, Hughes Supply, Inc., a building supply company Charles A. Ledsinger, Jr. President and Chief Executive Officer, Choice Hotels International, Inc., a lodging franchisor Joe R. Lee Chairman, Darden Restaurants, Inc. William M. Lewis, Jr. Managing Director and Co-Chairman, Investment...

  • Page 13
    Financial Review Darden Restaurants Management's Discussion and Analysis of Financial Condition and Results of Operations 22 35 2005 Report of Management Responsibilities Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm on ...

  • Page 14
    ...and Results of Operations Financial Review 2005 This discussion and analysis below for the Company should be read in conjunction with our consolidated financial statements and related notes found elsewhere in this report. For financial reporting, we operate on a 52/53 week fiscal year ending on the...

  • Page 15
    ... sold to assist in developing menu pricing, product offerings and promotional strategies. We view same-restaurant guest counts as an indication of the long-term health of an operating company, while increases in average check and menu mix may contribute more significantly to near-term profitability...

  • Page 16
    ... percent decrease in same-restaurant guest counts. Average annual sales per restaurant for Red Lobster were $3.6 million in fiscal 2005. Olive Garden sales of $2.40 billion were 8.5 percent above last year. U.S. same-restaurant sales for Olive Garden increased 7.2 percent (on a 52-week basis) due to...

  • Page 17
    ...impact of higher sales volumes and lower health insurance costs as a result of fewer claims. Restaurant expenses (which include lease, property tax, credit card, utility, workers' compensation, insurance, new restaurant pre-opening and other restaurant-level operating expenses) increased $31 million...

  • Page 18
    ..., 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...

  • Page 19
    ... Results of Operations Financial Review 2005 write-down of another four Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant. The increase in diluted net earnings per share is primarily due to a reduction in the average diluted shares outstanding from fiscal 2003 to...

  • Page 20
    ... to fiscal 2005 while the two Olive Garden restaurants and one Red Lobster restaurant continued to operate. Insurance Accruals Through the use of insurance program deductibles and self-insurance, we retain a significant portion of expected losses under our workers' compensation, employee medical...

  • Page 21
    ... Discussion and Analysis of Financial Condition and Results of Operations Financial Review 2005 patterns and claim reserve, management and settlement practices. Unanticipated changes in these factors may produce materially different amounts of reported expense under these programs. Income Taxes We...

  • Page 22
    ... Includes commitments for food and beverage items and supplies, capital projects and other miscellaneous commitments. 3) Includes expected payments associated with our defined benefit plans, postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2015. 4) Includes...

  • Page 23
    ... 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. Net cash flows provided by operating activities also reflect income tax payments of...

  • Page 24
    Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Review 2005 plans' expected long-term rate of return on plan assets decreased earnings before income taxes by approximately $2 million in fiscal 2004. At May 29, 2005, our expected health care cost trend...

  • Page 25
    ...; expected contributions to our defined benefit pension plans; and the impact of litigation on our financial position. These forward-looking statements are based on assumptions concerning important factors, risks and Future Application of Accounting Standards In December 2004, the FASB issued SFAS...

  • Page 26
    ...rates and increased insurance costs as a result of increases in our current insurance premiums; • increased advertising and marketing costs; • higher-than-anticipated costs to open, close, relocate or remodel restaurants; • litigation by employees, consumers, suppliers, shareholders or others...

  • Page 27
    ... internal auditors and employees have full and free access to the Audit Committee at any time. KPMG LLP, an independent registered public accounting firm, is retained to audit our consolidated financial statements. Their report follows. Clarence Otis, Jr. Chief Executive Officer Darden Restaurants...

  • Page 28
    ...Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 29, 2005 and May 30, 2004, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income...

  • Page 29
    ... of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated July 28, 2005 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. Orlando, Florida July 28, 2005 Darden Restaurants 37

  • Page 30
    ...Earnings Financial Review 2005 Fiscal Year Ended (In thousands, except per share data) May 29, 2005 $5,278,110 May 30, 2004 $5,003,355 May 25, 2003 $4,654,971 Sales Costs and expenses: Cost of sales: Food and beverage Restaurant labor Restaurant expenses Total cost of sales, excluding restaurant...

  • Page 31
    ... revenues Current portion of long-term debt Other current liabilities Total current liabilities Long-term debt, less current portion Deferred income taxes Deferred rent Other liabilities Total liabilities Stockholders' equity: Common stock and surplus, no par value. Authorized 500,000 shares; issued...

  • Page 32
    ... stock under Employee Stock Purchase Plan and other plans (280 shares) Repayment of officer notes, net Balance at May 25, 2003 Comprehensive income: Net earnings Other comprehensive income (loss): Foreign currency adjustment Change in fair value of derivatives, net of tax of $51 Minimum pension...

  • Page 33
    ... of unearned compensation and loan costs Change in current assets and liabilities Contribution to defined benefit pension plans and postretirement plan Loss on disposal of land, buildings and equipment Change in cash surrender value of trust-owned life insurance Deferred income taxes Change in...

  • Page 34
    ... to 40 years using the straight-line method. Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets...

  • Page 35
    ... 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 and distribution costs. Vendor Income Taxes We...

  • Page 36
    ...for our stock-based compensation plans under an intrinsic value method that requires compensation expense to be recorded only if, on the date of grant, the current market price of our common stock exceeds the exercise price the employee must pay for the stock. Our policy is to grant stock options at...

  • Page 37
    ... Statements Financial Review 2005 Had we determined compensation expense for our stock options based on the fair value at the grant date as prescribed under SFAS No. 123, our net earnings and net earnings per share would have been reduced to the pro forma amounts indicated below: Fiscal Year 2005...

  • Page 38
    ... on our financial statements. In December 2004, the FASB issued SFAS No. 123 (Revised), "Share-Based Payment." SFAS No. 123R revises SFAS No. 123, "Accounting for Stock-Based Compensation," and generally requires the cost associated with employee services received in exchange for an award of equity...

  • Page 39
    ... the write-down of carrying value of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones restaurant. The Smokey Bones restaurant was closed subsequent to fiscal 2005 while the two Olive Garden restaurants and one Red Lobster restaurant continued to operate. All impairment...

  • Page 40
    ... less issuance discount Less current portion Long-term debt, excluding current portion $ 350,318 $ 653,349 NOTE 7 Other Current Liabilities The components of other current liabilities are as follows: May 29, 2005 May 30, 2004 Employee benefits Sales and other taxes Insurance Miscellaneous Accrued...

  • Page 41
    ... 29, 2005 and is expected to be reclassified from accumulated other comprehensive income (loss) into restaurant expenses during the next nine months. To the extent these derivatives are not effective, changes in their fair value are immediately recognized in current earnings. Outstanding derivatives...

  • Page 42
    ... Darden stock units. To the extent the equity forward contracts are effective in offsetting the variability of the hedged cash flows, changes in the fair value of the equity forward contracts are not included in current earnings but are reported as accumulated other comprehensive income (loss...

  • Page 43
    ...no longer issue new loans under the Loan Program. We account for outstanding officer notes receivable as a reduction of stockholders' equity. Stockholders' Rights Plan Under our Rights Agreement dated as of May 16, 2005, each share of our common stock has associated with it one right to purchase one...

  • Page 44
    ... for income taxes thereon are as follows: Fiscal Year 2005 2004 2003 Accrued liabilities Compensation and employee benefits Deferred rent and interest income Asset disposition and restructuring liabilities Other Gross deferred tax assets Buildings and equipment Prepaid pension costs Prepaid...

  • Page 45
    ... include years of service and compensation factors and for a group of hourly employees, in which a fixed level of benefits is 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 46
    ...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 trend rate increase in the per-capita charges for benefits ranged from 10.0 percent to 11.0 percent for fiscal 2006, depending...

  • Page 47
    ... Financial Statements Financial Review 2005 Components of net periodic benefit cost (income) are as follows: 2005 Defined Benefit Plans 2004 2003 2005 Postretirement Benefit Plan 2004 2003 Service cost Interest cost Expected return on plan assets Amortization of unrecognized prior service cost...

  • Page 48
    ... common shares are issued under the plan at a value equal to the market price in consideration of foregone retainer and meeting fees. The per share weighted-average fair value of stock options granted during fiscal 2005, 2004 and 2003 was $7.75, $6.83 and $9.01, respectively. 56 Darden Restaurants

  • Page 49
    ... NOTE 17 Employee Stock Purchase Plan We maintain the Darden Restaurants Employee Stock Purchase Plan to provide eligible employees who have completed one year of service (excluding senior officers subject to Section 16(b) of the Securities Exchange Act of 1934) an opportunity to purchase shares of...

  • Page 50
    ...impact of recognizing compensation expense for purchases made under the plan in accordance with the fair value method specified in SFAS No. 123 is less than $900, net of related tax effects, in fiscal 2005, 2004 and 2003 and had no impact on reported basic or diluted net earnings per share. NOTE 18...

  • Page 51
    ... 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 includes charges of $1,112 ($681 after-tax) related to severance payments made to certain restaurant employees and exit...

  • Page 52
    ...) Long-term debt less current portion Stockholders' equity Stockholders' equity per outstanding share Other Statistics Cash flow from operations Capital expenditures Dividends paid Dividends paid per share Advertising expense Stock price: High Low Close Number of employees Number of restaurants...