Red Lobster 2005 Annual Report Download - page 14

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 last Sunday in May. Our 2005 fiscal
year, which ended on May 29, 2005, and our 2003 fiscal
year, which ended on May 25, 2003, each had 52 weeks.
Our 2004 fiscal year, which ended on May 30, 2004, had 53
weeks. We have included in this discussion certain financial
information for fiscal 2004 on a 52-week basis in order to
assist investors in making comparisons to our 2005 and
2003 fiscal years.
Overview of Operations
Our business operates in the casual dining segment
of the restaurant industry, primarily in the United States.
At May 29, 2005, we operated 1,381 Red Lobster, Olive
Garden, Bahama Breeze, Smokey Bones Barbeque & Grill
and Seasons 52 restaurants in the United States and Canada
and licensed 37 Red Lobster restaurants in Japan. We own
and operate all of our restaurants in the United States and
Canada, with no franchising.
Our sales were $5.28 billion in fiscal 2005 and $5.00
billion in fiscal 2004, a 5.5 percent increase. On a 52-week
basis, after reducing fiscal 2004 sales by the $90 million
contributed by the additional 53rd operating week, our
sales increased 7.4 percent in fiscal 2005. Net earnings
for fiscal 2005 were $291 million ($1.78 per diluted share)
compared with net earnings for fiscal 2004 of $227 million
($1.34 per diluted share). Net earnings for fiscal 2005
increased 27.9 percent and diluted net earnings per share
increased 32.8 percent compared to fiscal 2004. The net
earnings increase in fiscal 2005 reflected Red Lobster’s
substantial progress in some important areas. A primary
driver was substantially improved operations behind Red
Lobster’s new “simply great” operating discipline, which
allowed the brand to simultaneously improve both guest
satisfaction and operating efficiency. Red Lobster finished
fiscal 2005 with three consecutive quarters of U.S. same-
restaurant sales and guest count growth and year-over-year
operating profit growth. Olive Garden also delivered strong
performance in fiscal 2005. Driven by U.S. same-restaurant
sales increases in each quarter of fiscal 2005, which resulted
in 43 consecutive quarters of same-restaurant sales growth,
Olive Garden had a double-digit operating profit increase,
record annual operating profit and record return on sales.
Bahama Breeze also contributed to net earnings growth
in fiscal 2005 as a result of operating improvements in a
number of areas and the closing and write-down of under-
performing restaurants in fiscal 2004. Smokey Bones’
continued investment in expansion, combined with high
rib costs and the write-down in the carrying value of one
restaurant, resulted in a modestly greater operating loss in
fiscal 2005 than in fiscal 2004.
In fiscal 2006, we expect a net increase of between 55 to
65 restaurants. We expect combined U.S. same-restaurant
sales growth in fiscal 2006 of between two percent and four
percent at Red Lobster and Olive Garden. We also expect
Bahama Breeze to have minimal effect on consolidated net
earnings growth in fiscal 2006 as we continue to invest in
positioning the business for successful, renewed growth.
And, in fiscal 2006, we expect Smokey Bones to open 25 to
30 new restaurants while implementing menu enhancements
to broaden its appeal. As a result, we anticipate approxi-
mately $0.04 to $0.06 per diluted share improvement in
Smokey Bones’ impact on our consolidated net earnings.
On a consolidated basis, we anticipate low double-digit
diluted net earnings per share growth in fiscal 2006.
Our mission is to be the best in casual dining, now
and for generations. We believe we can achieve this goal
by continuing to build on our historical strength as a multi-
brand casual dining company, which is grounded in our
commitment to combining the following:
• A strong culture that inspires and engages our
people, with firmly held values, a clear mission
and a core purpose to nourish and delight every-
one we serve;
• Competitively superior leadership;
• Brand management excellence;
• Restaurant operating excellence; and
• Restaurant support excellence
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Review 2005
22 Darden Restaurants