Red Lobster 2005 Annual Report Download - page 17

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Review 2005
Darden Restaurants 25
percent of sales, food and beverage costs decreased from
the prior year in fiscal 2005 primarily as a result of favor-
able changes in promotional and menu mix of sales and
pricing changes, which were partially offset by higher dairy,
beef, chicken and seafood costs. As a percent of sales,
food and beverage costs decreased from the prior year
in fiscal 2004 primarily as a result of pricing changes and
favorable changes in promotional and menu mix of sales,
which was partially offset by higher seafood costs and by
crab usage and additional plate accompaniments at Red
Lobster during its crab promotion in the first quarter of fiscal
2004. Other commodity costs, such as chicken and shrimp,
decreased modestly in fiscal 2004.
Restaurant labor increased $95 million, or 5.9 percent,
from $1.60 billion to $1.70 billion in fiscal 2005 compared
to fiscal 2004. Restaurant labor increased $116 million, or
7.8 percent, from $1.49 billion to $1.60 billion in fiscal 2004
compared to fiscal 2003. As a percent of sales, restaurant
labor increased in fiscal 2005 primarily as a result of a mod-
est increase in wage rates and higher manager bonuses at
Olive Garden and Red Lobster as a result of their increased
operating performance in fiscal 2005. These factors were
only partially offset by the favorable impact of higher sales
volumes. As a percent of sales, restaurant labor increased
in fiscal 2004 from fiscal 2003 primarily as a result of a
modest increase in wage rates at Red Lobster and Olive
Garden and higher manager bonuses at Olive Garden as a
result of its increased operating performance in fiscal 2004.
These factors were only partially offset by the favorable
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, or 4.1 percent,
from $775 million to $806 million in fiscal 2005 compared
to fiscal 2004. Restaurant expenses increased $61 million,
or 8.6 percent, from $714 million to $775 million in fiscal
2004 compared to fiscal 2003. As a percent of sales,
restaurant expenses decreased in fiscal 2005 primarily due
to decreased insurance, workers’ compensation and new
restaurant pre-opening costs, which were partially offset
by increased utility expenses and repairs and maintenance
expenses. Restaurant expenses were also favorably
impacted by higher sales volumes. As a percent of sales,
restaurant expenses increased in fiscal 2004 from fiscal
2003 primarily due to increased utility, workers’ compensa-
tion, insurance and new restaurant pre-opening costs.
These cost increases were only partially offset by the favor-
able impact of higher sales volumes in fiscal 2004.
Selling, general and administrative expenses increased
$25 million, or 5.4 percent, from $472 million to $497 million
in fiscal 2005 compared to fiscal 2004. Selling, general
and administrative expenses increased $40 million, or 9.4
percent, from $432 million to $472 million in fiscal 2004 com-
pared to fiscal 2003. As a percent of sales, selling, general
and administrative expenses increased in fiscal 2005 primar-
ily as a result of increased bonus costs, which were partially
offset by decreased marketing expenses as a percent of
sales and the favorable impact of higher sales volumes.
As a percent of sales, selling, general and administrative
expenses increased in fiscal 2004 from fiscal 2003 primarily
due to increased employee benefit costs, an increased con-
tribution 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.
Depreciation and amortization expense increased
$3 million, or 1.5 percent, from $210 million to $213 million
in fiscal 2005 compared to fiscal 2004. Depreciation and
amortization expense increased $19 million, or 9.8 percent,
from $191 million to $210 million in fiscal 2004 compared
to fiscal 2003. As a percent of sales, depreciation and
amortization decreased in fiscal 2005 primarily as a result
of the continued use of fully depreciated, well maintained,
equipment and the favorable impact of higher sales vol-
umes, which were only partially offset by new restaurant
and remodel activities. This benefit was only partially offset
by increased repairs and maintenance costs incurred in
fiscal 2005. As a percent of sales, depreciation and amor-
tization increased in fiscal 2004 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 decreased $1 million, or 1.2
percent, from $44 million to $43 million in fiscal 2005
compared to fiscal 2004. Net interest expense increased
$1 million, or 2.5 percent, from $43 million to $44 million in
fiscal 2004 compared to fiscal 2003. As a percent of sales,
net interest expense decreased in fiscal 2005 primarily as a