Red Lobster 2005 Annual Report Download - page 18

Management’s Discussion and Analysis of Financial Condition and Results of Operations
Financial Review 2005
26 Darden Restaurants
result of higher interest income in fiscal 2005 and the favor-
able impact of higher sales volumes. As a percent of sales,
net interest expense in fiscal 2004 was comparable to fiscal
2003, reflecting lower interest income in fiscal 2004, offset
by the favorable impact of higher sales volumes.
During fiscal 2005, 2004 and 2003, we recognized asset
impairment charges in the amount of $1 million, $6 million
and $5 million, 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 $3 million, $1 million and $1 million in fiscal
2005, 2004 and 2003, respectively. During fiscal 2005, we
also recorded charges of $6 million for 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 Gardens and one Red Lobster
continued to operate.
In addition to the asset impairment charges described
above, during the fourth quarter of fiscal 2004, 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, includ-
ing 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 the
restaurant’s ability to successfully implement these changes.
Based on our review of the other 28 Bahama Breeze res-
taurants, we believe their locations and ability to execute
these and future initiatives will reduce 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 loca-
tions to minimize the risk of future asset impairment charges.
Income Taxes
The effective income tax rates for fiscal 2005, 2004 and
2003 were 31.4 percent, 31.7 percent and 33.1 percent,
respectively. The rate decrease in fiscal 2005 and fiscal
2004 was primarily a result of favorable resolutions of prior
year tax matters and an increase in FICA tax credits for
employee-reported tips.
Net Earnings and Net Earnings Per Share
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) and net earnings
for fiscal 2003 of $226 million ($1.27 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 increases in net earnings
and diluted net earnings per share were primarily due to
decreases in food and beverage costs, restaurant expenses
and depreciation and amortization expenses as a percent of
sales, which were only partially offset by increases in restau-
rant labor expenses and selling, general and administrative
expenses as a percent of sales. Fiscal 2004 net earnings
were also impacted by the $38 million pre-tax ($23 million
after-tax) asset impairment and restructuring charges recog-
nized related to the closing of six Bahama Breeze restaurants
and the write-down of another four Bahama Breeze restau-
rants, one Olive Garden restaurant and one Red Lobster
restaurant. The increase in diluted net earnings per share was
also due to a reduction in the average diluted shares out-
standing from fiscal 2004 to fiscal 2005 primarily as a result of
our continuing repurchase of our common stock.
Net earnings for fiscal 2004 increased 0.5 percent
and diluted net earnings per share increased 5.5 percent
compared to fiscal 2003. The increase in net earnings was
primarily due to decreases in food and beverage costs as a
percent of sales, which were largely offset by increases in
restaurant labor, restaurant expenses, selling, general and
administrative expenses and depreciation and amortization
expense as a percent of sales and the asset impairment and
restructuring charges recognized during fiscal 2004 related
to the closing of six Bahama Breeze restaurants and the