Red Lobster 2005 Annual Report Download - page 9

To Our Shareholders, Employees and Guests
We welcome this opportunity to review fiscal 2005 and share with
you our outlook for fiscal 2006 and beyond. Fiscal 2005 was a mile-
stone year for Darden. We implemented key leadership transitions,
achieved outstanding financial performance and celebrated our
tenth anniversary as a public company since our 1995 spin-off from
General Mills – a period in which Darden delivered an annualized
total shareholder return of over 16 percent, a top-quartile result as
compared to other S&P 500 companies during the same period.
As part of our leadership transition, we looked to both our past (the
legacy we inherit) and our future (the legacy we will build), examining:
• Casual dining’s evolution, with a focus on what has driven
our success and the success of other industry leaders.
• The current state of our business.
• The long-term dynamics and growth opportunity for
casual dining.
• What we must do to take full advantage of the opportunity
the industry offers.
Our review confirmed that casual dining continues to be a vibrant,
thriving industry that offers strong operators like Darden the oppor-
tunity to achieve meaningful sales and earnings growth and create
long-term shareholder value at top quartile S&P 500 levels. We also
came away from this review with greater clarity about the appropri-
ate long-term strategic direction and goals for Darden.
Fiscal 2005 Highlights
We begin fiscal 2006 with increased strategic clarity, focused
priorities and strong operating momentum. This is reflected in our
outstanding overall financial performance in fiscal 2005.
• Our sales increased 5.5 percent to $5.3 billion, driven primarily
by new restaurant growth at Olive Garden and Smokey Bones
and same-restaurant sales growth at Olive Garden.
• Net earnings for fiscal 2005 were $291 million, a 28 percent
increase from fiscal 2004 net earnings of $227 million, and earn-
ings per diluted share were $1.78 in fiscal 2005, a 33 percent
increase from the earnings per diluted share of $1.34 in fiscal
2004. Excluding asset impairment and restructuring charges
of $23.1 million, after tax, associated with the closing of six
Bahama Breeze restaurants and the write-down of the carry-
ing value of four other Bahama Breeze restaurants, one Olive
Garden restaurant and one Red Lobster restaurant in fiscal 2004,
net earnings were $250.2 million, or $1.47 per diluted share.
After excluding these charges, our fiscal 2005 net earnings
and net earnings per diluted 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 addi-
tional operating week in fiscal 2004, annual sales in fiscal 2005
increased 1.7 percent. Average annual sales per restaurant were
$3.6 million, and U.S. same-restaurant sales growth for fiscal
2005 was 0.9 percent (on a 52-week basis), with increases in
each of the last three quarters of the year. As a result of excel-
lent progress behind its new “Simply Great” operating discipline,
Red Lobster achieved record guest satisfaction for the year, while
simultaneously improving its restaurant operating efficiency. This
resulted in strong operating profit growth for the fiscal year.
• Olive Garden’s total sales were a record $2.40 billion, up 8.5 per-
cent from fiscal 2004 sales of $2.21 billion. Excluding sales of
$41 million from the additional operating week in fiscal 2004,
annual sales increased by 10.6 percent in fiscal 2005. This
reflected record average annual sales per restaurant of $4.4 mil-
lion, the addition of 20 net new restaurants and outstanding U.S.
same-restaurant sales growth of 7.2 percent (on a 52-week
basis). The strong financial results Olive Garden has delivered
over many years and its 43 consecutive quarters of U.S.
same-restaurant sales growth demonstrate the power of
combining strong brand positioning, brilliance with the basics
of in-restaurant operations, great restaurant support and
compelling advertising.
• Bahama Breeze’s total sales were $164 million, which was down
7.2 percent from fiscal 2004, due primarily to the closing of six
underperforming restaurants in the fourth quarter of fiscal 2004.
While same-restaurant sales decreased 1.6 percent (on a 52-
week basis) in fiscal 2005, average annual sales per restaurant
were $5.1 million, and Bahama Breeze’s earnings results were
significantly favorable to fiscal 2004.
• Smokey Bones’ total sales were $269 million, a 54.6 percent
increase from last year, as it added 35 new restaurants to its base
of 69 and achieved same-restaurant sales growth of 1.1 percent
(on a 52-week basis). Sales per restaurant averaged $3.1 mil-
lion for the year with appreciable variation by region, while guest
satisfaction remained strong overall and consistently high
across regions.
• Seasons 52, the new concept we are testing, opened two
more restaurants in fiscal 2005 and continued to post impres-
sive early results. To further test the concept’s viability, plans
are in place to open three more restaurants in fiscal 2006.
Seasons 52 pairs a wide selection of premium wines, including
many by the glass, with seasonally inspired menus using fresh
ingredients. The result is great tasting, nutritionally balanced
meals that are lower in calories than comparable restaurant
meals. We believe there is strong consumer interest in the type
of dining occasion offered by Seasons 52.
• As a result of this year’s outstanding financial results and our
strong cash flow and balance sheet, we spent $312 million to
repurchase 11.3 million shares of our common stock. Since
beginning our share repurchase program in 1995, we have
repurchased more than 120 million shares of our common stock
for over $1.8 billion.
The Casual Dining Industry Opportunity
Our industry, casual dining, began 40 years ago when early entre-
preneurs created restaurants that combined components of family
restaurants (such as no reservations and multi-unit systems) with
components of fine dining (such as full bar service and a more
hand-crafted approach to food). Among these entrepreneurs were
Darden Restaurants 1514 Darden Restaurants
Inherit A Legacy,
Build A Legacy
Andrew Madsen
President and Chief Operating Officer
Clarence Otis, Jr.
Chief Executive Officer
Joe R. Lee
Chairman