Red Lobster 2006 Annual Report Download

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2006 Annual Report
Darden Restaurants, Inc.
5900 Lake Ellenor Drive
Orlando, Florida 32809
(407) 245-4000
www.darden.com
Darden Restaurants, Inc. 2006 Annual Report
Diluted Net Earnings Per Share
(In Dollars)
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 our 1,427
restaurants in 49 states and Canada.
Our four distinct restaurant brands
together generated sales of $5.7 billion
in fiscal 2006. Red Lobster® and Olive
Garden®, our flagship brands, are the
market share leaders in their casual
dining segments. Each produced sales
of $2.6 billion in fiscal 2006, making
Darden the only casual dining restaurant
company with two restaurant brands
of this scale. Our emerging brands are
Bahama Breeze® and Smokey Bones
Barbeque & Grill®, and our newest
concept, Seasons 52®, is in the test
phase. Based in Orlando, Florida, we
employ nearly 160,000 people, and our
Company trades on the New York Stock
Exchange under the symbol DRI.
Total Restaurants
Sales
(In Billions)
TableofContents
2006 Financial Highlights IFC
Introduction 1
Letter to Shareholders 2
Q&A 5
Board of Directors and
Executive and Operating Teams 16
Financial Review 17
Shareholder Information IBC

Table of contents

  • Page 1
    2006 Annual Report

  • Page 2
    ... Total Restaurants phase. Based in Orlando, Florida, we employ nearly 160,000 people, and our Company trades on the New York Stock Exchange under the symbol DRI. TableofContents 2006 Financial Highlights Introduction Letter to Shareholders Q&A Sales (In Billions) IFC 1 2 5 Board of Directors...

  • Page 3
    2006FinancialHighlights Darden Restaurants Fiscal Year Ended (In millions, except per share amounts) May 28, 2006 (52 weeks) May 29, 2005 (52 weeks) May 30, 2004 (53 weeks) Sales Net Earnings Net Earnings per Share: Basic Diluted Dividends Paid per Share Average Shares Outstanding: Basic ...

  • Page 4
    ... and 31 in Canada, Red Lobster's fiscal 2006 sales were $2.6 billion, an average of $3.8 million per restaurant. Olive Garden Olive Garden helped define the Italian segment of casual dining when it opened in 1982 and today is the world's largest full-service Italian restaurant company, with 576...

  • Page 5
    ... Relations, Darden Restaurants, Inc., P.O. Box 593330, Orlando, FL 32859-3330 Markets New York Stock Exchange Stock Exchange Symbol: DRI Certifications We have filed as exhibits to our Annual Report on Form 10-K for the year ended May 28, 2006, the Chief Executive Officer and Chief Financial...

  • Page 6
    ...and operated casual dining restaurant company, we have a track record of success. But, we know there's much room for improvement and growth. And our unquenchable appetite for excellence that delivers growth for our shareholders, satisfaction for our customers and opportunity for our employees drives...

  • Page 7
    ... culture as our foundation, we had very good business results in 2006 at Olive Garden, where we sustained same-restaurant sales and profit growth while preparing for accelerated new restaurant growth in 2007; Red Lobster, where we had a number of successes that put us back on a strong performance...

  • Page 8
    ...-restaurant sales growth of 5.5 percent. Olive Garden also ended the year with their 47th consecutive quarter of same-restaurant sales growth. • Red Lobster's total sales were a record $2.58 billion, an increase of 5.9 percent from fiscal 2005. In fiscal 2006, average annual sales per restaurant...

  • Page 9
    ... while we add important new skills. Thank you for being a shareholder and for your confidence in our ability to make Darden a truly great company. Darden Restaurants 2006 Annual Report than 132.5 million shares of our common stock for $2.25 billion. Recently, the Board of Directors authorized an...

  • Page 10
    Darden Restaurants 2006 Annual Report 5 WhatShareholdersHaveBeenAsking

  • Page 11
    ... every day in our restaurants and, as a result, fully capture the exciting long-term growth opportunity we see in casual dining. What are your growth targets and how will you achieve them? We are focused on same-restaurant sales growth at Red Lobster and Olive Garden, accelerating new restaurant...

  • Page 12
    Darden Restaurants 2006 Annual Report 7

  • Page 13
    Darden Restaurants 2006 Annual Report 8

  • Page 14
    ..., brand management excellence, restaurant operating excellence and restaurant support excellence. Red Lobster experienced strong same-restaurant growth in fiscal 2006 as it worked to rebuild guest counts, which are still below historic levels. Red Lobster's Darden Restaurants 2006 Annual Report

  • Page 15
    ... working to sustain positive same-restaurant sales growth. Olive Garden's family atmosphere, its fresh, simple, • Offering exciting, price-accessible food news that reminds people why they love our brands and gives them new reasons to return; and • Proactively managing our costs. We will drive...

  • Page 16
    Darden Restaurants 2006 Annual Report 11

  • Page 17
    Darden Restaurants 2006 Annual Report 12

  • Page 18
    ... stable cash flow with two well-established, broadly appealing brands in Red Lobster and Olive Garden. Each enjoys excellent guest loyalty and total annual sales of $2.6 billion. This gives us a greater ability to reinvest in our existing businesses when we need to, regardless of what's going on in...

  • Page 19
    ... and Culture; Darden Restaurants 2006 Annual Report • Social Services and Nutrition; • Education; and • Natural Resources and Environment. We are particularly interested in helping fund programs and organizations that our employees support through their volunteerism. Strong communities are...

  • Page 20
    ... a copy of the 2006 Darden Restaurants Being of Service Report or visit our Web site. Feeding the Hungry Our Darden Harvest Food Donation Program is another program that we're very proud of. It provides a systematic way for all our restaurants to donate food they cannot use to food banks and other...

  • Page 21
    ..., New Business Development and Executive Vice President, Darden Restaurants, Inc. Rita P. Wilson Retired President, Allstate Indemnity Company, a subsidiary of Allstate Insurance Company Executive and Operating Teams Ronald Bojalad Senior Vice President, Group Human Resources JJ Buettgen Senior...

  • Page 22
    17 Darden Restaurants 2006 Annual Report 18 Management's Discussion and Analysis of Financial Condition and Results of Operations 32 Report of Management Responsibilities 32 Management's Report on Internal Control Over Financial Reporting 33 Report of Independent Registered Public Accounting Firm ...

  • Page 23
    ... Red Lobster's significantly improved business fundamentals which have resulted in lower operating costs and seven consecutive quarters with same-restaurant sales growth. Both Red Lobster and Olive Garden also produced record annual sales, operating profit and return on sales in fiscal 2006. Bahama...

  • Page 24
    ...the 53-week period ended May 30, 2004. This information is derived from the consolidated statements of earnings, found elsewhere in this report, for the periods indicated. 2006 Fiscal Years 2005 2004 Darden Restaurants 2006 Annual Report Sales Costs and expenses: Cost of sales: Food and beverage...

  • Page 25
    ...and a 2.1 percent increase in average check. Average annual sales per restaurant for Olive Garden were $4.6 million in fiscal 2006. Olive Garden reported its 47th consecutive quarter of U.S. samerestaurant sales growth at the end of fiscal 2006. Red Lobster sales of $2.58 billion in fiscal 2006 were...

  • Page 26
    ... higher manager bonuses at Olive Garden and Red Lobster as a result of their increased operating performance in fiscal 2005. These impacts were only partially offset by the favorable impact of higher sales volumes. Restaurant expenses (which include lease, property tax, credit card, utility, workers...

  • Page 27
    ...Red Lobster restaurant, which continued to operate, except for the Olive Garden restaurant, which was closed in fiscal 2006. We also recorded a $1 million pre-tax ($0.7 million after-tax) restructuring charge primarily related to severance payments made to certain restaurant employees and exit costs...

  • Page 28
    ... and Analysis of Financial Condition and Results of Operations Financial Review 2006 costs, restaurant expenses, depreciation and amortization expenses and interest expenses as a percent of sales, which were only partially offset by increases in restaurant labor expenses and selling, general and...

  • Page 29
    ... restaurants continued to operate subsequent to fiscal 2006. During fiscal 2005, we recognized asset impairment charges of $6 million ($4 million after-tax) for the write-down of two Olive Garden restaurants, one Red Lobster restaurant and one Smokey Bones Darden Restaurants 2006 Annual Report

  • Page 30
    ...and one Red Lobster restaurant based on an evaluation of expected cash flows. The Olive Garden restaurant was closed in fiscal 2006. several months after our fiscal year-end. Income tax returns are subject to audit by federal, state and local governments, generally years after the returns are filed...

  • Page 31
    ... notes due August 2035; and • An unsecured, variable rate $22 million commercial bank loan due in December 2018 that is used to support two loans from us to the Employee Stock Ownership Plan portion of the Darden Savings Plan. We also have $150 million of unsecured 5.750 percent medium-term notes...

  • Page 32
    27 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Review 2006 A summary of our contractual obligations and commercial commitments at May 28, 2006, is as follows (in thousands): Contractual Obligations Total Less than 1 Year Payments Due by Period ...

  • Page 33
    ...carrying value of four other Bahama Breeze restaurants, one Olive Garden restaurant and one Red Lobster restaurant. Net cash flows provided by operating activities also reflect income tax payments of $126 million, $111 million and $92 million in fiscal 2006, 2005 and 2004, respectively. The increase...

  • Page 34
    ... repurchase program and other operating activities through fiscal 2007. Darden Restaurants 2006 Annual Report Off-Balance Sheet Arrangements We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial...

  • Page 35
    30 Management's Discussion and Analysis of Financial Condition and Results of Operations Financial Review 2006 in liabilities associated with our non-qualified deferred compensation plan and an increase in accounts payable of $22 million, primarily due to the timing of our inventory and capital ...

  • Page 36
    ... in minimum wage 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...

  • Page 37
    ... criteria. The Company's independent registered public accounting firm, KPMG LLP, has issued an audit report on our assessment of our internal control over financial reporting, which follows. Darden Restaurants 2006 Annual Report Clarence Otis, Jr. Chairman of the Board and Chief Executive Officer

  • Page 38
    ...loss), and cash flows for each of the years in the three-year period ended May 28, 2006, and our report dated July 27, 2006 expressed an unqualified opinion on those consolidated financial statements. Darden Restaurants 2006 Annual Report Orlando, Florida July 27, 2006 Certified Public Accountants

  • Page 39
    ... Commission (COSO), and our report dated July 27, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. Darden Restaurants 2006 Annual Report Orlando, Florida July 27, 2006 Certified Public Accountants

  • Page 40
    ... Statements of Earnings Financial Review 2006 (In thousands, except per share data) Fiscal Year Ended May 28, 2006 $5,720,640 May 29, 2005 $5,278,110 May 30, 2004 $5,003,355 Sales Costs and expenses: Cost of sales: Food and beverage Restaurant labor Restaurant expenses Total cost of sales...

  • Page 41
    ... earnings Treasury stock, 127,685 and 116,711 shares, at cost, respectively Accumulated other comprehensive income (loss) Unearned compensation Officer notes receivable Total stockholders' equity Total liabilities and stockholders' equity See accompanying notes to consolidated financial statements...

  • Page 42
    ... Earned compensation ESOP note receivable repayments Income tax benefits credited to equity Purchases of common stock for treasury (11,343 shares) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (296 shares) Issuance of treasury stock under Employee Stock Ownership Plan...

  • Page 43
    ... $ 36,694 Darden Restaurants 2006 Annual Report Cash flows - operating activities Net earnings Adjustments to reconcile net earnings to cash flows: Depreciation and amortization Asset impairment charges, net Restructuring charge Amortization of loan costs Change in current assets and liabilities...

  • Page 44
    ... financial statements include the operations of Darden Restaurants, Inc. and its wholly owned subsidiaries (Darden, the Company, we, us or our). We own and operate the Red Lobster®, Olive Garden®, Bahama Breeze®, Smokey Bones Barbeque & Grill® and Seasons 52® restaurant concepts located...

  • Page 45
    .... Darden Restaurants 2006 Annual Report Trust-Owned Life Insurance In August 2001, we caused a trust that we previously had established to purchase life insurance policies covering certain of our officers and other key employees (trust-owned life insurance or TOLI). The trust is the owner and...

  • Page 46
    ... non-qualified stock options and vesting of employee restricted stock awards. See Note 14 - Income Taxes for additional information. Derivative Instruments and Hedging Activities We use financial and commodities derivatives to manage interest rate, compensation and commodities pricing risks inherent...

  • Page 47
    ... with opening new restaurants are expensed as incurred. Darden Restaurants 2006 Annual Report Advertising Production costs of commercials are charged to operations in the fiscal period the advertising is first aired. The costs of programming and other advertising, promotion and marketing programs...

  • Page 48
    ... Notes to Consolidated Financial Statements Financial Review 2006 The weighted-average assumptions used in the Black Scholes model were as follows: Stock Options Granted in Fiscal Year 2006 2005 2004 Risk-free interest rate Expected volatility of stock Dividend yield Expected option life 3.91...

  • Page 49
    ..., ($18) and ($53), are included in selling, general and administrative expenses for fiscal 2006, 2005 and 2004, respectively. Segment Reporting As of May 28, 2006, we operated 1,427 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones Barbeque & Grill and Seasons 52 restaurants in North America as...

  • Page 50
    ..., one Olive Garden restaurant and one Red Lobster restaurant, which continued to operate, except for the Olive Garden restaurant, which closed in fiscal 2006. We also recorded a restructuring charge of $1,112 primarily related to severance payments made to certain restaurant employees and exit costs...

  • Page 51
    ...29, 2005 Prepaid pension costs Trust-owned life insurance Capitalized software costs, net Liquor licenses Loan costs Miscellaneous Total other assets $ 58,365 49,905 30,975 24,988 9,746 12,549 $186,528 $ 63,475 43,873 31,165 24,570 8,008 7,960 $179,051 Darden Restaurants 2006 Annual Report Note...

  • Page 52
    ... results from a change in interest rates, commodity prices, or market price of our common stock. We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken. Darden Restaurants 2006 Annual Report Option Contracts and...

  • Page 53
    ...an adjustment to interest expense over the same period Darden Restaurants 2006 Annual Report in which the related interest costs on the new debt issuance are being recognized in earnings. A loss of $177 was recognized in earnings during fiscal 2006 as an adjustment to interest expense. We also had...

  • Page 54
    .... Stock Purchase/Loan Program We have share ownership guidelines for our officers. To assist them in meeting these guidelines, we implemented the 1998 Stock Purchase/Option Award Loan Program (Loan Program) in conjunction with our Stock Option and Long-Term Incentive Plan of 1995. The Loan Program...

  • Page 55
    50 Notes to Consolidated Financial Statements Financial Review 2006 having a value equal to two times the exercise price of the right. The rights are redeemable by our Board of Directors under certain circumstances and expire on May 25, 2015. Accumulated Other Comprehensive Income (Loss) The ...

  • Page 56
    ... 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 57
    ...Defined Benefit Plans 2006 2005 Postretirement Benefit Plan 2006 2005 Weighted-average assumptions used to determine benefit obligations at May 28 and May 29, (1) Discount rate Rate of future compensation increases Weighted-average assumptions used to determine net expense for fiscal years ended...

  • Page 58
    ... reported for defined benefit pension plans. A quarter percentage point change in the defined benefit plans' discount rate and the expected longterm rate of return on plan assets would increase or decrease earnings before income taxes by $709 and $367, respectively. The assumed health care cost...

  • Page 59
    ... 2018. The shares acquired under this loan are accounted for in accordance with Statement of Position (SOP) 93-6, "Employers Accounting for Employee Stock Ownership Plans." Fluctuations in our stock price are recognized as adjustments to common stock and surplus when the shares are committed to...

  • Page 60
    ... Plan for NonEmployee Directors. The Director Compensation Program provides for payments to non-employee directors of: (a) an annual retainer and meeting fees for regular or special Board meetings and committee meetings; (b) an initial award of non-qualified stock options to purchase 12.5 shares...

  • Page 61
    ... the Director Compensation Program are awarded under the 2002 Plan. Stock option activity during the periods indicated was as follows: Weighted-Average Exercise Price Per Share Weighted-Average Exercise Price Per Share Darden Restaurants 2006 Annual Report Options Exercisable Options Outstanding...

  • Page 62
    ... 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 63
    ... wage and hour violations. In March 2002 and March 2003, two purported class action lawsuits were brought against us in the Superior Court of Orange County, California by three current and former hourly restaurant employees alleging violations of California labor laws with respect to providing meal...

  • Page 64
    ... and 2005: Aug. 28 Nov. 27 Fiscal 2006 - Quarters Ended Feb. 26 May 28 Total Darden Restaurants 2006 Annual Report Sales Earnings before income taxes Net earnings Net earnings per share: Basic Diluted Dividends paid per share Stock price: High Low $1,409,167 127,998 85,514 0.56 0.53 - 34.81 30...

  • Page 65
    ... Financial Summary Financial Review 2006 Fiscal Year Ended (In thousands, except per share data) May 28, 2006 $ 5,720,640 May 29, 2005 $ 5,278,110 May 30, 2004 (1) $ 5,003,355 May 25, 2003 $ 4,654,971 May 26, 2002 $ 4,366,911 Operating Results Sales Costs and expenses: Cost of sales: Food...

  • Page 66
    Darden Restaurants, Inc. 5900 Lake Ellenor Drive Orlando, Florida 32809 (407) 245-4000 www.darden.com