Red Lobster 2007 Annual Report Download

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COMBINATIONS
Winning
DARDEN RESTAURANTS, INC. • 2007 ANNUAL REPORT

Table of contents

  • Page 1
    Winning CombINATIoNS DARDEN RESTAURANTS, INC. • 2007 ANNUAl REpoRT

  • Page 2
    ... together generated annual sales of more than $5.5 billion. Red Lobster® and Olive Garden®, our flagship brands, are the market-share leaders in their casual dining segments. Each produced sales of at least $2.6 billion annually, making Darden the only casual dining restaurant company with two...

  • Page 3
    Darden is the company it is today because we place no limits on what we believe we can achieve. our winning combination of great people, great brand management, great restaurant operations and great restaurant support allowed us to nourish and delight more than 325 million guests last year and has...

  • Page 4
    ... trading day for our fiscal year ended May 26, 2002, and that all dividends were reinvested. The companies included in the S&P Restaurants Index, in addition to Darden, were as follows: McDonald's Corporation; Starbucks Corporation; YUM! Brands, Inc.; and Wendy's International, Inc. The stock prices...

  • Page 5
    ... and six in Canada. Olive Garden posted its 51st consecutive quarter of U.S. same-restaurant sales growth in fiscal 2007, and sales totaled $2.8 billion, an average of $4.7 million per restaurant. Red Lobster An American icon that helped change the nation's dining habits, Red Lobster has been the...

  • Page 6
    ... and financial success reflected in the competitively superior samerestaurant sales and earnings growth from continuing operations we delivered over that time. This success resulted in a total shareholder return from our 1995 spin-off from General Mills through the beginning of the fiscal year that...

  • Page 7
    ... year began. More specifically, we are better positioned to supplement the same-restaurant excellence we've historically enjoyed with stronger new restaurant growth going forward, all while maintaining solid profitability. We believe this is a combination that will create long-term shareholder value...

  • Page 8
    ... restaurants opened in fiscal 2007, bringing the total number in operation to seven. • Sales from continuing operations increased 4.0 percent to $5.57 billion for fiscal 2007, driven by new restaurant growth at Olive Garden and same-restaurant sales growth at Olive Garden and Red Lobster...

  • Page 9
    ... current period success while better positioning us to capture the attractive long-term opportunity our industry offers. Thank you for being a shareholder and placing your trust in our ability to build a great company that will perform strongly for generations. • Olive Garden - Accelerate new...

  • Page 10
    Darden Restaurants is a strong company with a rich history. When our founder, Bill Darden, opened his first restaurant in 198, he knew how important great people were to the success and growth of his business. Bill referred to the quality of our employees as "our greatest competitive edge." This ...

  • Page 11
    CUlTURE 9

  • Page 12
    Strong & 10

  • Page 13
    ...opening 2 net new restaurants. Olive Garden also continued to outpace the industry in sales at its existing units with its 51st consecutive quarter of U.S. same-restaurant sales growth. At Red Lobster, we continue to improve our guest experience and strengthen restaurant-level returns while working...

  • Page 14
    ... to build new restaurants and acquire new brands. By continuing to combine disciplined management of the business with balanced growth plans that set appropriate one-year targets and include the appropriate investments, Darden is working on the right things to drive strong future sales and earnings...

  • Page 15
    1

  • Page 16
    Commitment Darden Restaurants is a company that strives to make a positive difference in the lives of others - our customers, our employees, and those in the communities where we live and work. This commitment is part of Darden's DNA and the reason we strive to be an industry leader in philanthropy,...

  • Page 17
    ... job shadowing, hands-on career exploration and one-on-one mentoring. Our sponsorship and the participation of our restaurant teams set the stage for learning new skills and for employers - like Darden - to scout new talent! We thank all of the restaurant teams who participate in this event and make...

  • Page 18
    ... Insurance Company E xecutive & operating Teams Ronald Bojalad Senior Vice President, Group Human Resources Kim Lopdrup Senior Vice President, President, Red Lobster C. Bradford Richmond Senior Vice President, Chief Financial Officer JJ Buettgen Senior Vice President, Business Development...

  • Page 19
    ... Firm on Internal Control Over Financial Reporting 32 Report of Independent Registered Public Accounting Firm 33 Consolidated Statements of Earnings 34 Consolidated Balance Sheets 35 Consolidated Statements of Changes in Stockholders' Equity and Accumulated Other Comprehensive Income (Loss) 36...

  • Page 20
    ... of consecutive quarters with same-restaurant sales growth to 51, annual same-restaurant sales increases at Red Lobster and new restaurant growth at Olive Garden. Bahama Breeze significantly improved same-restaurant performance in fiscal 2007, positioning the brand to restart new restaurant growth...

  • Page 21
    ... items sold to aid in developing menu pricing, product offerings and promotional strategies. We view same-restaurant guest counts as a measure of the long-term health of a restaurant concept, while increases in average check and menu mix may contribute more significantly to near-term profitability...

  • Page 22
    ... of an increase in wage rates and benefit costs and an increase in FICA taxes on higher reported tips, which was only partially offset by the favorable impact of higher sales volumes. Restaurant expenses (which include lease, property tax, credit card, utility, workers' compensation, insurance, new...

  • Page 23
    ... primarily due to an increase in FICA tax credits for employee-reported tips and a decrease in our federal effective income tax rate resulting from the favorable resolution of prior year tax matters expensed in prior years. Selling, general and administrative expenses increased $29.9 million, or...

  • Page 24
    ...amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates. 22 Darden Restaurants, Inc. Annual Report 2007

  • Page 25
    ... after tax), included in asset impairment, net on our consolidated statements of earnings, for the write-down of two Olive Garden restaurants and one Red Lobster restaurant based on an evaluation of expected cash flows. These charges were partially offset by $2.8 million of gains related to the sale...

  • Page 26
    ... and Results of operations We currently manage our business and our financial ratios to maintain an investment grade bond rating, which allows flexible access to financing at reasonable costs. Currently, our publicly issued long-term debt carries "Baa1" (Moody's Investors Service), "BBB+" (Standard...

  • Page 27
    ... Results of operations • $150.0 million of unsecured 6.000 percent senior notes due August 205; and • An unsecured, variable rate $19.1 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...

  • Page 28
    M anagement's Discussion and Analysis of Financial Condition and Results of operations services and the reclassification of excess income tax benefits from the exercise of employee stock options from an operating activity to a financing activity as required following the adoption of SFAS No. 12...

  • Page 29
    ...and Analysis of Financial Condition and Results of operations that could differ from the assumptions used. A quarter-percentage point change in the defined benefit plans' discount rate and the expected long-term rate of return on plan assets would increase or decrease earnings before income taxes by...

  • Page 30
    ... Financial Statements, included elsewhere in this report). We use the variance/covariance method to measure value at risk, over time horizons ranging from one week to one year, at the 95 percent confidence level. At May 27, 2007, our potential losses in future net earnings resulting from changes...

  • Page 31
    ... and in Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended May 27, 2007: • The intensely competitive nature of the restaurant industry, especially pricing, service, location, personnel and type and quality of food; Darden Restaurants, Inc. Annual Report 2007 29

  • Page 32
    ... regarding utilization of our assets and proper financial reporting. These formally stated and regularly communicated policies set high standards of ethical conduct for all employees. The Audit Committee of the Board of Directors meets at least quarterly to determine that management, internal...

  • Page 33
    ... the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Darden Restaurants, Inc. as of May 27, 2007 and May 28, 2006, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and...

  • Page 34
    ...the year ended May 27, 2007, the Company changed its method of accounting for share-based compensation by adopting Statement of Financial Accounting Standards No. 12(R), Share-Based Payment, and accounting for defined benefit pension and other postretirement plans by adopting Statement of Financial...

  • Page 35
    ... Statements of Earnings Fiscal Year Ended (In millions, except per share data) May 27, 2007 $ 5,567.1 May 28, 2006 $ 5,5.6 May 29, 2005 $ 4,977.6 Sales Costs and expenses: Cost of sales: Food and beverage Restaurant labor Restaurant expenses Total cost of sales, excluding restaurant...

  • Page 36
    ... 141.4 and 147.0 shares, respectively Preferred stock, no par value. Authorized 25.0 shares; none issued and outstanding Retained earnings Treasury stock, 16. and 127.7 shares, at cost, respectively Accumulated other comprehensive income (loss) Unearned compensation Officer notes receivable Total...

  • Page 37
    ... tax benefits credited to equity Purchases of common stock for treasury (11.9 shares) Issuance of treasury stock under Employee Stock Purchase Plan and other plans (0.2 shares) Repayment of officer notes Balances at May 28, 2006 Comprehensive income: Net earnings Other comprehensive income (loss...

  • Page 38
    ... costs Change in current assets and liabilities Contribution to postretirement plan Loss on disposal of land, buildings and equipment Change in cash surrender value of trust-owned life insurance Deferred income taxes Change in deferred rent Change in other liabilities Income tax benefits credited...

  • Page 39
    ... Inventories consist of food and beverages and are valued at the lower of weighted-average cost or market. land, buildings and Equipment, Net Land, buildings and equipment are recorded at cost less accumulated depreciation. Building components are depreciated over estimated useful lives ranging...

  • Page 40
    ... term. Revenue Recognition Revenue from restaurant sales is recognized when food and beverage products are sold. Unearned revenues represent our liability for gift cards that have been sold but not yet redeemed. We recognize revenue from our gift cards when the gift card is redeemed by the customer...

  • Page 41
    ...reserves for uncertain tax positions is included in interest, net in our consolidated statements of earnings. A corresponding liability is included in accrued interest, which is a component of other current liabilities on our consolidated balance sheets. Income tax benefits credited to equity relate...

  • Page 42
    ... price of all options granted was equal to the current market value of our stock on the grant date. Due to the adoption of SFAS No. 12(R), during fiscal 2007, we recognized $17.1 million ($10.6 million net of tax) in stock-based compensation expense related to stock options and benefits granted...

  • Page 43
    ... casual dining industry, providing similar products to similar customers. The restaurants also possess similar pricing structures, resulting in similar long-term expected financial performance characteristics. Revenues from external customers are derived principally from food and beverage sales. We...

  • Page 44
    ... gains and losses on items for which the fair value option has been elected are reported in earnings at each subsequent reporting date. SFAS No. 159 is effective for fiscal years beginning after November 15, 2007, which will require us to adopt these provisions in fiscal 2009. We are currently...

  • Page 45
    ... 2007 we also recorded $0.2 million of gains related to the sale of previously impaired restaurants. During fiscal 2006 we recorded $1.5 million of long-lived asset impairment charges primarily related to the closing of three Red Lobster and two Olive Garden restaurants. During fiscal 2006 we also...

  • Page 46
    ... 28, 2006 Non-qualified deferred compensation plan Sales and other taxes Insurance related Miscellaneous Employee benefits Accrued interest Total other current liabilities $146.9 42. 54.4 1.7 18.1 11.6 $05.0 $124.7 4.7 40.6 6.7 28.0 9.6 $28. 44 Darden Restaurants, Inc. Annual Report 2007

  • Page 47
    .... We minimize this credit risk by entering into transactions with high quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or market price of our common stock. We minimize this market risk by...

  • Page 48
    ...current earnings but are reported as accumulated other comprehensive income (loss). A deferred gain of $. million related to the equity forward contracts was recognized in accumulated other comprehensive income (loss) at May 27, 2007. As the Darden stock 46 Darden Restaurants, Inc. Annual Report...

  • Page 49
    ... value of the equity forward contract would offset changes in the fair value of the Darden stock investments in the non-qualified deferred compensation plan within net earnings in our consolidated statements of earnings. A gain (loss) of $0.9 million and ($0.1) million related to the equity forward...

  • Page 50
    ... Year 2007 2006 2005 Restaurant minimum rent Restaurant percentage rent Restaurant rent averaging expense Transportation equipment Office equipment Office space Warehouse space Total rent expense Earnings from continuing operations Losses from discontinued operations Total consolidated income tax...

  • Page 51
    ... amounts. U.S. statutory rate State and local income taxes, net of federal tax benefits Benefit of federal income tax credits Other, net Effective income tax rate 5.0% . (6.1) (.2) 29.0% 5.0% .1 (5.1) (2.2) 0.8% 5.0% 2.9 (4.5) (1.) 2.1% Darden Restaurants, Inc. Annual Report 2007 49

  • Page 52
    ... 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, at a minimum...

  • Page 53
    ...in Benefit Obligation: Benefit obligation at beginning of period Service cost Interest cost Plan amendments Participant contributions Benefits paid Actuarial loss (gain) Benefit obligation at end of period Change in Plan Assets: Fair value at beginning of period Actual return on plan assets Employer...

  • Page 54
    ... defined benefit pension plans. A quarter percentage point change in the defined benefit plans' discount rate and the expected long-term rate of return on plan assets would increase or decrease earnings before income taxes by $0.6 million and $0.4 million, respectively. The assumed health care cost...

  • Page 55
    ... the Internal Revenue Code are not eligible to participate in this plan. Instead, highly compensated employees are eligible to participate in a separate non-qualified deferred compensation plan. This plan allows eligible employees to defer the payment of all or part of their annual salary and bonus...

  • Page 56
    ... Compensation Plan for Non-Employee 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...

  • Page 57
    ... our stock plans. This cost is expected to be recognized over a weighted-average period of 2.0 years. The total fair value of stock options that vested during fiscal 2007 was $16.9 million. Restricted stock and RSUs are granted at a value equal to the market price of our common stock on the date of...

  • Page 58
    ... Director Compensation Program and to employees for performance awards under the 2002 Plan. As of May 27, 2007, there was $1.5 million of unrecognized compensation cost related to Darden stock units granted under our incentive plans. This cost is expected to be recognized over a weighted-average...

  • Page 59
    ...purported class action lawsuit on behalf of servers and bartenders alleging that Olive Garden's server banking policy and its alleged failure to pay split shift premiums violated California law. We believe that our policies and practices were lawful and that we have strong defenses to both cases. On...

  • Page 60
    ... Financial Statements Fiscal 2006 - Quarters Ended Aug. 28 Nov. 27 Feb. 26 May 28 Total Sales Earnings before income taxes Earnings from continuing operations Losses from discontinued operations, net of tax Net earnings Basic net earnings per share: Earnings from continuing operations Losses...

  • Page 61
    ... operations Losses from discontinued operations Net earnings Average number of common shares outstanding: Basic Diluted Financial Position Total assets Land, buildings and equipment, net Working capital (deficit) Long-term debt, less current portion Stockholders' equity Stockholders' equity per...

  • Page 62
    ... 25, 200 Other Statistics Cash flows from operations (1) Capital expenditures (1) Dividends paid Dividends paid per share Advertising expense (1) Stock price: High Low Close Number of employees Number of restaurants $ 569.8 45.2 65.7 0.46 20.0 45.88 .29 $ 45.2 156,500 1,97 $ 699.1 27.5 59...

  • Page 63
    ... Address Changes Stock Transfers Shareholder Services Mailing Address Darden Restaurants, Inc. P.O. Box 593330 Orlando, FL 32859-3330 Our Web site also includes corporate governance information, including our Corporate Governance Guidelines, Code of Business Conduct and Ethics, and board committee...

  • Page 64
    Darden Restaurants, Inc. • 5900 Lake Ellenor Drive • • Orlando, FL 32809 (407) 245-4000 www.darden.com