Red Lobster 2007 Annual Report Download - page 20

18 Darden Restaurants, Inc. Annual Report 2007
Management’s Discussion and Analysis of Financial Condition and
Results of Operations
M
This discussion and analysis below for Darden Restaurants, Inc.
(Darden, the Company, we, us or our) should be read in conjunction
with our consolidated financial statements and related financial
statement notes found elsewhere in this report.
We operate on a 52/53 week fiscal year, which ends on the last
Sunday in May. Fiscal 2007, 2006, 2005 each consisted of 52 weeks
of operation.
Overview of Operations
Our business operates in the casual dining segment of the restaurant
industry, primarily in the United States. At May 27, 2007, we operated
1,397 Red Lobster®, Olive Garden®, Bahama Breeze®, Smokey Bones
Barbeque & Grill® and Seasons 52® restaurants in the United States
and Canada. As of May 31, 2007, we also licensed 32 Red Lobster
restaurants in Japan. Through subsidiaries, we own and operate
all of our restaurants in the United States and Canada. None of our
restaurants are franchised.
On May 5, 2007, we announced the closure of 54 Smokey
Bones and two Rocky River Grillhouse restaurants as well as our
intention to offer for sale the remaining 73 operating Smokey Bones
restaurants. Softening of sales at Smokey Bones led us to reevaluate
our new restaurant opening strategy and test a new direction for
the business. In fiscal 2007, we opened a new repositioned Smokey
Bones restaurant named Rocky River Grillhouse, and a second Rocky
River Grillhouse from a converted Smokey Bones. However, the
Smokey Bones concept and related business model was designed
to be a nationally advertised brand, and since it was not on a path to
achieving that vision, we concluded it was not a meaningful growth
vehicle for the Company. As a result of these actions, we recognized
$229.5 million and $13.7 million of long-lived asset impairment
charges and closing costs, respectively, during the fourth quarter
of fiscal 2007. Additionally, on April 28, 2007, we closed nine
under-performing Bahama Breeze restaurants. We have classified
the results of operations, impairment charges and closing costs of
Smokey Bones, Rocky River Grillhouse and the nine closed Bahama
Breeze restaurants as discontinued operations in our consolidated
statements of earnings for all periods presented. We have similarly
presented our consolidated statements of earnings and cash
flows for all periods presented to reflect the classification of these
restaurants as discontinued operations.
Our sales from continuing operations were $5.57 billion in
fiscal 2007 and $5.35 billion in fiscal 2006, a 4.0 percent increase. Net
earnings from continuing operations for fiscal 2007 were $377.1 million
($2.53 per diluted share) compared with net earnings from continuing
operations for fiscal 2006 of $351.8 million ($2.24 per diluted share).
Net earnings from continuing operations for fiscal 2007 increased
7.2 percent and diluted net earnings per share from continuing opera-
tions increased 13.0 percent compared with fiscal 2006. The primary
drivers of our increases in net earnings from continuing operations
were Olive Garden’s same-restaurant sales increases in each quarter
of fiscal 2007, bringing its string 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. In addition to achieving a second straight year of
same-restaurant sales growth from continuing operations, Bahama
Breeze also meaningfully improved restaurant-level returns and
guest satisfaction. Additionally, with the closure of the nine under-
performing Bahama Breeze restaurants in the fourth quarter of fiscal
2007 we will be able to re-focus efforts and resources on continuing
to build business in its most profitable restaurants, while also building
a site pipeline for new restaurant growth.
Our net losses from discontinued operations were $175.7 million,
$13.6 million and $9.3 million, respectively, for fiscal 2007, 2006 and
2005. Our diluted net losses per share from discontinued operations
were $1.18, $0.08 and $0.06, respectively, for fiscal 2007, 2006 and
2005. When combined with results from continuing operations, our
diluted net earnings per share were $1.35, $2.16 and $1.78, respec-
tively, for fiscal 2007, 2006 and 2005.
We adopted the provisions of Statement of Financial Accounting
Standards (SFAS) No. 123 (Revised) “Share-Based Payment” (SFAS No.
123R) in the first fiscal quarter of fiscal 2007. SFAS No. 123R requires
us to recognize the cost of employee services received in exchange
for awards of equity instruments based on the grant date fair value of
those awards in our consolidated statements of earnings. We adopted
the provisions of SFAS No. 123R according to the modified prospective
transition method and therefore, did not restate our consolidated
financial statements for periods prior to adoption. The adoption of
SFAS No. 123R reduced diluted net earnings per share from continuing
operations by $0.08 in fiscal 2007 from fiscal 2006.
In fiscal 2008, we expect a net increase of approximately 40
restaurants, excluding the disposition of the 73 Smokey Bones that
continue to operate. We expect combined U.S. same-restaurant sales
growth in fiscal 2008 of between 2 to 4 percent at Olive Garden and
Red Lobster. We also expect further earnings improvement at Bahama
Breeze in fiscal 2008 as we continue to focus on strengthening restau-
rant level returns by removing costs and complexity that do not add
value for their guests. On a consolidated basis, we expect diluted net
earnings per share growth from continuing operations of 10 percent
to 12 percent in fiscal 2008.
Additionally, over the course of fiscal 2008 we plan to increase
the range of our target debt leverage ratio to 55 to 65 percent, up
from our previous target range of 40 to 50 percent. We believe
that this modification of our capital structure will enable us to invest
appropriately in our existing business, preserve financial flexibility to
pursue acquisitions that meet our criteria and return excess cash to
our shareholders. In June 2007 we announced that we would pay a
quarterly dividend of 18 cents per share on August 1, 2007. Previously,
we paid a semi-annual dividend of 23 cents per share, or 46 cents per
share on an annual basis. Based on the 18-cent quarterly dividend