Red Lobster 2008 Annual Report Download

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What We
Bring To
The Table
Darden Restaurants, Inc. 2008 Annual Report
2008 ANNUAL REPORT

Table of contents

  • Page 1
    2008 ANNUAL REPORT Darden Restaurants, Inc. 2008 Annual Report What We Bring To The Table

  • Page 2
    ... restaurant industry offers effective multi-unit operators longer term. Culturally, we want to create an organization that understands, values and helps realize the dreams and aspirations of our employees, who are essential to achieving our financial targets. We recognize that there will be years...

  • Page 3
    ... estimate. Olive Garden also reported their 55th consecutive quarter of same-restaurant sales increases in the fourth quarter of fiscal 2008. • Red Lobster's total sales were a record $2.63 billion, an increase of 1 percent from fiscal 2007. Average annual sales per restaurant were $3.9 million...

  • Page 4
    ... to drive new restaurant growth with excellence. CONCLUSION We are convinced that Darden's success as a public company since our spin-off from General Mills in 1995 and the enviable competitive position we currently enjoy are the product of a strong collection of brands, great brand building and...

  • Page 5
    ...each to Brand Management and Restaurant Operations leaders who are great brand builders. We expect these leaders to continuously increase brand relevance - and as a result, guest loyalty - by successfully developing and executing strategies that enhance both the positioning and delivery of the brand...

  • Page 6
    ..., Red Lobster has a proud history. The company continues to be the market leader in full service seafood dining and continues to evolve to refresh the brand. With 651 restaurants in the United States and 29 in Canada, Red Lobster had record total sales for fiscal 2008 of $2.63 billion, an average...

  • Page 7
    "All of us at Red Lobster are proud of our heritage and excited about the future. We have the best people in the industry, committed to delighting our guests with fresh, delicious seafood prepared ... takes to make that vision a reality." Kim Lopdrup President, Red Lobster DARDEN RESTAURANTS, INC. 3

  • Page 8
    ... Italian Family Meal Olive Garden continues to be the number one Italian family of restaurants in full service dining. In fiscal 2008, the company continued to accelerate new restaurant growth opening 39 net new restaurants for a total of 647 in the United States and six in Canada. Olive Garden...

  • Page 9
    "Olive Garden's success is a direct reï¬,ection of the strong leadership teams in our restaurants and the commitment of more than 80,000 team members to our purpose, 'Hospitaliano' - Our Passion for 100% Guest Delight! We're proud of our strong brand and the results we have achieved, yet we will ...

  • Page 10
    ...-Style Dining Experience As the second largest full service steakhouse chain, LongHorn Steakhouse is a trusted brand with broad appeal. The company opened 24 net new restaurants totaling 305 in the United States and achieved record total sales for the fiscal year. Total sales since the acquisition...

  • Page 11
    ... while we're all very proud of what we've accomplished, we firmly believe that with our great people committed to providing fresh, ï¬,avorful food and great service combined with being a part of the Darden family of restaurants - the best is yet to come." Dave George President, LongHorn Steakhouse...

  • Page 12
    ... personalized service. Total sales since the acquisition were $170 million, an increase of 12 percent from the comparable period last year. The company opened four net new restaurants and average annual sales per restaurant were $8.1 million. "The Capital Grille's 18-year track record of success...

  • Page 13
    ... atmosphere of the islands. The company's 23 restaurants operating in 12 states achieved total sales of $135 million in fiscal 2008, an average of $5.9 million per restaurant. "At Bahama Breeze, we hold ourselves to high standards when it comes to providing our guests with a great Caribbean escape...

  • Page 14
    ... the year. Fiscal 2008 sales were $45 million, a 15 percent increase from prior year, with an average of $6.5 million per restaurant. "We are delighted with the continuing positive response from guests as they embrace the unique experience of Seasons 52. Our culinary, beverage and service teams are...

  • Page 15
    What Else We Bring To The Table DARDEN RESTAURANTS, INC. 11

  • Page 16
    Expertise We Bring 12 DARDEN RESTAURANTS, INC.

  • Page 17
    ...at the core of our strategy for achieving sustainable growth. Our Brand Management expertise starts with robust research to understand who our guests are, how they live their lives, what they need today and how those needs may change over time. Armed with this inspired insight, we work to create and...

  • Page 18
    We Bring Scale 14 DARDEN RESTAURANTS, INC.

  • Page 19
    ... respond to current cost pressures related to increasing globalization and the changing public policy landscape in the U.S. Darden is first and foremost a people business, and our nearly 180,000 employees are our greatest competitive edge. Because of that, many of our brand-support investments are...

  • Page 20
    Direction We Bring 16 DARDEN RESTAURANTS, INC.

  • Page 21
    ... who do business with Darden and the people who invest in Darden are able to fulfill their personal and professional goals. To become the kind of great company we aspire to be, we will continue to execute our multi-brand growth strategy by working to strengthen our brand-building and brand-support...

  • Page 22
    Confidence We Bring 18 DARDEN RESTAURANTS, INC.

  • Page 23
    ... we serve - which means making a positive difference in the lives of our employees and colleagues, our guests, our vendor and community partners, our shareholders and all the others we touch. With the addition of LongHorn Steakhouse and The Capital Grille, we have a strong portfolio of trusted...

  • Page 24
    ...be defining characteristics of Darden Restaurants today and reinforce our position as a neighbor, business partner and employer of choice. From funding worldwide research in support of conservation efforts to supporting the volunteer activities of our employees in their local communities, we are as...

  • Page 25
    ... with local business professionals for one-on-one mentoring. Employees from Darden's Restaurant Support Center in Orlando enjoy serving as mentors at nearby Oak Ridge High School because they know they are helping shape their community's future. Through our corporate sponsorship and employee-mentor...

  • Page 26
    ... chain. David H. Hughes Retired Chairman of the Board of Hughes Supply, Inc., a building supply company. Clarence Otis, Jr. Chairman of the Board and Chief Executive Officer, Darden Restaurants, Inc. Rita P. Wilson Retired President, Allstate Indemnity Company, a subsidiary of Allstate Insurance...

  • Page 27
    ..., Specialty Restaurant Group Robert McAdam Senior Vice President, Government and Community Affairs C. Bradford Richmond Senior Vice President, Chief Financial Officer JJ Buettgen Senior Vice President, Business Development Kim Lopdrup Senior Vice President, President, Red Lobster Paula Shives...

  • Page 28
    Table Soon Come Visit Our 24 DARDEN RESTAURANTS, INC.

  • Page 29
    ... 46 Consolidated Balance Sheets 42 Management's Report on Internal Control Over Financial Reporting 47 Consolidated Statements of Changes in Stockholders' Equity and Accumulated Other Comprehensive Income (Loss) 43 Report of Independent Registered Public Accounting Firm on Internal Control Over...

  • Page 30
    ... 52 weeks of operation. OVERVIEW OF OPERATIONS Our business operates in the full-service dining segment of the restaurant industry, primarily in the United States. At May 25, 2008, we operated 1,702 Red Lobster®, Olive Garden®, LongHorn Steakhouse®, The Capital Grille®, Bahama Breeze®, Seasons...

  • Page 31
    ...sales data and regularly analyze the guest traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies. We view samerestaurant guest counts as a measure of the long-term health of a restaurant concept, while increases in average check...

  • Page 32
    ... increase in same-restaurant guest counts. Average annual sales per restaurant for Olive Garden were $4.9 million in fiscal 2008 compared to $4.7 million in fiscal 2007. Olive Garden reported its 55th consecutive quarter of U.S. same-restaurant sales growth at the end of fiscal 2008. Red Lobster...

  • Page 33
    ... net earnings from continuing operations level by a corresponding income tax credit, which reduces income tax expense. Restaurant expenses (which include lease, property tax, credit card, utility, workers' compensation, insurance, new restaurant pre-opening and other restaurant-level operating...

  • Page 34
    ... was 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. and beverage costs, restaurant expenses, depreciation and amortization...

  • Page 35
    ... Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is...

  • Page 36
    ... statements of earnings. During fiscal 2006, we also recorded charges of $1.3 million ($0.8 million after tax), included in selling, general and administrative expenses in our consolidated statements of earnings, primarily related to the closing of three Red Lobster and two Olive Garden restaurants...

  • Page 37
    ...of our common stock price over the expected term and the number of options that will ultimately not complete their vesting requirements (forfeitures). From year to year, our determination of these subjective assumptions can materially affect the estimate of fair value of stock-based compensation and...

  • Page 38
    ... our capital needs. 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 "Baa3" (Moody's Investors Service), "BBB" (Standard & Poor...

  • Page 39
    ...in December 2018 that is used to support two loans from us to the Employee Stock Ownership Plan portion of the Darden Savings Plan. Through our shelf registration statement on file with the SEC, we may issue an indeterminate amount of unsecured debt securities from time to time in one or more series...

  • Page 40
    ... on unrecognized income tax benefits of $11.0 million. 6) Includes letters of credit for $64.4 million of workers' compensation and general liabilities accrued in our consolidated financial statements, letters of credit for $3.2 million of lease payments included in the contractual operating lease...

  • Page 41
    ..., respectively. Net cash flows provided by operating activities from continuing operations increased in fiscal 2008 primarily as a result of the timing of purchases of inventories and restaurant level services. Net cash flows provided by operating activities also reflect income tax payments of $119...

  • Page 42
    ... selection of a discount rate, expected long-term rate of return on plan assets and expected health care cost trend rates. We set the discount rate assumption annually for each plan at its valuation date to reflect the yield of high quality fixed-income debt instruments, with lives that approximate...

  • Page 43
    ... have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources. APPLICATION OF NEW ACCOUNTING STANDARDS In September 2006, the FASB issued SFAS No. 157, "Fair Value...

  • Page 44
    ... Part I, Item 1A, "Risk Factors" in our Annual Report on Form 10-K for the year ended May 25, 2008: • The intensely competitive nature of the restaurant industry, especially pricing, service, location, personnel and type and quality of food; • Economic and business factors, both specific to the...

  • Page 45
    ...or we are ultimately found liable; • Unfavorable publicity relating to food safety or other concerns; • A lack of suitable new restaurant locations or a decline in the quality of the locations of our current restaurants; • Federal, state and local regulation of our business, including laws and...

  • Page 46
    ...on these criteria. The Company's independent registered public accounting firm KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which follows. Clarence Otis, Jr. Chairman of the Board and Chief Executive Officer 42 DARDEN RESTAURANTS, INC.

  • Page 47
    ... the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Darden Restaurants, Inc. as of May 25, 2008 and May 27, 2007, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and...

  • Page 48
    ...balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 25, 2008 and May 27, 2007, and the related consolidated statements of earnings, changes in stockholders' equity and accumulated other comprehensive income (loss), and cash flows for each of the years in the three year period ended...

  • Page 49
    ...sales, excluding restaurant depreciation and amortization of $230.0, $186.4 and $181.1, respectively Selling, general and administrative Depreciation and amortization Interest, net Total costs and expenses Earnings before income taxes Income taxes Earnings from continuing operations Earnings (losses...

  • Page 50
    ... sale Total current assets Land, buildings and equipment, net Goodwill Trademarks Other assets Total assets Liabilities and Stockholders' Equity Current liabilities: Accounts payable Short-term debt Accrued payroll Accrued income taxes Other accrued taxes Unearned revenues Other current liabilities...

  • Page 51
    ... Employee Stock Purchase Plan and other plans (0.2 shares) 5.8 Repayment of officer notes - Balances at May 27, 2007 $1,904.3 Comprehensive income: Net earnings - Other comprehensive income (loss): Foreign currency adjustment - Change in fair value of derivatives, net of tax of $2.6 - Benefit plans...

  • Page 52
    ... charges, net Amortization of loan costs Stock-based compensation expense 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...

  • Page 53
    ... 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®, LongHorn Steakhouse®, The Capital Grille®, Bahama Breeze®, Seasons 52®, Hemenway's Seafood Grille...

  • Page 54
    ... Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings, are amortized over the lesser of the expected lease term, including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is...

  • Page 55
    ... as a result of lease termination or changes in estimates of sublease income are recorded in the period incurred. Upon disposal of the assets, primarily land, associated with a closed restaurant, any gain or loss is recorded in the same caption within our consolidated statements of earnings as the...

  • Page 56
    ... initially recorded as long-term liabilities. Amounts which are expected to be earned within one year are recorded as current liabilities. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES We use financial and commodities derivatives to manage interest rate, compensation and commodities pricing risks...

  • Page 57
    ...-Based Payment," which requires companies to recognize in the financial statements the cost of employee services received in exchange for awards of equity instruments based on the grant date fair value of those awards. Previously, SFAS No. 123, "Accounting for Stock-Based Compensation," encouraged...

  • Page 58
    ... interest rate Expected volatility of stock Dividend yield Expected option life 4.63% 32.6% 1.6% 6.4 years 5.08% 34.5% 1.3% 6.4 years 3.91% 30.0% 1.2% 6.0 years Earnings from continuing operations Add: Stock-based compensation expense included in reported net earnings, net of related tax effects...

  • Page 59
    ...May 27, 2007, respectively. Gains and losses from foreign currency transactions were not significant for fiscal 2008, 2007 or 2006. SEGMENT REPORTING As of May 25, 2008, we operated the Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Hemenway's Seafood...

  • Page 60
    ... other employee costs RARE debt conversion premium Total $1,191.6 40.5 13.5 9.9 9.8 $1,265.3 rights associated with the four franchised LongHorn Steakhouse restaurants in Puerto Rico, are included in the results of operations of our consolidated financial statements from the date of acquisition and...

  • Page 61
    Notes to Consolidated Financial Statements restaurant support infrastructure. During the period subsequent to the acquisition, $8.0 million of tax benefits related to the exercise of converted stock-based compensation was charged against goodwill related to the portion of the value of the awards ...

  • Page 62
    ... sales prices of comparable assets and estimates of future cash flows. The results of operations for all Red Lobster and Olive Garden restaurants permanently closed in fiscal 2008, 2007 and 2006 that would otherwise have met the criteria for discontinued Current assets Land, buildings and equipment...

  • Page 63
    ... of our Restaurant Support Center (RSC) for $45.2 million. The RSC houses all of our executive offices, shared service functions and concept administrative personnel. The transaction was completed in anticipation of moving the RSC to a new facility approximately three years from the date of sale. As...

  • Page 64
    ...) under a registration statement filed with the Securities and Exchange Commission on October 9, 2007. Discount and issuance costs, which were $4.3 million and $11.7 million, respectively, are being amortized over the terms of the New Senior Notes using the straight-line method, the results of which...

  • Page 65
    ...net gain of $0.1 million at May 25, 2008 and is expected to be reclassified from accumulated other comprehensive income (loss) into restaurant expenses during fiscal 2009. To the extent that these derivatives are no longer highly effective in offsetting changes in cash flows related to our purchases...

  • Page 66
    ... with the expectation that changes in the fair value of the equity forward contracts 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. (Losses) gains of ($0.6) million...

  • Page 67
    ... with our Stock Option and Long-Term Incentive Plan of 1995. The Loan Program provided loans to our officers and awarded two options for every new share purchased, up to a maximum total share value equal to a designated percentage of the officer's base compensation. Loans are full recourse...

  • Page 68
    ...those related to restaurants reported as discontinued operations, for each of the five fiscal years subsequent to May 25, 2008 and thereafter is as follows: Fiscal Year Capital Operating Earnings from continuing operations Earnings (losses) from discontinued operations Total consolidated income tax...

  • Page 69
    ...Balance at May 25, 2008 $64.1 23.3 4.2 1.4 (3.2) (4.1) (8.2) $77.5 Accrued liabilities Compensation and employee benefits Deferred rent and interest income Asset disposition Other Gross deferred tax assets Trademarks and other acquisition related intangibles Buildings and equipment Prepaid pension...

  • Page 70
    ...formulas that include years of service and compensation factors; and for a group of hourly employees in the United States, 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...

  • Page 71
    ... Benefit Plan 2008 2007 Components of the Consolidated Balance Sheets: Non-current assets Current liabilities Non-current liabilities Net amounts recognized Amounts Recognized in Accumulated Other Comprehensive Income (Loss), net of tax: Unrecognized prior service cost Unrecognized actuarial loss...

  • Page 72
    ... 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 $0.9 million and $0.4 million, respectively. The assumed health care cost...

  • Page 73
    ... interest rate of 2.864 percent at May 25, 2008, is due to be repaid no later than December 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...

  • Page 74
    ... STOCK-BASED COMPENSATION We maintain two active stock option and stock grant plans under which new awards may still be issued, known as the Darden Restaurants, Inc. 2002 Stock Incentive Plan (2002 Plan) and the RARE Hospitality International, Inc. Amended and Restated 2002 Long-Term Incentive Plan...

  • Page 75
    ... (d) an annual award of common stock with a fair market value of $0.1 million on the date of grant. Directors may elect to have their cash compensation paid in any combination of current or deferred cash, common stock or salary replacement options. Deferred cash compensation may be invested on a tax...

  • Page 76
    ... service period of the related awards. As of May 25, 2008, there was $34.2 million of unrecognized compensation cost related to unvested stock options granted under our stock plans. This cost is expected to be recognized over a weighted-average period of 1.5 years. The total fair value of stock...

  • Page 77
    ... is measured based on grant date fair value. As of May 25, 2008, there was $12.7 million of unrecognized compensation cost related to unvested performance stock units granted under our stock plans. This cost is expected to be recognized over a weighted-average period of DARDEN RESTAURANTS, INC. 73

  • Page 78
    ...press releases and public filings that misrepresented and failed to disclose certain information, and that as a result, had no reasonable basis for statements about Darden's prospects and guidance for fiscal 2008. The complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange...

  • Page 79
    ... Financial Statements NOTE 21 QUARTERLY DATA (UNAUDITED) The following table summarizes unaudited quarterly data for fiscal 2008 and fiscal 2007: Fiscal 2008 - Quarters Ended (in millions) Aug. 26 Nov. 25 Feb. 24 May 25 Total Sales Earnings before income taxes Earnings from continuing operations...

  • Page 80
    ... operations Earnings (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...

  • Page 81
    ... close of business on July 21, 2008, we had 37,144 registered shareholders of record. 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 25, 2008, the Chief Executive Officer and Chief Financial...

  • Page 82
    Darden Restaurants, Inc. • 5900 Lake Ellenor Drive, Orlando, FL 32809 • (407) 245-4000 • www.darden.com