Red Lobster 2008 Annual Report Download - page 30

26 DARDEN RESTAURANTS, INC.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
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 2008, 2007 and 2006 each consisted
of 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 52®, Hemenway’s Seafood Grille & Oyster Bar® and
The Old Grist Mill Tavern® restaurants in the United States
and Canada. Through subsidiaries, we own and operate all of
our restaurants in the United States and Canada, except three.
Those three restaurants are located in Central Florida and are
owned by joint ventures managed by us. The joint ventures pay
management fees to us, and we control the joint ventures’ use
of our service marks. None of our restaurants in the United
States or Canada are franchised. As of May 25, 2008, we fran-
chised five LongHorn Steakhouse restaurants in Puerto Rico
to an unaffiliated franchisee, and 27 Red Lobster restaurants
in Japan to an unaffiliated Japanese corporation, under area
development and franchise agreements.
On August 16, 2007, we announced that we had entered
into an agreement to purchase the common stock of RARE
Hospitality International, Inc. (RARE) through a tender offer
for $38.15 per share in cash, to be followed by a merger in
which the remaining RARE shareholders would each receive
$38.15 per share in cash, or $1.27 billion in total purchase
price. Additionally, as a result of the acquisition, we repaid
RARE’s 2.5 percent convertible notes for approximately
$134.8 million, including $9.8 million related to a conversion
premium. RARE owned two principal restaurant concepts,
LongHorn Steakhouse and The Capital Grille, of which 288
and 29 locations, respectively, were in operation as of the date
of acquisition. The acquisition was completed on October 1,
2007 and the acquired operations are included in our consoli-
dated financial statements since the date of acquisition.
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. Sales declines 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
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.
On November 30, 2007, we entered into a definitive agreement
to sell the 73 operating Smokey Bones restaurants to Barbeque
Integrated, Inc. (BII), an affiliate of Sun Capital Partners, Inc.,
a worldwide private investment firm, for $82.0 million, net of
selling costs of approximately $1.8 million. On December 31,
2007, we closed with BII on the sale of 62 of the restaurants,
and as of February 24, 2008, we had closed on the sale of an
additional ten restaurants for a total of 72 restaurants. The sale
of the remaining restaurant closed on June 13, 2008. As of
May 25, 2008, we had received $81.5 million in net cash proceeds
related to the sale and have recognized a gain on the sale of
$18.0 million, which is included in earnings from discontinued
operations for fiscal 2008. Additionally, on April 28, 2007, we
closed nine under-performing Bahama Breeze restaurants.
We have classified the results of operations, gains and losses
on disposition, impairment charges and closing costs of these
Smokey Bones and Rocky River Grillhouse restaurants and
the nine closed Bahama Breeze restaurants as discontinued
operations in our consolidated statements of earnings and
cash flows for all periods presented.
Our sales from continuing operations were $6.63 billion
in fiscal 2008 compared to $5.57 billion in fiscal 2007. The
19.0 percent increase was primarily driven by the acquisition
of RARE, the addition of 39 net new Olive Gardens in fiscal
2008 and a same-restaurant sales increase at Olive Garden.
Olive Garden had same-restaurant sales increases in each fiscal
quarter, bringing its string of consecutive quarters with same-
restaurant sales growth to 55. Net earnings from continuing
operations for fiscal 2008 were $369.5 million ($2.55 per diluted
share) compared with net earnings from continuing operations
for fiscal 2007 of $377.1 million ($2.53 per diluted share). Net
earnings from continuing operations for fiscal 2008 decreased
2.0 percent and diluted net earnings per share from continuing
operations increased 0.8 percent compared with fiscal 2007.
The decrease in net earnings from continuing operations was
primarily due to integration costs and purchase accounting
adjustments related to the RARE acquisition of approximately
$44.8 million, on a pre-tax basis, in addition to increased food
and beverage costs, wage rates and interest costs, which were
only partially offset by the operating profit contribution of
LongHorn Steakhouse and The Capital Grille, same-restaurant
sales increases at Olive Garden as well as the operating profit
contribution of 39 net new Olive Gardens. While net earnings
from continuing operations declined versus prior year, diluted
earnings per share increased slightly primarily due to a reduction
in diluted weighted average shares outstanding.