Red Lobster 2013 Annual Report Download

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2013 Annual Report
The New Era
of Casual Dining
Leadership...

Table of contents

  • Page 1
    The New Era of Casual Dining Leadership...2013 Annual Report

  • Page 2

  • Page 3
    ... from guests who want fresh, exciting new experiences and, in many cases, more for less • Expectations from employees who want us to support their aspirations and remain a compelling place to work • Expectations from business partners and other stakeholders who want us to create social value...

  • Page 4
    ... of our brand portfolio. Today, Darden's portfolio is well-positioned to drive profitable market share growth and generate competitively superior returns for the next decade. Adding Yard House® to our Specialty Restaurant Group (SRG) provides us with greater exposure to new guests and new occasions...

  • Page 5
    ...home-like setting where everyone is welcomed as a member of our family.  $3.7 Billion in Sales  828 Units  $4.6 Million Average Unit Sales LongHorn Steakhouse® Known for a passion for grilling fresh, hand-seasoned steaks, we provide guests with a cut-above steakhouse dining experience...

  • Page 6
    ... lead increasingly digital lives, giving us more opportunities to connect with them. Quality Guests aren't willing to compromise on quality, demanding better offers and experiences. Affordability Many guests are financially constrained, leaving them 2 Darden Restaurants, Inc. 2013 Annual Report...

  • Page 7
    ... preferences for dining experience, whether enjoying our food in restaurant or at home through takeout, is important. New Guest Behavior The growing number of Millennial and multicultural guests is influencing taste and guest experience preferences. Darden Restaurants, Inc. 2013 Annual Report 3

  • Page 8
    ... operations were $8.3 billion, a 3.7 percent increase from fiscal 2012. Clarence Otis, Jr. Chairman and Chief Executive Officer Fiscal 2013 Financial Highlights Despite blended same-restaurant sales and traffic declines at our three large brands (Olive Garden, Red Lobster and 4 Darden Restaurants...

  • Page 9
    ...Olive Garden, Red Lobster and LongHorn Steakhouse; a combined U.S. same-restaurant sales increase of 2.1 percent for our Specialty Restaurant Group, including The Capital Grille®, Bahama Breeze® and Seasons 52®, but excluding Eddie V's and Yard House; 3.6 percent of growth compared to fiscal 2012...

  • Page 10
    ... nearly 172 million shares of our common stock for $3.82 billion. advertising is a fraction of the amount spent by most nationally advertised chains, including Olive Garden and Red Lobster. In addition, within our Specialty Restaurant Group, each brand's average sales per restaurant is among...

  • Page 11
    ... on price in our advertising messages and being more active in the use of tactics such as daily and weekly digital specials to support our offers. We also stepped up the emphasis on affordability in our core menus, which included launching with heavy media support of a new core menu at Red Lobster...

  • Page 12
    ...to the new healthcare landscape in a way that maintains strong employee engagement. And, we are continuing to invest in commercializing lobster Clarence Otis, Jr. Chairman and Chief Executive Officer Andrew Madsen President and Chief Operating Officer 8 Darden Restaurants, Inc. 2013 Annual Report

  • Page 13
    What We Bring to the New Era...

  • Page 14
    ... Stable Cash Generation With the considerable operating cash flow generated by two multibillion-dollar brands, not only is Darden able to appropriately reinvest in our business, but we are also able to return considerable capital to our shareholders. 10 Darden Restaurants, Inc. 2013 Annual Report

  • Page 15
    ... opened last year, in order to better focus on regaining sales momentum and consistently delivering a high-quality guest experience in existing restaurants. Red Lobster continues to have a business model that creates significant value, with annual sales of $2.6 billion and average unit sales volumes...

  • Page 16
    We Bring Ready-to-Grow Dining Concepts With our LongHorn and Specialty Restaurant Group (SRG) brands, we will continue to expand in the New Era. 12 Darden Restaurants, Inc. 2013 Annual Report

  • Page 17
    ... casual dining - SRG is positioned to make a significant contribution to Darden's annual sales and operating profit growth. Each brand in the group generates high average unit sales volumes - $8.2 million at Yard House, $7.0 million at The Capital Grille, $6.2 million at Seasons 52, $5.8 million at...

  • Page 18
    ... of our talented restaurant operations teams enables us to provide world-class service to over 1 million guests on a daily basis. As one of the world's largest restaurant operating companies, we understand that to provide outstanding guest experiences, having top-notch support teams is vital for...

  • Page 19
    ... our guests with exceptional food and attentive service that exceeds expectations. We also created new full-time hourly roles within each restaurant to help the restaurant's managers effectively Specialty Restaurant Group The Specialty Restaurant Group leverages Darden's supply chain expertise...

  • Page 20
    ... by our second Global Reporting Initiative report and the reporting we do via social media. • Health and Wellness: Our company is addressing one of the top health challenges facing our society today - obesity. Working with the Partnership for a Healthier America, Darden has committed to reducing...

  • Page 21
    ...Income 36 Consolidated Balance Sheets 37 Consolidated Statements of Changes in Stockholders' Eqpity 38 Consolidated Statements of Cash Flows 39 Notes to Consolidated Financial Statements 66 Five-Year Financial Spmmary 2013 Financial Review Comparison of Five-Year Total Return for Darden Restaurants...

  • Page 22
    ... sales increase for The Capital Grille, Bahama Breeze and Seasons 52, partially offset by the 1.3 percent blended same-restaurant sales decrease for Olive Garden, Red Lobster and LongHorn Steakhouse. Net earnings from continuing operations for fiscal 2013 were $412.6 million ($3.14 per diluted share...

  • Page 23
    ... new business development, including franchising our restaurants outside of the U.S. and Canada, testing "synergy restaurants" and other formats to expand our brands, and selling consumer packaged goods such as Olive Garden's salad dressing and Red Lobster's Cheddar Bay Biscuit Mix. The total sales...

  • Page 24
    ... guest check. Average annual sales per restaurant for Red Lobster were $3.7 million in fiscal 2013 compared to $3.8 million in fiscal 2012. LongHorn Steakhouse's sales of $1.23 billion in fiscal 2013 were 10.3 percent above last fiscal year, driven primarily by revenue from 44 net new restaurants...

  • Page 25
    ... include utilities, repairs and maintenance, credit card, lease, property tax, workers' compensation, new restaurant pre-opening and other restaurant-level operating expenses) increased $133.8 million, or 11.1 percent, from $1.20 billion in fiscal 2012 to $1.33 billion in fiscal 2013. Restaurant...

  • Page 26
    ...buildings and equipment, net, 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 depreciated over estimated useful lives ranging from 2 to 10 years, also using...

  • Page 27
    ... 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 original impairment. The judgments we make related to the expected useful lives of long...

  • Page 28
    ... had goodwill: Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Eddie V's, and Yard House. As part of our process for performing the step one impairment test of goodwill, we estimated the fair value of our reporting units utilizing the income and market approaches described above...

  • Page 29
    ...$18.6 million relates to items that would impact our effective income tax rate. LIQUIDITY AND CAPITAL RESOURCES Cash flows generated from operating activities provide us with a significant source of liquidity, which we use to finance the purchases of land, buildings and equipment for new restaurants...

  • Page 30
    ... of this type. On May 15, 2013 we repaid, prior to maturity, a $4.9 million unsecured commercial bank loan which was used to support a loan from us to the Employee Stock Ownership Plan portion of the Darden Savings Plan. At May 26, 2013, our long-term debt consisted principally of: • $100...

  • Page 31
    ... income tax benefits of $1.2 million, $0.5 million of which relates to contingencies expected to be resolved within one year. (6) Includes letters of credit for $107.0 million of workers' compensation and general liabilities accrued in our consolidated financial statements, letters of credit...

  • Page 32
    ... of tax benefits related to the timing of deductions for fixed-asset related expenditures and the application of the overpayment of income taxes in prior years to fiscal 2013 tax liabilities. Net cash flows used in investing activities from continuing operations were $1,290.4 million, $721.6 million...

  • Page 33
    ....9 million in fiscal years 2013, 2012 and 2011, respectively. The expected long-term rate of return on plan assets component of our net periodic benefit cost is calculated based on the market-related value of plan assets. Our target asset fund allocation is 40 percent U.S. equities, 35 percent high...

  • Page 34
    ...). 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 26, 2013, our potential losses in future net earnings resulting from changes in foreign currency exchange rate instruments, commodity...

  • Page 35
    ...diluted net earnings per share growth, and capital expenditures in fiscal 2014, and all other statements that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden...

  • Page 36
    ...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 32 Darden Restaurants, Inc. 2013 Annual Report

  • Page 37
    ...the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 26, 2013 and May 27, 2012, and the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity...

  • Page 38
    ... consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries as of May 26, 2013 and May 27, 2012, and the related consolidated statements of earnings, comprehensive income, changes in stockholders' equity, and cash flows for each of the years in the three-year period ended May 26, 2013...

  • Page 39
    Management's ConsolidatedDiscussion Statementsand of Earnings Analysis of Financial Condition and Results of Operations Darden Darden May 26, 2013 Fiscal Year Ended May 27, 2012 May 29, 2011 (in millions, except per share data) Sales Costs and expenses: Cost of sales: Food and beverage Restaurant ...

  • Page 40
    Consolidated Balance Sheets Darden May 26, 2013 May 27, 2012 (in millions) Assets Current assets: Cash and cash equivalents Receivables, net Inventories Prepaid income taxes Prepaid expenses and other current assets Deferred income taxes Total current assets Land, buildings and equipment, net ...

  • Page 41
    ...Issuance of treasury stock under Employee Stock Purchase Plan and other plans (0.2 shares) 6.7 Treasury shares retirement (159.3 shares) (1,411.4) Balances at May 26, 2013 See accompanying notes to consolidated financial statements. $ 1,207.6 Darden Restaurants, Inc. 2013 Annual Report 37

  • Page 42
    ..., net Amortization of loan costs Stock-based compensation expense Change in current assets and liabilities Contributions to pension and postretirement plan Loss on disposal of land, buildings and equipment Change in cash surrender value of trust-owned life insurance Deferred income taxes Change...

  • Page 43
    ... consolidated 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 Olive Garden®, Red Lobster®, LongHorn Steakhouse®, The Capital Grille®, Yard House®, Bahama Breeze®, Seasons 52...

  • Page 44
    ... buildings and equipment, net, 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 depreciated over estimated useful lives ranging from 2 to 10 years also using...

  • Page 45
    ...is discounted using a weighted-average cost of capital that reflects current market conditions. The projection uses management's best estimates of economic and market conditions over the projected period including growth rates in sales, costs and number of units, estimates of future expected changes...

  • Page 46
    ... stock price) as well as in the market capitalization of other companies in the restaurant industry, declines in sales at our restaurants, and significant adverse changes in the operating environment for the restaurant industry may result in future impairment. 42 Darden Restaurants, Inc. 2013 Annual...

  • Page 47
    ... claims, both reported and not yet reported. REVENUE RECOGNITION Sales, as presented in our consolidated statements of earnings, represents food and beverage product sold and is presented net of discounts, coupons, employee meals, and complimentary meals and gift cards. Revenue from restaurant sales...

  • Page 48
    ... Fiscal Year 2012 2011 (in millions) Advertising expense $409.2 $357.2 $340.2 STOCK-BASED COMPENSATION We recognize the cost of employee service received in exchange for awards of equity instruments based on the grant date fair value of those awards. We utilize the Black-Scholes option pricing...

  • Page 49
    ... statements of earnings were not significant for fiscal 2013, 2012 or 2011. SEGMENT REPORTING As of May 26, 2013, we operated the Olive Garden, Red Lobster, LongHorn Steakhouse, The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V's restaurant brands in North America as operating...

  • Page 50
    ... operations, net of tax benefit in our consolidated statements of earnings and are comprised of the following: (in millions) NOTE 4 ASSET IMPAIRMENTS During fiscal 2013, we recognized long-lived asset impairment charges of $0.8 million ($0.5 million net of tax), primarily related to the write...

  • Page 51
    ... of long-term debt are as follows: May 26, 2013 May 27, 2012 (1) (in millions) May 26, 2013 May 27, 2012 Trust-owned life insurance Capitalized software costs, net (2) Liquor licenses Acquired below-market leases, net Loan costs, net Marketable securities Deferred-tax charge (3) Insurance-related...

  • Page 52
    ... Financial Statements Darden The Revolving Credit Agreement matures on October 3, 2016, and the proceeds may be used for commercial paper back-up, working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. Loans...

  • Page 53
    ... equity forward contract will be recognized in current earnings. We periodically incur interest on the notional value of the contracts and receive dividends on the underlying shares. These amounts are recognized currently in earnings as they are incurred. Darden Restaurants, Inc. 2013 Annual Report...

  • Page 54
    ... (loss) reclassified from AOCI to earnings as well as the gain (loss) recognized in earnings for the ineffective portion of the hedge is food and beverage costs, which is a component of cost of sales, and selling, general and administrative expenses. 50 Darden Restaurants, Inc. 2013 Annual Report

  • Page 55
    ...in Fair Value Hedge Relationship Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item Location of Gain (Loss) Recognized in Earnings on Related Hedged Item (in millions) 2013 Fiscal Year 2012 2011 2013 Fiscal Year 2012 2011 Interest rate $(1.3) $(0.4) $0.2 Interest, net Debt...

  • Page 56
    ... securities related to insurance funding requirements for our workers' compensation and general liability claims. The following table summarizes cost and market value for our securities that qualify as available-for-sale as of May 26, 2013: Gross Unrealized Gains Gross Unrealized Losses Market Value...

  • Page 57
    ... Marketable Securities on Derivatives Benefit Plan Funding Position Accumulated Other Comprehensive Income (Loss) Balances at May 29, 2011 Gain (loss) Reclassification realized in net earnings Balances at May 27, 2012 Gain (loss) Reclassification realized in net earnings Balances at May 26, 2013...

  • Page 58
    ...NOTE 16 INCOME TAXES Total income tax expense was allocated as follows: (in millions) 2013 Fiscal Year 2012 2011 The annual future lease commitments under capital lease obligations and noncancelable operating leases, including those related to restaurants reported as discontinued operations, for...

  • Page 59
    ... effective income tax rate from continuing operations included in the accompanying consolidated statements of earnings: 2013 Fiscal Year 2012 2011 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...

  • Page 60
    ... 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. and International equities as well as long-duration bonds and real estate investments. Our policy...

  • Page 61
    ... 2013 May 27, 2012 Postretirement Benefit Plan May 26, 2013 May 27, 2012 Components of the Consolidated Balance Sheets: Non-current liabilities Net amounts recognized Amounts Recognized in Accumulated Other Comprehensive Income (Loss), net of tax: Prior service (cost) credit Net actuarial loss Net...

  • Page 62
    ... 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 $0.5 million, respectively. The assumed health care cost...

  • Page 63
    Notes to Consolidated Financial Statements Darden Components of net periodic benefit cost included in continuing operations are as follows: (in millions) 2013 Defined Benefit Plans 2012 2011 2013 Postretirement Benefit Plan 2012 2011 Service cost Interest cost Expected return on plan assets ...

  • Page 64
    ... 3) Private Equity Energy & Real Estate Real Asset Securities Public Sector Private Funds (in millions) Total Beginning balance at May 29, 2011 Actual return on plan assets: Relating to assets still held at the reporting date Relating to assets sold during the period Purchases, sales and...

  • Page 65
    ... Financial Statements Darden The following benefit payments are expected to be paid between fiscal 2014 and fiscal 2023: (in millions) Defined Benefit Plans Postretirement Benefit Plan 2014 2015 2016 2017 2018 2019-2023 POSTEMPLOYMENT SEVERANCE PLAN We accrue for postemployment severance costs...

  • Page 66
    ... the 2002 Plan. Stock-based compensation expense included in continuing operations was as follows: 2013 Fiscal Year 2012 2011 (in millions) Stock options Restricted stock/restricted stock units Darden stock units Performance stock units Employee stock purchase plan Director compensation program...

  • Page 67
    ... ongoing share repurchase program. As of May 26, 2013, there was $32.8 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 2.4 years. The total fair value of stock options...

  • Page 68
    ... plans. This cost is expected to be recognized over a weighted-average period of 1.7 years. The total fair value of performance stock units that vested in fiscal 2013 was $21.5 million. We maintain an Employee Stock Purchase Plan to provide eligible employees who have completed one year of service...

  • Page 69
    ...2013 and fiscal 2012: Fiscal 2013 - Quarters Ended Feb. 24 May 26 (in millions, except per share data) Aug. 26 Nov. 25 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...

  • Page 70
    ... (Losses) earnings 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 71
    ... D. Harker Chief Financial Officer of Gannett Co., Inc., an international media and marketing solptions company. Chairman and Managing Director of SpnBridge Capital Management, LLC , an investment management firm. Retired Vice Chairman and Chief Execptive Officer of Choice Hotels International, Inc...

  • Page 72
    ... Financial Officer Teresa Sebastian Senior Vice President, General Copnsel and Secretary Will Setliff Senior Vice President, Chief Marketing Officer Salli A. Setta President, Red Lobster Spk Singh Senior Vice President, Chief Development Officer 68 Darden Restaurants, Inc. 2013 Annual Report

  • Page 73
    ... contact the Investor Relations Department at (800) 832-7336. Shareholders may request to receive, free of charge, copies of quarterly earnings releases. Information may also be obtained by visiting our website at www.darden.com. Annual reports, SEC filings, press releases and other Company news are...

  • Page 74
    ® 1000 Darden Center Drive Orlando, FL 32837 407-245-4000 www.darden.com