Red Lobster 2013 Annual Report Download - page 25

Management’s Discussion and Analysis
of Financial Condition and Results of Operations
Darden
Darden Restaurants, Inc. 2013 Annual Report 21
improved wage-rate management and lower manager incentive compensation,
partially offset by an increase in FICA taxes on higher reported tips. The increase in
FICA tax expense on higher reported tips is fully offset in our consolidated earnings
from continuing operations by a corresponding income tax credit, which reduces
income tax expense. Manager incentive compensation paid out at approximately
65.0 percent of the targeted amount in fiscal 2013, as compared to 84.0 percent
and 93.0 percent in fiscal 2012 and 2011, respectively.
Restaurant expenses (which 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 expenses
increased $71.6 million, or 6.3 percent, from $1.13 billion in fiscal 2011 to
$1.20 billion in fiscal 2012. As a percent of sales, restaurant expenses increased
in fiscal 2013 as compared to fiscal 2012 primarily as a result of Yard House’s higher
restaurant expenses as a percentage of sales compared to our consolidated average
prior to the acquisition. Additionally, restaurant expenses as a percentage of sales
increased due to lost sales leverage, partially offset by lower utilities expenses.
As a percent of sales, restaurant expenses decreased in fiscal 2012 as compared
to fiscal 2011 primarily due to sales leveraging and lower credit card fees partially
offset by higher workers’ compensation costs.
Selling, general and administrative expenses increased $101.0 million, or
13.5 percent, from $746.8 million in fiscal 2012 to $847.8 million in fiscal 2013.
Selling, general and administrative expenses increased $4.1 million, or 0.6 percent,
from $742.7 million in fiscal 2011 to $746.8 million in fiscal 2012. As a percent of
sales, selling, general and administrative expenses increased from fiscal 2012 to
fiscal 2013 primarily due to higher media costs and acquisition and integration
costs associated with the Yard House acquisition, partially offset by sales leverage
and lower performance-based compensation. As a percent of sales, selling,
general and administrative expenses decreased from fiscal 2011 to fiscal 2012
primarily due to sales leveraging, lower performance incentive compensation
and favorable market-driven changes in fair value related to our non-qualified
deferred compensation plans, partially offset by higher media costs.
Depreciation and amortization expense increased $45.7 million, or 13.1 percent,
from $349.1 million in fiscal 2012 to $394.8 million in fiscal 2013. Depreciation and
amortization expense increased $32.3 million, or 10.2 percent, from $316.8 million
in fiscal 2011 to $349.1 million in fiscal 2012. As a percent of sales, depreciation
and amortization expense increased in fiscal 2013 primarily due to an increase in
depreciable assets related to new restaurants and remodel activities. As a percent
of sales, depreciation and amortization expense increased in fiscal 2012 primarily
due to an increase in depreciable assets related to new restaurants and remodel
activities, partially offset by sales leveraging.
Net interest expense increased $24.3 million, or 23.9 percent, from
$101.6 million in fiscal 2012 to $125.9 million in fiscal 2013. Net interest expense
increased $8.0 million, or 8.5 percent, from $93.6 million in fiscal 2011 to
$101.6 million in fiscal 2012. As a percent of sales, net interest expense increased
in fiscal 2013 compared to fiscal 2012 due to higher average debt balances in fiscal
2013 principally driven by the acquisition of Yard House. As a percent of sales, net
interest expense increased in fiscal 2012 compared to fiscal 2011 due to higher
average debt balances in fiscal 2012, partially offset by sales leveraging.
INCOME TAXES
The effective income tax rates for fiscal 2013, 2012 and 2011 continuing operations
were 21.0 percent, 25.3 percent and 26.1 percent, respectively. The decrease in our
effective rate for fiscal 2013 is primarily attributable to an increase in the impact
of FICA tax credits for employee reported tips due to a decrease in our earnings
before income taxes and the impact of market-driven changes in the value of our
trust-owned life insurance that are excluded for tax purposes, partially offset by a
decrease in federal income tax credits related to the HIRE Act. The decrease in our
effective rate for fiscal 2012 is primarily attributable to an increase in federal income
tax credits related to the HIRE Act, an increase in the impact of FICA tax credits for
employee reported tips, partially offset by the impact of market-driven changes
in the value of our trust-owned life insurance that are excluded for tax purposes.
NET EARNINGS AND NET EARNINGS PER SHARE
FROM CONTINUING OPERATIONS
Net earnings from continuing operations for fiscal 2013 were $412.6 million
($3.14 per diluted share) compared with net earnings from continuing operations
for fiscal 2012 of $476.5 million ($3.58 per diluted share) and net earnings from
continuing operations for fiscal 2011 of $478.7 million ($3.41 per diluted share).
Net earnings from continuing operations for fiscal 2013 decreased 13.4 percent
and diluted net earnings per share from continuing operations decreased 12.3 per-
cent compared with fiscal 2012, primarily due to higher selling, general and
administrative expenses, restaurant expenses, depreciation and amortization
expenses and net interest expense as a percent of sales, partially offset by increased
sales and a lower effective income tax rate. Costs associated with the Yard House
acquisition adversely affected diluted net earnings per share from continuing
operations by approximately $0.09.
Net earnings from continuing operations for fiscal 2012 decreased 0.5 percent
and diluted net earnings per share from continuing operations increased 5.0 percent
compared with fiscal 2011. The decrease in net earnings from continuing opera-
tions was primarily due to higher food and beverage costs and depreciation and
amortization expense as a percent of sales, which were partially offset by increased
sales, lower restaurant labor expenses, and selling, general and administrative
expenses as a percent of sales, and a lower effective income tax rate. While net
earnings from continuing operations decreased, diluted net earnings per share
from continuing operations increased for fiscal 2012 due to a reduction in the
average diluted shares outstanding primarily as a result of the cumulative impact
of our continuing repurchase of our common stock.
LOSSES FROM DISCONTINUED OPERATIONS
On an after-tax basis, losses from discontinued operations for fiscal 2013 were
$0.7 million ($0.01 per diluted share) compared with losses from discontinued
operations for fiscal 2012 of $1.0 million ($0.01 per diluted share) and fiscal 2011
of $2.4 million ($0.02 per diluted share).