Darden Restaurants 10-K 2008
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
For the fiscal year ended May 25, 2008
For the transition period from to
Commission File Number: 1-13666
DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Registrants telephone number, including area code: (407) 245-4000
Securities registered pursuant to Section 12(b) of the Act:
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes x No ¨
Indicate by check mark if registrant is not required to file reports pursuant to Section 13 or 15(d) of the Act. Yes ¨ No x.
Indicate by check mark if the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ Smaller reporting company ¨
(Do not check if a smaller reporting company)
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No x.
The aggregate market value of Common Stock held by non-affiliates of the Registrant, based on the closing price of $39.40 per share as reported on the New York Stock Exchange on November 25, 2007, was approximately: $5,653,774,471.
Number of shares of Common Stock outstanding as of June 30, 2008: 140,446,512 (excluding 139,499,953 shares held in the Companys treasury).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrants Proxy Statement for its Annual Meeting of Shareholders on September 12, 2008, to be filed with the Securities and Exchange Commission no later than 120 days after May 25, 2008, are incorporated by reference into Part III, and portions of the Registrants Annual Report to Shareholders for the fiscal year ended May 25, 2008 are incorporated by reference into Parts I and II of this Report.
DARDEN RESTAURANTS, INC.
FISCAL YEAR ENDED MAY 25, 2008
Darden Restaurants, Inc. is the worlds largest company-owned and operated full service restaurant company1, and served over 380 million meals in fiscal 2008. As of May 25, 2008, we operated through subsidiaries 1,702 restaurants in the United States and Canada. In the United States, we operated 1,667 restaurants in 49 states (the exception being Alaska), including 651 Red Lobster®, 647 Olive Garden®, 305 LongHorn Steakhouse®, 32 The Capital Grille®, 23 Bahama Breeze®, and seven Seasons 52® restaurants, and two specialty restaurants: Hemenways Seafood Grille & Oyster Bar® and The Old Grist Mill Tavern®. In Canada, we operated 35 restaurants, including 29 Red Lobster and six Olive Garden restaurants. 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 U.S. or Canada are franchised. Of our 1,702 restaurants open on May 25, 2008, 904 were located on owned sites and 798 were located on leased sites. As of May 25, 2008, we franchised 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.
Darden Restaurants, Inc. is a Florida corporation incorporated in March 1995, and is the parent company of GMRI, Inc., also a Florida corporation. GMRI, Inc. and certain other of our subsidiaries own and operate our restaurants. GMRI, Inc. was originally incorporated in March 1968 as Red Lobster Inns of America, Inc. We were acquired by General Mills, Inc. in 1970 and became a separate publicly held company in 1995 when General Mills distributed all of our outstanding stock to the stockholders of General Mills. Our principal executive offices and restaurant support center are located at 5900 Lake Ellenor Drive, Orlando, Florida 32809, telephone (407) 245-4000. Our corporate website address is www.darden.com. We make our reports on Forms 10-K, 10-Q and 8-K, and Section 16 reports on Forms 3, 4 and 5, and all amendments to those reports available free of charge on our website the same day as the reports are filed with or furnished to the Securities and Exchange Commission. Information on our website is not deemed to be incorporated by reference into this Form 10-K. Unless the context indicates otherwise, all references to Darden, we, our or us include Darden Restaurants, Inc., GMRI, Inc. and our respective subsidiaries.
We have a 52/53 week fiscal year ending the last Sunday in May. Our 2008 fiscal year ended May 25, 2008, our 2007 fiscal year ended May 27, 2007, and our 2006 fiscal year ended May 28, 2006, and each had 52 weeks.
The following description of our business should be read in conjunction with the information in our Managements Discussion and Analysis of Financial Condition and Results of Operations incorporated by reference in Item 7 of this Form 10-K and our consolidated financial statements incorporated by reference in Item 8 of this Form 10-K.
We opened our first restaurant, a Red Lobster seafood restaurant, in Lakeland, Florida in 1968. Red Lobster was founded by William B. Darden, for whom we are named. We were acquired by General Mills, Inc. in 1970. In May 1995, we became a separate publicly held company when General Mills distributed all outstanding Darden stock to General Mills stockholders.
Red Lobster has grown from six restaurants in operation at the end of fiscal 1970 to 680 restaurants in North America by the end of fiscal 2008. Olive Garden, an internally developed Italian restaurant concept, opened
its first restaurant in Orlando, Florida in fiscal 1983, and by the end of fiscal 2008 had expanded to 653 restaurants in North America. The number of Red Lobster and Olive Garden restaurants open at the end of fiscal 2008 remained the same and increased by 39, respectively, as compared to the end of fiscal 2007.
Bahama Breeze is an internally developed concept that provides a Caribbean escape, offering the food, drinks and atmosphere you would find in the islands. In fiscal 1996, Bahama Breeze opened its first restaurant in Orlando, Florida. At the end of fiscal 2008, there were 23 Bahama Breeze restaurants.
Seasons 52 is an internally developed concept that provides a casually sophisticated fresh grill and wine bar with seasonally inspired menus offering fresh ingredients to create great tasting meals that are lower in calories than comparable restaurant meals. Seasons 52 opened its first restaurant in Orlando, Florida in fiscal 2003. At the end of fiscal 2008, there were seven Seasons 52 restaurants.
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 approximately $1.27 billion in total purchase price. In addition, as a result of the acquisition, we repaid RAREs 2.5 percent convertible notes for approximately $134.8 million, including $9.8 million related to a conversion premium. RARE owned and operated 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 the acquisition, which was completed on October 1, 2007. LongHorn Steakhouse, with locations primarily in the Eastern half of the United States, is a leader in the full service dining steakhouse category, and The Capital Grille, with locations in major metropolitan cities in the United States, is a leader in the premium steakhouse category. RARE also had two specialty restaurants, Hemenways Seafood Grille & Oyster Bar and The Old Grist Mill Tavern, that were acquired in the merger. The acquired operations are included in our financial statements from the date of the acquisition.
The following table shows our growth and lists the number of restaurants operated by Red Lobster, Olive Garden, Bahama Breeze and Seasons 52 as of the end of each fiscal year since 1970, and the number of LongHorn Steakhouse and The Capital Grille restaurants operated by us at the end of fiscal 2008. The final column in the table lists our total sales for the years indicated.
Company-Operated Restaurants Open at Fiscal Year End
The restaurant industry is generally considered to be comprised of two segments: quick service and full service. The full service segment is highly fragmented and includes many independent operators and small chains. We believe that capable operators of strong multi-unit concepts have the opportunity to increase their share of the full service segment. We plan to grow by increasing the number of restaurants in each of our existing concepts and by developing or acquiring additional concepts that can be expanded profitably.
While we are a leader in the full service dining segment, we know we cannot be successful without a clear sense of who we are. Our core purpose is To nourish and delight everyone we serve. This core purpose is supported by our core values:
Our mission is to be The best in full service dining, now and for generations. We believe we can achieve this goal by continuing to build on our strategy to be a multi-brand full service restaurant growth company, which is grounded in our commitment to combining:
Our strategic framework also includes two points that we believe separate us from our competition. We are committed to:
Red Lobster is the largest full service dining, seafood specialty restaurant operator in the United States. It offers an extensive menu featuring fresh fish, shrimp, crab, lobster, scallops and other seafood in a casual atmosphere. The menu includes a variety of specialty seafood and non-seafood entrées, appetizers and desserts.
Most dinner menu entrée prices range from $9.75 to $35.50, with certain lobster items available by the pound and seasonal/regional fresh fish selections available on a daily fresh fish menu. Most lunch menu entrée prices range from $6.25 to $13.99. The price of most entrées includes salad, side items and our signature Cheddar Bay biscuits. During fiscal 2008, the average check per person ranged from $18.00 to $19.00, with alcoholic beverages accounting for approximately 7.6 percent of Red Lobsters sales. Red Lobster maintains different lunch and dinner menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a lower-priced childrens menu.
Olive Garden is the largest full service dining Italian restaurant operator in the United States. Olive Gardens menu includes a variety of authentic Italian foods featuring fresh ingredients and a wine list that includes a broad selection of wines imported from Italy. The menu includes antipasti (appetizers); soups, salad and garlic breadsticks; baked pastas; sautéed specialties with chicken, seafood and fresh vegetables; grilled meats; and a variety of desserts. Olive Garden also uses coffee imported from Italy for its espresso and cappuccino.
Most dinner menu entrée prices range from $8.75 to $19.95, and most lunch menu entrée prices range from $5.95 to $11.95. The price of each entrée also includes as much fresh salad or soup and breadsticks as a guest desires. During fiscal 2008, the average check per person ranged from $14.75 to $15.75, with alcoholic beverages accounting for approximately 8.0 percent of Olive Gardens sales. Olive Garden maintains different menus for dinner and lunch and different menus across its trade areas to reflect geographic difference in consumer preferences, prices and selections, as well as childrens menus.
Acquired by Darden in October 2007 as part of the RARE acquisition, LongHorn Steakhouse restaurants are full service establishments serving both lunch and dinner in an attractive and inviting atmosphere reminiscent of the classic American West. With locations in 28 states, primarily in the Eastern half of the United States, LongHorn Steakhouse restaurants feature a variety of top quality menu items including signature fresh steaks, as well as salmon, shrimp, chicken, ribs, pork chops, burgers and prime rib.
Most dinner menu entrée prices range from $12.00 to $20.00, and most lunch menu entrée prices range from $8.00 to $12.00. The price of each entrée also includes as much freshly baked bread as a guest desires. During
fiscal 2008, the average check per person ranged from $17.00 to $18.00, with alcoholic beverages accounting for approximately 9.8 percent of LongHorn Steakhouses sales. LongHorn Steakhouse maintains different menus for dinner and lunch and different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as one childrens menu.
The Capital Grille
Acquired by Darden in October 2007, The Capital Grille has locations in major metropolitan cities in the United States and features relaxed elegance and style. Nationally acclaimed for dry aging steaks on the premises, The Capital Grille is also known for fresh seafood flown in daily and culinary specials created by its chefs. The restaurants feature an award-winning wine list offering over 300 selections, personalized service, comfortable club-like atmosphere and premiere private dining rooms.
Most dinner menu entrée prices range from $23.00 to $55.00 and most lunch menu entrée prices range from $8.00 to $36.00. During fiscal 2008, the average check per person ranged from $68.50 to $75.00, with alcoholic beverages accounting for approximately 33.3 percent of The Capital Grilles sales. The Capital Grille maintains different menus and for dinner and lunch and different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections.
Bahama Breeze restaurants bring guests the feeling of a Caribbean escape, offering food, drinks and atmosphere you would find in the islands. The menu features distinctive, Caribbean-inspired fresh seafood, chicken and steaks as well as signature specialty drinks. The first Bahama Breeze opened in 1996 and met with strong positive consumer response. We continued to test the concept by opening a limited number of additional restaurants in each of the following years, and began national expansion of the concept in 1998. While the concept continued to be well received by guests, its financial performance did not meet our overall expectations, and in the fourth quarter of fiscal 2004 Bahama Breeze closed six restaurants and wrote down the carrying value of four others. This action reduced the total number of restaurants in operation to 32, and all new restaurant expansion was postponed.
Since fiscal 2004, Bahama Breeze has implemented changes to become a more relevant brand for its guests, evolve its menu to make it more approachable yet still distinctive and improve the guest experience while lowering its operating costs. In fiscal 2007, Bahama Breeze wrote down the carrying value of five restaurants and closed nine but improved the guest experience and unit economics sufficiently at the remaining restaurants that we are restarting modest unit growth, with two projected new restaurant openings in fiscal 2009. The results of operations of the nine closed restaurants are reported as a component of discontinued operations in the accompanying consolidated financial statements.
Most dinner menu entrée prices at Bahama Breeze range from $9.00 to $23.00, and most lunch entrée prices range from $7.00 to $14.00. During fiscal 2008, the average check per person ranged from $22.00 to $23.00, with alcoholic beverages accounting for approximately 23 to 24 percent of Bahama Breezes sales. Bahama Breeze maintains different menus for dinner and lunch and different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as two childrens menus.
Seasons 52 is a casually sophisticated fresh grill and wine bar with seasonally inspired menus offering fresh ingredients to create great tasting meals that are lower in calories than comparable restaurant meals. It offers an international wine list of more than 130 wines, with 70 available by the glass. The first Seasons 52 opened in 2003, and currently operates seven existing restaurants with plans to open one new restaurant in fiscal 2009.
In fiscal 2007, we announced the closure of 54 Smokey Bones Barbeque & Grill restaurants and two Rocky River Grillhouse restaurants, and our intention to offer for sale the remaining 73 operating Smokey Bones restaurants. Smokey Bones featured barbequed pork, beef and chicken, as well as other grilled favorites, all served
in a lively yet comfortable mountain-lodge setting that featured televised sports. We opened the first Smokey Bones in September 1999, and began national expansion of the concept in fiscal 2002. The concept was designed to be a nationally advertised brand, but since it was not on a path to achieving that vision, we concluded it was not a meaningful growth vehicle for Darden. From December 2007 through February 2008, we closed the sale of 72 of the Smokey Bones restaurants. The sale of the remaining restaurant was completed in June 2008. Also in fiscal 2007, we closed nine Bahama Breeze restaurants. The results of operations for these restaurants are treated as a component of discontinued operations in the accompanying consolidated financial statements.
Recent and Planned Growth
On a continuing operations basis, during fiscal 2008, we opened 65 new restaurants (excluding the relocation of existing restaurants to new sites and the rebuilding of restaurants at existing sites). Our actual and projected new openings from continuing operations by concept (excluding relocations and rebuilds) are shown below.
The actual number of openings for each of our concepts will depend on many factors, including our ability to locate appropriate sites, negotiate acceptable purchase or lease terms, obtain necessary local governmental permits, complete construction, and recruit and train restaurant management and hourly personnel. Our objective is to continue to expand all of our restaurant concepts, and to develop or acquire additional concepts that can be expanded profitably. We have continued to test new ideas and concepts, and also to evaluate potential acquisition candidates to assess whether they would satisfy our strategic and financial objectives.
We consider location to be a critical factor in determining a restaurants long-term success, and we devote significant effort to the site selection process. Prior to entering a market, we conduct a thorough study to determine the optimal number and placement of restaurants. Our site selection process incorporates a variety of analytical techniques to evaluate key factors. These factors include trade area demographics, such as target population density and household income levels; competitive influences in the trade area; the sites visibility, accessibility and traffic volume; and proximity to activity centers such as shopping malls, hotel/motel complexes, offices and universities. Members of senior management evaluate, inspect and approve each restaurant site prior to its acquisition. Constructing and opening a new restaurant typically takes approximately 180 days on average after permits are obtained and the site is acquired.
The following table illustrates the approximate average capital investment, size and dining capacity of the nine Red Lobster restaurants (four new restaurants and five relocations) and 41 Olive Garden restaurants (40 new restaurants and one relocation) that were opened during fiscal 2008, and the 18 LongHorn Steakhouse restaurants (18 new restaurants and no relocations) opened during fiscal 2008 since the acquisition of RARE on October 1, 2007.
We systematically review the performance of our restaurants to ensure that each one meets our standards. When a restaurant falls below minimum standards, we conduct a thorough analysis to determine the causes, and implement marketing and operational plans to improve that restaurants performance. If performance does not improve to acceptable levels, the restaurant is evaluated for relocation, closing or conversion to one of our other concepts.
During fiscal 2008, as discussed in Discontinued Operations above, we sold 72 Smokey Bones restaurants along with the one Smokey Bones restaurant that sold in fiscal 2009. During fiscal 2008, we also permanently closed three Red Lobster restaurants, one Olive Garden restaurant, and no Bahama Breeze or Seasons 52 restaurants. Following the acquisition of RARE on October 1, 2007, we permanently closed one LongHorn Steakhouse restaurant and no The Capital Grille restaurants. We continue to evaluate our site locations in order to minimize the risk of future closures or asset impairment charges.
We believe that high-quality restaurant management is critical to our long-term success. Our restaurant management structure varies by concept and restaurant size. We issue detailed operations manuals covering all aspects of restaurant operations, as well as food and beverage manuals which detail the preparation procedures of our recipes. The restaurant management teams are responsible for the day-to-day operation of each restaurant and for ensuring compliance with our operating standards.
Each Red Lobster, Olive Garden, Bahama Breeze and Seasons 52 restaurant is led by a general manager and three to five additional managers, depending on the operating complexity and sales volume of the restaurant. Each restaurant also employs approximately 50-185 hourly employees, most of whom work part-time. Restaurant general managers report to multi unit supervisors who may be directors or vice presidents. At the end of fiscal 2008, each multi unit supervisor was responsible for approximately six to 10 restaurants. Restaurants are visited regularly by all levels of supervision to help ensure strict adherence to all aspects of our standards.
The management staff of a typical LongHorn Steakhouse and The Capital Grille restaurant consists of one managing partner, one to four assistant managers and one or two kitchen managers. In addition, each of these restaurants employs approximately 40 to 80 hourly employees. The managing partner of each restaurant reports directly to a multi unit supervisor who may be a regional manager or regional director. Multi unit supervisors have operational responsibility for approximately three to nine restaurants. Regional directors at The Capital Grille also have responsibility for The Old Grist Mill Tavern, and Hemenways Seafood Grille & Oyster Bar restaurants. Restaurants are visited regularly by all levels of supervision to help ensure strict adherence to all aspects of our standards.
Each concepts head of training, together with senior operations executives, are responsible for developing and maintaining that concepts operations training programs. These efforts include a 12 to 15-week training program for management trainees and continuing development programs for managers, supervisors and directors. This program has now been expanded to include both LongHorn Steakhouse and The Capital Grille personnel as part of the integration of RARE. The emphasis of the training and development programs varies by restaurant concept, but includes leadership, restaurant business management and culinary skills. We also use a highly structured training program to open new restaurants, including deploying training teams experienced in all aspects of restaurant operations. The opening training teams typically begin work one week prior to opening and remain at the new restaurant for up to three weeks after the opening. They are re-deployed as appropriate to enable a smooth transition to the restaurants operating staff.
We maintain performance measurement and incentive compensation programs for our management-level employees. We believe that our leadership position, strong success-oriented culture and various short-term and long-term incentive programs, including stock units, help attract and retain highly motivated restaurant managers. With
the acquisition of RARE, we also have continued a managing partner program in which qualifying general managers of LongHorn Steakhouse and The Capital Grille restaurants receive cash compensation and restricted stock awards based upon individual performance.
Our Total Quality Department helps ensure that all restaurants provide safe, high-quality food in a clean and safe environment. Through rigorous physical evaluation and testing at our North American laboratories and through point source inspection by our international team of Quality Specialists in several foreign countries, we purchase only seafood that meets or exceeds our specifications. We use independent third parties to inspect and evaluate commodity vendors. In addition, any commodity supplier that produces a high risk product is subject to a food safety evaluation by Darden personnel at least annually. We require our suppliers to maintain sound manufacturing practices and operate with the comprehensive Hazard Analysis and Critical Control Point (HACCP) food safety programs adopted by the U.S. Food and Drug Administration. The HACCP programs focus on preventing hazards that could cause food-borne illnesses by applying scientifically-based controls to analyze hazards, identify and monitor critical control points, and establish corrective actions when monitoring shows that a critical limit has not been met. Since 1976, we have required routine microbiological testing of seafood and other commodities for quality and microbiological safety. In addition, our total quality managers and third party auditors visit each restaurant periodically throughout the year to review food handling and to provide education and training in food safety and sanitation. The total quality managers also serve as a liaison to regulatory agencies on issues relating to food safety. This HACCP program has now been expanded to include both LongHorn Steakhouse and The Capital Grille operations as part of the integration of RARE.
Purchasing and Distribution
Our ability to ensure a consistent supply of high-quality food and supplies at competitive prices to all of our restaurant concepts depends on reliable sources of procurement. Our purchasing staff sources, negotiates and purchases food and supplies from more than 2,000 suppliers in more than 30 countries. Suppliers must meet strict quality control standards in the development, harvest, catch and production of food products. Competitive bids, long-term contracts and long-term vendor relationships are routinely used to manage availability and cost of products.
We believe that our seafood purchasing capabilities are a significant competitive advantage. Our purchasing staff travels routinely within the United States and internationally to source more than 100 varieties of top-quality seafood at competitive prices. We believe that we have established excellent long-term relationships with key seafood vendors and usually source our product directly from producers (not brokers or middlemen). We operate procurement offices in Singapore and Toronto, our only purchasing offices outside of Orlando, to source products directly from Asia and Canada. While the supply of certain seafood species is volatile, we believe we have the ability to identify alternative seafood products and to adjust our menus as necessary. All other essential food products are available, or can be made available upon short notice, from alternative qualified suppliers. Because of the relatively rapid turnover of perishable food products, inventories in the restaurants have a modest aggregate dollar value in relation to sales. Controlled inventories of specified products are distributed to restaurants through independent national distribution companies. In addition, through strategic alliances between Darden Direct Distribution, Inc. and these distribution companies, we maintain inventory ownership and dedicated operations in select environments enhancing our supply chains competitive advantage.
Our supplier diversity program is an integral part of our purchasing efforts. Through this program, we identify minority and women-owned vendors and assist them in establishing supplier relationships with us. We are committed to the development and growth of minority and women-owned enterprises, and in fiscal 2008 we spent approximately 9 percent and 3 percent, respectively, of our purchasing dollars with those firms.
We continue to invest in new technologies to improve our purchasing and restaurant operations. We are in the process of expanding iKitchen, a web-based software system, to our regional suppliers. The system is designed to more efficiently handle restaurant product orders, receiving, invoice approval and inventories.
Advertising and Marketing
We believe we have developed significant marketing and advertising capabilities. Our size enables us to be a leading advertiser in the full service dining segment of the restaurant industry. Red Lobster and Olive Garden leverage the efficiency of national network television advertising and supplement it with local television advertising. LongHorn Steakhouse, The Capital Grille, Bahama Breeze and Seasons 52 do not use national television advertising. Our restaurants appeal to a broad spectrum of consumers and we use advertising to attract customers. We implement periodic promotions as appropriate to maintain and increase our sales and profits. We also rely on outdoor billboard and direct mail advertising, as well as radio, newspaper and direct mail coupon programs, as appropriate, to attract customers. We have developed and consistently use sophisticated consumer marketing research techniques to monitor customer satisfaction and evolving expectations.
At the end of fiscal 2008, we employed approximately 179,000 persons. Of these employees, approximately 1,550 were corporate or restaurant concept personnel located in our restaurant support center in Orlando, Florida, approximately 50 were corporate personnel located in Atlanta, Georgia, approximately 8,000 were restaurant management personnel in the restaurants or in field offices, and the remainder were hourly restaurant personnel. Of the corporate and restaurant concept personnel located at our restaurant support center in Orlando and Atlanta, approximately 65 percent were management personnel and the balance were administrative or office employees. Our operating executives have an average of more than 11 years of experience with us. The restaurant general managers average nine years with us. We believe that we provide working conditions and compensation that compare favorably with those of our competitors. Most employees, other than restaurant management and corporate management, are paid on an hourly basis. None of our employees are covered by a collective bargaining agreement. We consider our employee relations to be good.
We strive for leadership in the restaurant business by using technology as a competitive advantage and as an enabler of our strategy. Since 1975, computers located in the restaurants have been used to assist in the management of the restaurants. We have implemented systems targeted at improved financial control, cost management, enhanced guest service and improved employee effectiveness. Management information systems are designed to be used across restaurant concepts, yet are flexible enough to meet the unique needs of each restaurant concept. Several years ago, we implemented a suite of web-enabled and fully integrated financial and human resource (including payroll and benefits) systems. We also implemented a high-speed data network connecting all restaurants to all current and anticipated future applications. During the past year, we completed the implementation of DASH, a next generation technology platform for our restaurant point of sale system in Olive Garden, Red Lobster, Bahama Breeze and Seasons 52 restaurants. We expect to deploy the new platform, including new hardware and software, to all LongHorn Steakhouse and The Capital Grille restaurants over the next year. In the past year, we completed the implementation of a meal pacing system in Olive Garden and Red Lobster. The new meal pacing system is designed to properly pace the preparation of menu items, based on cook-times, to enhance the guests experience and enhance restaurant capacity by increasing table turns. We are also in the process of expanding iKitchen, a web-based software system designed to more efficiently handle restaurant product orders and other related matters, to regional suppliers as discussed above under Purchasing and Distribution.
In the past year, we began integrating the LongHorn Steakhouse and The Capital Grille restaurant businesses into the Companys core business processes and applications. We completed the integration and implementation effort for the financial systems and began to deploy several other key applications including human resources systems, iKitchen, and Par Pull, a web-based software system designed to more efficiently handle food and menu item preparation. We expect to have our human resource applications and iKitchen fully deployed in fiscal 2009 in all LongHorn Steakhouse and The Capital Grille restaurants and Par Pull fully deployed in fiscal 2009 in all LongHorn Steakhouse restaurants.
Restaurant hardware and software support for all of our restaurant concepts, including the newly integrated LongHorn Steakhouse and The Capital Grille concepts, is provided or coordinated from the restaurant support center in Orlando, Florida, seven days a week, 24 hours a day. A communications network sends and receives critical business data to and from the restaurants throughout the day and night, providing timely and extensive information
on business activity in every location. The restaurant support center houses our data center, which contains sufficient computing power to process information from all restaurants quickly and efficiently. Our information is processed in a secure environment to protect both the actual data and the physical assets. We guard against business interruption by maintaining a disaster recovery plan, which includes storing critical business information off-site, testing the disaster recovery plan at a host-site facility and providing on-site power backup via a large diesel generator. We use internally developed proprietary software, as well as purchased software, with proven, non-proprietary hardware. This allows processing power to be distributed effectively to each of our restaurants.
Our management believes that our current systems and practice of implementing regular updates will position us well to support current needs and future growth. We are committed to maintaining an industry leadership position in information systems and computing technology. We use a strategic information systems planning process that involves senior management and is integrated into our overall business planning. Information systems projects are prioritized based upon strategic, financial, regulatory and other business advantage criteria.
The restaurant industry is intensely competitive with respect to the type and quality of food, price, service, restaurant location, personnel, concept, attractiveness of facilities, and effectiveness of advertising and marketing. The restaurant business is often affected by changes in consumer tastes; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants; and consumers discretionary purchasing power. We compete within each market with national and regional chains and locally-owned restaurants for customers, management and hourly personnel and suitable real estate sites. We also face growing competition from the supermarket industry, which offers convenient meals in the form of improved entrées and side dishes from the deli section. We expect intense competition to continue in all of these areas.
Other factors pertaining to our competitive position in the industry are addressed under the sections entitled Purchasing and Distribution, Advertising and Marketing and Information Technology and in our Risk Factors in Item 1A of this Form 10-K.
Trademarks, Franchises and Joint Ventures
We regard our Darden Restaurants®, Red Lobster®, Olive Garden®, LongHorn Steakhouse®, The Capital Grille®, Bahama Breeze®, and Seasons 52® service marks, and other service marks related to our restaurant businesses, as having significant value and as being important to our marketing efforts. Our policy is to pursue registration of our important service marks and trademarks and to oppose vigorously any infringement of them. Generally, with appropriate renewal and use, the registration of our service marks will continue indefinitely.
All but three of our 1,702 restaurants in operation at May 25, 2008 are Company-owned and operated. 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. We have one unaffiliated franchisee with an area development and franchise agreement with the right to operate franchised LongHorn Steakhouse restaurants in Puerto Rico. As of May 25, 2008, this franchisee operated five LongHorn Steakhouse restaurants in Puerto Rico. Our only other restaurant operations outside of North America are conducted through an area development and franchise agreement with an unaffiliated Japanese corporation. This corporation operated 27 Red Lobster restaurants in Japan as of May 25, 2008. We do not have an ownership interest in this corporation, but we receive royalty income under the franchise agreement. The amount of income we derive from these joint venture and franchise arrangements is not material to our consolidated financial statements.
Our sales volumes fluctuate seasonally. During fiscal 2008, 2007 and 2006, our average sales per restaurant were highest in the spring and winter, followed by the summer, and lowest in the fall. Holidays, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
We are subject to various federal, state and local laws affecting our business. Each of our restaurants must comply with licensing requirements and regulations by a number of governmental authorities, which include health, safety and fire agencies in the state or municipality in which the restaurant is located. The development and operation of restaurants depend on selecting and acquiring suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations. To date, we have not been significantly affected by any difficulty, delay or failure to obtain required licenses or approvals.
During fiscal 2008, approximately 9.2 percent of our sales were attributable to the sale of alcoholic beverages. Regulations governing their sale require licensure by each site (in most cases, on an annual basis), and licenses may be revoked or suspended for cause at any time. These regulations relate to many aspects of restaurant operation, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. The failure of a restaurant to obtain or retain these licenses would adversely affect the restaurants operations. We also are subject in certain states to dram-shop statutes, which generally provide an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated person who then causes injury to himself or a third party. We carry liquor liability coverage as part of our comprehensive general liability insurance.
We also are subject to federal and state minimum wage laws and other laws governing such matters as overtime, tip credits, working conditions, safety standards, and hiring and employment practices. Changes in these laws during fiscal 2008 have not had a material effect on our operations.
We currently are operating under a Tip Rate Alternative Commitment (TRAC) agreement with the Internal Revenue Service. Through increased educational and other efforts in the restaurants, the TRAC agreement reduces the likelihood of potential chain-wide employer-only FICA assessments for unreported tips.
We are subject to federal and state environmental regulations, but these rules have not had a material effect on our operations. During fiscal 2008, there were no material capital expenditures for environmental control facilities and no material expenditures for this purpose are anticipated.
Our facilities must comply with the applicable requirements of the Americans with Disabilities Act of 1990 (ADA) and related state accessibility statutes. Under the ADA and related state laws, we must provide equivalent service to disabled persons and make reasonable accommodation for their employment, and when constructing or undertaking significant remodeling of our restaurants, we must make those facilities accessible.
We are subject to laws and regulations relating to nutritional content, nutritional labeling, product safety and menu labeling. Multi-jurisdictional regulations relating to nutritional labeling may lead to increased operational complexity and expenses and may impact guest behavior.
Cautionary Statement Regarding Forward-Looking Statements
This report may contain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries. Statements preceded by, followed by or that include words such as may, will, expect, intend, anticipate, continue, estimate, project, believe, plan or similar expressions are intended to identify some of the forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. These forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements due to, among others, the risks and uncertainties described in this report, including under the heading Risk Factors, and the documents incorporated by reference in this report. We undertake no obligation to update publicly or revise any forward-looking statements for any reason, whether as a result of new information, future events or otherwise.
Executive Officers of the Registrant
Our executive officers as of the date of this report are listed below.
Clarence Otis, Jr., age 52, has been our Chairman of the Board since November 2005, Chief Executive Officer since November 2004, and a Director since September 2004. Mr. Otis was our Executive Vice President from March 2002 until November 2004 and President of Smokey Bones Barbeque & Grill from December 2002 until November 2004. He served as our Senior Vice President from December 1999 until March 2002, and our Chief Financial Officer from December 1999 until December 2002. He joined us in 1995 as Vice President and Treasurer. He served as our Senior Vice President, Investor Relations from July 1997 to August 1998, and as Senior Vice President, Finance and Treasurer from August 1998 until December 1999. From 1991 to 1995, he was employed by Chemical Securities, Inc. (now J.P. Morgan Securities, Inc.), an investment banking firm, where he had been Managing Director and Manager of Public Finance.
Andrew H. (Drew) Madsen, age 52, has been our President and Chief Operating Officer since November 2004, and a Director since September 2004. Mr. Madsen was our Senior Vice President and President of Olive Garden from March 2002 until November 2004, and Executive Vice President of Marketing for Olive Garden from December 1998 to March 2002. From 1997 until joining us, he was President of International Master Publishers, Inc., a company that developed and marketed consumer information products such as magazines and compact discs. From 1993 until 1997, he held various positions at James River Corporation (now part of Georgia-Pacific Corporation, a diversified paper and building products manufacturer), including Vice President and General Manager for the Dixie consumer products unit. From 1980 until 1992, he held various marketing positions with our former parent company, General Mills, Inc. a manufacturer and marketer of consumer food products.
James (J.J.) Buettgen, age 48, has been our Senior Vice President, Business Development since May 2007. He served as our Senior Vice President and President of Smokey Bones Barbeque & Grill from November 2004 until May 2007, and our Senior Vice President and President-designate of Smokey Bones from August 2004 until November 2004. From July 2003 until August 2004, he was President of Big Bowl Asian Kitchen, a full service dining company owned by Brinker International, Inc., a restaurant operator, and from October 2002 until June 2003 he was Senior Vice President of Marketing and Brand Development for Brinker. From 1999 to 2002, he was Senior Vice President of Marketing and Sales for Disneyland Resorts, a division of the Walt Disney Company, where he helped launch Disneys California Adventure theme park, and from 1998 to 1999 was Senior Vice President of Marketing for Hollywood Entertainment Group, a video retailer. He held several marketing posts with our former parent company, General Mills, Inc., a manufacturer and marketer of consumer food products, from 1989 through 1994, and served first as a director, next as Vice President, and then as Senior Vice President of Marketing for Olive Garden from 1994 until 1998.
Valerie K. Collins, age 49, has been our Senior Vice President, Corporate Controller since December 2006, and was Senior Vice President, Corporate Controller, and Chief Information Officer from December 2006 until September 2007. She served as our Senior Vice President and Chief Information Officer from January 2003 until December 2006, and Senior Vice President, Finance and Controller for Red Lobster from August 1998 until January 2003. She joined Red Lobster in 1985 as Manager of Accounting Systems and held progressively more responsible positions until being promoted to Vice President Finance and Controller for Olive Garden in 1994 and to Senior Vice President Finance and Controller for Olive Garden in 1996.
David George, age 52, has been our President of LongHorn Steakhouse since our acquisition of RARE on October 1, 2007. Prior to the acquisition, he served as RAREs President of LongHorn Steakhouse from May 2003 until October 2007. From October 2001 until May 2003, he was RAREs Senior Vice President of Operations for LongHorn Steakhouse, and from May 2000 until October 2001 was RAREs Vice President of Operations for The Capital Grille.
Kim A. Lopdrup, age 50, has been our Senior Vice President and President of Red Lobster since May 2004. He joined us in November 2003 as Executive Vice President of Marketing for Red Lobster. From 2001 until 2002, he served as Executive Vice President and Chief Operating Officer for North American operations of Burger King Corporation, an operator and franchiser of fast food restaurants. From 1985 until 2001, he worked for Allied Domecq Quick Service Restaurants (ADQSR), a franchiser of quick service restaurants including Dunkin Donuts,
Baskin-Robbins and Togos Eateries, where he held progressively more responsible positions in marketing, strategic and general management roles, eventually serving as Chief Executive Officer of ADQSR International.
Eugene I. (Gene) Lee, Jr., age 47, has been President of our Specialty Restaurant Group since our acquisition of RARE on October 1, 2007. Prior to the acquisition, he served as RAREs President and Chief Operating Officer from January 2001 to October 2007. From January 1999 until January 2001, he served as RAREs Executive Vice President and Chief Operating Officer.
Daniel M. Lyons, age 55, has been our Senior Vice President, Human Resources since January 1997. He joined us in 1993 as Senior Vice President of Personnel for Olive Garden. Prior to joining Olive Garden, he spent 18 years with the Quaker Oats Company, an international marketer of food and beverage products, holding increasingly more responsible positions including Vice President Human Resources for the North American Breakfast Food Division.
Robert McAdam, age 50, has been our Senior Vice President of Government and Community Affairs since December 2006. Prior to joining us, he was employed by retailer Wal-Mart Inc. as Vice President, Corporate Affairs from 2004 to 2006, and Vice President, State and Local Government Relations from 2000 to 2004. From 1997 to 2000 he was a Senior Vice President of Fleishman-Hillard, an international public relations firm.
David T. Pickens, age 53, has been our Senior Vice President and President of Olive Garden since December 2004. He joined us in 1973 as a Red Lobster hourly employee and progressed from manager trainee to regional operations manager, director of operations, and ultimately was promoted to a division Senior Vice President of Operations for Red Lobster. He joined Olive Garden in 1995 as Senior Vice President of Operations for the Orlando division and was promoted to Executive Vice President of Operations in September 1999, where he served until his promotion to President of Olive Garden in December 2004.
C. Bradford (Brad) Richmond, age 49, has been our Senior Vice President and Chief Financial Officer since December 2006. From August 2005 to December 2006, he served as our Senior Vice President and Corporate Controller. He served as Senior Vice President Finance, Strategic Planning and Controller of Red Lobster from January 2003 to August 2005, and previously was Senior Vice President, Finance and Controller at Olive Garden from August 1998 to January 2003. He joined us in 1982 as a food and beverage analyst for Casa Gallardo, a restaurant concept formerly owned and operated by us, and from June 1985 to August 1998 held progressively more responsible finance and marketing positions with our York Steak House, Red Lobster and Olive Garden operating companies in both the United States and Canada.
Paula J. Shives, age 57, has been our Senior Vice President, General Counsel and Secretary since June 1999. Prior to joining us, she served as Senior Vice President, General Counsel and Secretary from 1995 to 1999, and Associate General Counsel from 1985 to 1995, of Long John Silvers Restaurants, Inc., a seafood restaurant company.
Various risks and uncertainties could affect our business. Any of the risks described below or elsewhere in this report or our other filings with the Securities and Exchange Commission could have a material impact on our business, financial condition or results of operations. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. Therefore, the following is not intended to be a complete discussion of all potential risks or uncertainties.
We face intense competition, and if we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected.
The full service dining sector of the restaurant industry is intensely competitive with respect to pricing, service, location, personnel and type and quality of food, and there are many well-established competitors. We compete within each market with national and regional restaurant chains and locally-owned restaurants. We also face growing competition as a result of the trend toward convergence in grocery, deli and restaurant services, particularly in the supermarket industry which offers convenient meals in the form of improved entrées and side dishes from
the deli section. We compete primarily on the quality, variety and value perception of menu items. The number and location of restaurants, type of concept, quality and efficiency of service, attractiveness of facilities and effectiveness of advertising and marketing programs are also important factors. We anticipate that intense competition will continue with respect to all of these factors. If we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected.
Certain economic and business factors specific to the restaurant industry and certain general economic factors including energy prices and interest rates that are largely out of our control may adversely affect our results of operations.
Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control. The full service dining sector of the restaurant industry is affected by changes in national, regional and local economic conditions, seasonal fluctuation of sales volumes, consumer spending patterns and consumer preferences, including changes in consumer tastes and dietary habits, the level of consumer acceptance of our restaurant concepts and health concerns. For example, health concerns relating to the consumption of beef or to specific events such as the outbreak of mad cow disease may adversely impact sales at LongHorn Steakhouse and The Capital Grille restaurants that offer beef as a primary menu item. In addition, public concern over avian flu may cause fear about the consumption of chicken, eggs and other products derived from poultry. The inability to serve beef or poultry-based products would restrict our ability to provide a variety of menu items to our guests. If we change a restaurant concept or menu in response to such concerns, we may lose customers who do not prefer the new concept or menu, and we may not be able to attract a sufficient new customer base to produce the revenue needed to make the restaurant profitable. We also may have different or additional competitors for our intended customers as a result of such a concept change and may not be able to successfully compete against such competitors. The performance of individual restaurants may also be adversely affected by factors such as demographic trends, severe weather including hurricanes, traffic patterns and the type, number and location of competing restaurants.
General economic conditions may also adversely affect our results of operations. Recessionary economic cycles, a protracted economic slowdown, a worsening economy, increased energy prices, rising interest rates or other industry-wide cost pressures could affect consumer behavior and spending for restaurant dining occasions and lead to a decline in sales and earnings. When gasoline, natural gas, electricity and other energy costs increase, and credit card, home mortgage and other borrowing costs increase with rising interest rates, our guests may have lower disposable income and reduce the frequency with which they dine out, or may choose more inexpensive restaurants when eating outside the home. Furthermore, we cannot predict the effects that actual or threatened armed conflicts, terrorist attacks, efforts to combat terrorism, heightened security requirements, or a failure to protect information systems for critical infrastructure, such as the electrical grid and telecommunications systems, could have on our operations, the economy or consumer confidence generally. Any of these events could affect consumer spending patterns or result in increased costs for us due to security measures.
Unfavorable changes in the above factors or in other business and economic conditions affecting our customers could increase our costs, reduce traffic in some or all of our restaurants or impose practical limits on pricing, any of which could lower our profit margins and have a material adverse affect on our financial condition and results of operations.
The price and availability of food, ingredients and utilities used by our restaurants could adversely affect our revenues and results of operations.
Our results of operations depend significantly on our ability to anticipate and react to changes in the price and availability of food, ingredients, utilities and other related costs over which we may have little control. Operating margins for our restaurants are subject to changes in the price and availability of food commodities, including shrimp, lobster, crab and other seafood, as well as beef, pork, chicken, cheese and produce. The introduction of or changes to tariffs on imported shrimp or other food products could increase our costs and possibly impact the supply of those products. We are subject to the general risks of inflation. Our restaurants operating margins are also affected by fluctuations in the price of utilities such as electricity and natural gas, whether as a result of inflation or otherwise, on which the restaurants depend for their energy supply. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our results of operations.
We may lose revenue or incur increased costs if our restaurants experience shortages or interruptions in the delivery of food and other supplies.
Possible shortages or interruptions in the supply of food items and other supplies to our restaurants caused by inclement weather, natural disasters such as floods and earthquakes, the inability of our vendors to obtain credit in a tightened credit market or other conditions beyond our control could adversely affect the availability, quality and cost of the items we buy and the operations of our restaurants. Our inability to effectively manage supply chain risk could increase our costs and limit the availability of products that are critical to our restaurant operations. If we temporarily close a restaurant or remove popular items from a restaurants menu, that restaurant may experience a significant reduction in revenue during the time affected by the shortage or thereafter as a result of our customers changing their dining habits.
We may be subject to increased labor and insurance costs.
Our restaurant operations are subject to federal and state laws governing such matters as minimum wages, working conditions, overtime and tip credits. As federal and state minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees but also the wages paid to employees at wage rates that are above minimum wage. Labor shortages and increased employee turnover could also increase our labor costs. If competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline. In addition, the current premiums that we pay for our insurance (including workers compensation, general liability, property, health, and directors and officers liability) may increase at any time, thereby further increasing our costs. The dollar amount of claims that we actually experience under our workers compensation and general liability insurance, for which we carry high per-claim deductibles, may also increase at any time, thereby further increasing our costs. Further, the decreased availability of property and liability insurance has the potential to negatively impact the cost of premiums and the magnitude of uninsured losses.
The loss of key personnel or difficulties recruiting and retaining qualified personnel could jeopardize our ability to meet our growth targets.
Our future growth depends substantially on the contributions and abilities of key executives and other employees. Our future growth also depends substantially on our ability to recruit and retain high quality employees to work in and manage our restaurants. We must continue to recruit, retain and motivate management and other employees sufficient to maintain our current business and support our projected growth. A loss of key employees or a significant shortage of high quality restaurant employees could jeopardize our ability to meet our growth targets.
We rely heavily on information technology in our operations, and any material failure, inadequacy, interruption or breach of security of that technology could harm our ability to effectively operate our business.
We rely heavily on information systems across our operations, including for management of our supply chain, point-of-sale processing in our restaurants, and various other processes and transactions. Our ability to effectively manage our business and coordinate the production, distribution and sale of our products depends significantly on the reliability and capacity of these systems. The failure of these systems to operate effectively, problems with transitioning to updgraded or replacement systems, or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations, and significant capital investments could be required to remediate the problem.
Increased advertising and marketing costs could adversely affect our results of operations.
If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses increase, or if our advertising and promotions become less effective than that of our competitors, we could experience a material adverse effect on our results of operations.
We may experience higher-than-anticipated costs associated with the opening of new restaurants or with the closing, relocating and remodeling of existing restaurants, which may adversely affect our results of operations.
Our revenues and expenses can be impacted significantly by the number and timing of the opening of new restaurants and the closing, relocating and remodeling of existing restaurants. We incur substantial pre-opening expenses each time we open a new restaurant and other expenses when we close, relocate or remodel existing
restaurants. The expenses of opening, closing, relocating or remodeling any of our restaurants may be higher than anticipated. An increase in such expenses could have an adverse effect on our results of operations.
Litigation may adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of litigation by employees, consumers, suppliers, shareholders or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend future litigation may be significant. There may also be adverse publicity associated with litigation that could decrease customer acceptance of our services, regardless of whether the allegations are valid or whether we are ultimately found liable. As a result, litigation may adversely affect our business, financial condition and results of operations.
Unfavorable publicity could harm our business.
Multi-unit restaurant businesses such as ours can be adversely affected by publicity resulting from complaints or litigation or general publicity regarding poor food quality, food-borne illness, personal injury, food tampering, adverse health effects of consumption of various food products or high-calorie foods (including obesity) or other concerns. Negative publicity may also result from actual or alleged violations by our restaurants of dram shop laws which generally provide an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated party who then causes injury to himself or to a third party. Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a limited number of our restaurants, or only to a single restaurant, could adversely affect public perception of the entire brand. Adverse publicity and its effect on overall consumer perceptions of food safety, or our failure to respond effectively to adverse publicity, could have a material adverse effect on our business.
A lack of availability of suitable locations for new restaurants or a decline in the quality of the locations of our current restaurants may adversely affect our revenues and results of operations.
The success of our restaurants depends in large part on their location. As demographic and economic patterns change, current locations may not continue to be attractive or profitable. Possible declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those neighborhoods could result in reduced revenues in those locations. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a new restaurant or relocation. The occurrence of one or more of these events could have a significant adverse effect on our revenues and results of operations.
We are subject to a number of risks relating to federal, state and local regulation of our business that may increase our costs and decrease our profit margins.
The restaurant industry is subject to extensive federal, state and local laws and regulations, including those relating to building and zoning requirements and those relating to the preparation and sale of food. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations and requirements. We are also subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and liquor licenses, federal and state laws governing our relationships with employees (including the Fair Labor Standards Act of 1938, the Immigration Reform and Control Act of 1986 and applicable requirements concerning the minimum wage, overtime, family leave, tip credits, working conditions, safety standards and immigration status), federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the Americans With Disabilities Act of 1990. In addition, we are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our inability to respond effectively to significant regulatory or public policy issues, could increase our compliance and other costs of doing business and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. We also face risks from
new and changing laws and regulations relating to nutritional content, nutritional labeling, product safety and menu labeling. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.
Our growth through the opening of new restaurants and the development or acquisition of new dining concepts may not be successful and could result in poor financial performance.
As part of our business strategy, we intend to continue to expand our current portfolio of restaurant concepts and to develop or acquire additional concepts that can be expanded profitably. This strategy involves numerous risks, and we may not be able to achieve our growth objectives. We may not be able to open all of our planned new restaurants, and the new restaurants that we open may not be profitable or as profitable as our existing restaurants. New restaurants typically experience an adjustment period before sales levels and operating margins normalize, and even sales at successful newly-opened restaurants generally do not make a significant contribution to profitability in their initial months of operation. The opening of new restaurants can also have an adverse effect on sales levels at existing restaurants. Furthermore, we may not be able to develop or acquire additional concepts that are as profitable as our existing restaurants. Growth through acquisitions may involve additional risks. For example, we may pay too much for a concept relative to the actual economic return, be required to borrow funds to make our acquisition (which would increase our interest expense) or be unable to integrate an acquired concept into our operations.
The ability to open and profitably operate restaurants is subject to various risks, such as the identification and availability of suitable and economically viable locations, the negotiation of acceptable lease or purchase terms for new locations, the need to obtain all required governmental permits (including zoning approvals and liquor licenses) on a timely basis, the need to comply with other regulatory requirements, the availability of necessary contractors and subcontractors, the ability to meet construction schedules and budgets, the ability to manage union activities such as picketing or hand billing which could delay construction, increases in labor and building material costs, the availability of financing at acceptable rates and terms, changes in weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time, our ability to hire and train qualified management personnel and general economic and business conditions. At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other resources. If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated revenues and earnings in future periods.
Our plans to expand our newer concepts Bahama Breeze and Seasons 52 that have not yet proven their long-term viability may not be successful, which could require us to make substantial further investments in those concepts and result in losses and impairments.
While each of our restaurant concepts, as well as each of our individual restaurants, are subject to the risks and uncertainties described above, there is an enhanced level of risk and uncertainty related to the operation and expansion of our newer concepts such as Bahama Breeze and Seasons 52. These concepts have not yet proven their long-term viability or growth potential. We have made substantial investments in the development and expansion of each of these concepts, and further investment is required. While we have implemented a number of changes to operations at Bahama Breeze, and believe we have improved the guest experience and unit economics sufficiently to restart modest unit growth in fiscal 2009, there can be no assurance that these changes will continue to be successful or that new unit growth will occur. Seasons 52 also is in the very early stages of its development and will require additional resources to support further growth. In each case, these brands will continue to be subject to the risks and uncertainties that accompany any emerging restaurant concept.
Failure to combine and integrate the business of RARE into our operations in a successful and timely manner could adversely affect our business.
We closed the acquisition of RARE on October 1, 2007. Our integration of RAREs business into our operations is a complex and time-consuming process which will require significant efforts and expenses. Prior to the merger, the two companies operated independently, each with its own business, customers, employees, culture and systems. We may experience material unanticipated difficulties or expenses in connection with the integration of the business of RARE. The difficulties of combining the business of RARE with our operations may include, among others:
Many of these factors are outside of our control and any one of them could result in increased costs, decreases in the amount of expected revenues and diversion of managements time and energy, which could materially impact our business, financial condition and results of operations.
Even if we successfully integrate the business of RARE into our operations, we may not realize the anticipated benefits of the RARE acquisition.
Even if we successfully integrate the business of RARE into our operations, there can be no assurance that the acquisition will result in the realization of the anticipated benefits. We acquired RARE with the expectation that the acquisition will result in various benefits for the combined company including, among others, business and growth opportunities and significant synergies from increased efficiency and effectiveness in purchasing, distribution and other restaurant and corporate support. However, we may not be able to realize the synergies, goodwill, business opportunities and growth prospects anticipated in connection with the acquisition. We may experience increased competition that limits our ability to expand our business, we may not be able to capitalize on expected business opportunities or general industry and business conditions may deteriorate. Achieving the anticipated benefits of the acquisition is subject to a number of uncertainties and other factors. If these factors limit our ability to achieve the anticipated benefits of the acquisition, our expectations of future results of operations, including the synergies expected to result from the acquisition, may not be met. If such difficulties are encountered or if such synergies, business opportunities and growth prospects are not realized, our business, financial condition and results of operations could be adversely affected.
We incurred substantial additional indebtedness to finance the RARE acquisition, which may decrease our business flexibility and increase our borrowing costs.
Our consolidated indebtedness following the RARE acquisition is substantially greater than our indebtedness prior to the acquisition. The increased indebtedness and higher debt-to-equity ratio of our company, as compared to that which existed on a historical basis, will have the effect, among other things, of reducing our flexibility to respond to changing business and economic conditions and increasing borrowing costs.
Our level of indebtedness could have important consequences. For example, it may:
There are various financial covenants and other restrictions in our debt instruments. If we fail to comply with any of these requirements, the related indebtedness (and other unrelated indebtedness) could become due and payable prior to its stated maturity. A default under our debt instruments may also significantly affect our ability to obtain additional or alternative financing.
Our ability to make scheduled payments or to refinance our obligations with respect to indebtedness will depend on our operating and financial performance, which in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control.
Failure of our internal controls over financial reporting could harm our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect a misstatement of our financial statements or fraud. Our growth and acquisition of other restaurant companies with procedures not identical to our own could place significant additional pressure on our system of internal control over financial reporting. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our common stock.
Restaurant Properties Continuing Operations
As of May 25, 2008, we operated 1,702 restaurants (consisting of 680 Red Lobster, 653 Olive Garden, 305 LongHorn Steakhouse, 32 The Capital Grille, 23 Bahama Breeze, seven Seasons 52, one The Old Grist Mill Tavern and one Hemenways Seafood Grille & Oyster Bar restaurants) in the following locations:
Of these 1,702 restaurants open on May 25, 2008, 904 were located on owned sites and 798 were located on leased sites. The 798 leases are classified as follows:
During fiscal 1999, we formed two subsidiary corporations, each of which elected to be taxed as a Real Estate Investment Trust (REIT) under Sections 856 through 860 of the Internal Revenue Code. These elections limit the activities of both corporations to holding certain real estate assets. The formation of these two REITs is designed primarily to assist us in managing our real estate portfolio and possibly to provide a vehicle to access capital markets in the future.
Both REITs are non-public REITs. Through our subsidiary companies, we indirectly own 100 percent of all voting stock and greater than 99.5 percent of the total value of each REIT. For financial reporting purposes, both REITs are included in our consolidated financial statements.
All of the buildings that make up our executive offices, culinary center, training facilities and supporting warehouses in Orange County (Orlando metro area), Florida, are currently leased. On June 20, 2006, we entered into an agreement to sell and lease back the 10 buildings that we previously owned. The sale and the commencement of our leases for those buildings occurred in August 2006. The initial term of the leases is three years, and we have two one-year renewal options.
We purchased several adjacent parcels of vacant land in Orange County, Florida, and plan to relocate our headquarters to this site. Construction of the buildings on this site is underway. We expect our proposed Restaurant Support Center campus at this new location to offer a more collaborative and unified environment with additional room for future growth. We currently project completing the first phase of this development during fiscal 2010.
As part of the acquisition of RARE, we acquired ownership of the former RARE executive offices and central training facility located in 6 office buildings in Atlanta, Georgia. We recently completed the sale of one of those buildings. The remaining buildings are currently being marketed for sale.
Except in limited instances, our present restaurant sites and other facilities are not subject to mortgages or encumbrances securing money borrowed by us from outside sources. In our opinion, our current buildings and equipment generally are in good condition, suitable for their purposes and adequate for our current needs. See also Note 6 Land, Buildings and Equipment, Net and Note 14 Leases under Notes to Consolidated Financial Statements in our 2008 Annual Report to Shareholders, incorporated herein by reference.
We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity. The following is a brief description of the more significant of these matters. In view of the inherent uncertainties of litigation, the outcome of any unresolved matter described below cannot be predicted at this time, nor can the amount of any potential loss be reasonably estimated.
Like other restaurant companies and retail employers, in a few states we have been faced with allegations of purported class-wide wage and hour violations. In January 2004, a former food server filed a purported class action in California state court alleging that Red Lobsters server banking policies and practices (under which servers settle guest checks directly with customers throughout their shifts, and turn in collected monies at the shifts end) improperly required her and other food servers and bartenders to make up cash shortages and walkouts in violation of California law. The case was ordered to arbitration. As a procedural matter, the arbitrator ruled that class-wide arbitration is permissible under our dispute resolution program. In January 2007, plaintiffs counsel filed in California state court a second purported class action lawsuit on behalf of servers and bartenders alleging that Olive Gardens server banking policy and its alleged failure to pay split shift premiums violated California law. Although we believed that our policies and practices were lawful and that we had strong defenses to both cases, following mediation with the plaintiffs, we reached a tentative resolution of the matters during the third quarter of fiscal 2008. As a result, we accrued approximately $4.0 million in legal settlement costs during the nine months ended February 24, 2008, which we expect to be paid in fiscal 2009. No additional reserves have been taken in connection with this settlement.
In August 2007, an action was filed in California state court by a former Olive Garden server alleging that Olive Gardens scheduling practices resulted in failure to properly pay reporting time (minimum shift) pay as well as to pay minimum wage, to provide itemized wage statements, and to timely pay employees upon the termination of
their employment. The complaint sought to have the suit certified as a class action. Although we believed that our policies and practices were lawful and we had strong defenses, following mediation with the plaintiffs, we reached a preliminary settlement of this matter during the fourth quarter of fiscal 2008 under which we agreed to pay $0.7 million. We anticipate that the preliminary settlement amount will be paid out during fiscal 2009 at the completion of the settlement process.
On March 13, 2008, a purported class action complaint alleging violation of the federal securities laws was filed by an institutional shareholder against Darden and certain of our current officers, one of whom is also a director, in the United States District Court for the Middle District of Florida. The complaint was filed on behalf of all purchasers of Dardens common stock between June 19, 2007 and December 18, 2007 (the Class). The complaint alleges that during that period, the defendants issued false and misleading statements in 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 Dardens prospects and guidance for fiscal 2008. The complaint alleges claims under Sections 10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 thereunder. The plaintiff seeks to recover unspecified damages on behalf of the Class. We intend to vigorously defend our position in this action.
By letter dated May 9, 2008, a putative shareholder demanded that our Board of Directors take action to remedy alleged breaches of fiduciary duty to the Company by certain officers and directors. The letter contains similar allegations to those in the purported class action described above regarding the alleged issuance of false and misleading statements and omissions regarding Dardens financial results and sales growth. The Board has formed a special litigation committee to evaluate the claims in the letter.
The principal United States market on which our common shares are traded is the New York Stock Exchange, where our shares are traded under the symbol DRI. As of June 30, 2008, there were approximately 37,616 record holders of our common shares. The information concerning the dividends and high and low intraday sales prices for our common shares traded on the New York Stock Exchange for each full quarterly period during fiscal 2007 and 2008 contained in Note 21 Quarterly Data (Unaudited) under Notes to Consolidated Financial Statements in our 2008 Annual Report to Shareholders is incorporated herein by reference. We have not sold any securities during the last fiscal year that were not registered under the Securities Act of 1933.
The table below provides information concerning our repurchase of shares of our common stock during the quarter ended May 25, 2008. Since commencing our repurchase program in December 1995, we have repurchased a total of 147 million shares through May 25, 2008 under authorizations from our Board of Directors to repurchase an aggregate of 162.4 million shares.
The information for fiscal 2004 through 2008 contained in the Five-Year Financial Summary in our 2008 Annual Report to Shareholders is incorporated herein by reference.
The information set forth in the section entitled Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2008 Annual Report to Shareholders is incorporated herein by reference.
The text under the heading Quantitative and Qualitative Disclosures About Market Risk contained within Managements Discussion and Analysis of Financial Condition and Results of Operations in our 2008 Annual Report to Shareholders is incorporated herein by reference.
The Report of Management Responsibilities, Managements Report on Internal Control Over Financial Reporting, Report of Independent Registered Public Accounting Firm on Internal Control Over Financial Reporting, Report of Independent Registered Public Accounting Firm, Consolidated Statements of Earnings, Consolidated Balance Sheets, Consolidated Statements of Changes in Stockholders Equity and Accumulated Other Comprehensive Income (Loss), Consolidated Statements of Cash Flows, and Notes to Consolidated Financial Statements in our 2008 Annual Report to Shareholders are incorporated herein by reference.
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the Exchange Act)) as of May 25, 2008, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of May 25, 2008.
During the fiscal quarter ended May 25, 2008, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
The annual report of our management on internal control over financial reporting, and the audit report of KPMG LLP, our independent registered public accounting firm, regarding our internal control over financial reporting in our 2008 Annual Report to Shareholders, are incorporated herein by reference.
The information contained in the sections entitled Proposal 1 Election of Eleven Directors, Meetings of the Board of Directors and Its Committees, Corporate Governance and Section 16(a) Beneficial Ownership Reporting Compliance in our definitive Proxy Statement for our 2008 Annual Meeting of Shareholders is incorporated herein by reference. Information regarding executive officers is contained in Part I above under the heading Executive Officers of the Registrant.
All of our employees are subject to our Code of Business Conduct and Ethics. Appendix A to the Code provides a special Code of Ethics with additional provisions that apply to our principal executive officer, principal financial officer, principal accounting officer or controller, and persons performing similar functions (the Senior Financial Officers). Appendix B to the Code provides a Code of Business Conduct and Ethics for members of our Board of Directors. These documents are posted on our internet website at www.darden.com and are available in print free of charge to any shareholder who requests them. We will disclose any amendments to or waivers of these Codes for directors, executive officers or Senior Financial Officers on our website.
We also have adopted a set of Corporate Governance Guidelines and charters for all of our Board Committees, including the Audit, Compensation, and Nominating and Governance Committees. The Corporate Governance Guidelines and committee charters are available on our website at www.darden.com and in print free of charge to any shareholder who requests them. Written requests for our Code of Business Conduct and Ethics, Corporate Governance Guidelines and committee charters should be addressed to Darden Restaurants, Inc., 5900 Lake Ellenor Drive, Orlando, Florida 32809, Attention: Corporate Secretary.
The information contained in the sections entitled Director Compensation, Executive Compensation, Compensation Committee Report and Corporate Governance in our definitive Proxy Statement for our 2008 Annual Meeting of Shareholders is incorporated herein by reference.
The information contained in the sections entitled Stock Ownership Of Principal Shareholders, Stock Ownership Of Management and Executive Compensation - Equity Compensation Plan Information in our definitive Proxy Statement for our 2008 Annual Meeting of Shareholders is incorporated herein by reference.
The information contained in the section entitled Corporate Governance - Related Party Transaction Policy and Procedures, Meetings of the Board of Directors and Its Committees and Corporate Governance in our definitive Proxy Statement for our 2008 Annual Meeting of Shareholders is incorporated herein by reference.
The information contained in the section entitled Independent Registered Public Accounting Firm Fees And Services in our definitive Proxy Statement for our 2008 Annual Meeting of Shareholders is incorporated herein by reference.
Report of Management Responsibilities.
Managements Report on Internal Control over Financial Reporting.
Report of Independent Registered Public Accounting Firm on Internal Control over Financial Reporting.
Report of Independent Registered Public Accounting Firm.
Consolidated Statements of Earnings for the fiscal years ended May 25, 2008, May 27, 2007 and May 28, 2006.
Consolidated Balance Sheets at May 25, 2008 and May 27, 2007.
Consolidated Statements of Changes in Stockholders Equity and Accumulated Other Comprehensive Income (Loss) for the fiscal years ended May 25, 2008, May 27, 2007 and May 28, 2006.
Consolidated Statements of Cash Flows for the fiscal years ended May 25, 2008, May 27, 2007 and May 28, 2006.
Notes to Consolidated Financial Statements.
2. Financial Statement Schedules:
The exhibits listed in the accompanying Exhibit Index are filed as part of this Form 10-K and incorporated herein by reference. Pursuant to Item 601(b)(4)(iii) of Regulation S-K, copies of certain instruments defining the rights of holders of certain of our long-term debt are not filed, and in lieu thereof, we agree to furnish copies thereof to the Securities and Exchange Commission upon request. The Exhibit Index specifically identifies with an asterisk each management contract or compensatory plan or arrangement required to be filed as an exhibit to this Form 10-K. We will furnish copies of any exhibit listed on the Exhibit Index upon request upon the payment of a reasonable fee to cover our expenses in furnishing such exhibits.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.