Darden Restaurants

Letter To Shareholders

During fiscal 2008, we took significant steps that leave Darden well positioned to achieve and sustain strong profitable sales growth. And we did so while successfully navigating a particularly challenging consumer and cost environment – delivering results on key measures of sales, earnings and profitability that were competitively superior.

Our Goals and Strategy

During calendar 2008, we continued to execute against our ultimate goal. Our passion is to create a great company, which we define as one that is:

• A winning organization financially – translating sales and earnings growth which is competitively superior within our industry into top quartile total shareholder return within the S&P 500.
• A special place – one that everyone wants to be part of because they have an opportunity to fulfill their professional and personal dreams.

More specifically, our aim financially is to sustain long-term annual sales growth of 7 percent to 9 percent and diluted net earnings per share growth of 10 percent to 15 percent, which are what we believe the full-service restaurant industry offers effective multi-unit operators longer term. Culturally, we want to create an organization that understands, values and helps realize the dreams and aspirations of our employees, who are essential to achieving our financial targets.

We recognize that there will be years when consumer and cost dynamics will not permit us to achieve our longterm financial targets, and fiscal 2008 was certainly one of those. Our goal, however, is to deliver competitively superior results, even during such periods as we did in fiscal 2008.

Our strategy for creating a great company has been consistent for some time now as well. We seek to build a multi-brand growth company – bound together by a unifying culture, shared expertise and a common approach to the business – that operates existing brands at a consistently high level and successfully adds new brands.

Fiscal 2008 Highlights

Executing Our Strategy

Put most simply, executing our strategy involves building great brands. And that starts with having differentiated and relevant brands and entrusting each to Brand Management and Restaurant Operations leaders who are great brand builders. Beyond great brand builders, strong and durable brands also require great brand support. For us, that means competitively superior expertise, systems, processes and practices in important areas like Human Resources, Supply Chain, Information Technology and Finance, among others.

During the leadership transition that took place at Darden in calendar 2004, we concluded that, to better execute each element of our strategy, we needed to transform the Company. It was clear that our brand portfolio had to be stronger. It was equally clear that we had to be better brand builders, provide better brand support and – to sustain excellence in these areas – enhance our culture. What was most apparent, however, is that success on any of these fronts meant making some fundamental changes in how we work.

Based on these conclusions, we started down the path of transformation in calendar 2004, and our progress accelerated in fiscal 2008. Among other things, this year we:

• Acquired RARE Hospitality International, Inc. (RARE) and its two brands, LongHorn Steakhouse and The Capital Grille, and completed the disposition of Smokey Bones Barbeque & Grill, resulting in a more proven portfolio of brands that has much stronger collective sales and earnings growth potential.
• Developed and began implementing integration plans for LongHorn Steakhouse and The Capital Grille that further leverage our brand support, putting us on track to capture meaningful cost synergies that are beyond those estimated in our initial acquisition analysis.
• Continued to both add to and optimize the use of our brand-building resources by working in an ever more integrated manner across brands in the two critical brand building areas – Brand Management and Restaurant Operations – to ensure that each brand benefits from our collective expertise, whether grounded in talent, processes or practices.
• Established a Specialty Restaurant Group that focuses on those brand-building considerations which distinguish our smaller brands from our larger ones, and that provides the smaller brands with senior management and support leadership in a cost effective manner.
• Continued to increase the efficiency and effectiveness of the brand support we provide by creating new "Centers of Excellence" in several areas to consolidate work that was previously done in multiple brands into single cross-enterprise units – reducing the cost of support and providing brand leaders with more time to focus on brand building.
• Launched an Organic Growth effort within our new Business Development Group to better ensure that we fully capture the innovative, longer-term brand extension opportunities available to our existing brands.

Financial Highlights

Financially, our results from continuing operations for fiscal 2008 were competitively superior in what was clearly a challenging industry environment.

• Sales from continuing operations increased 19 percent to $6.63 billion for fiscal 2008, which reflects the addition of LongHorn Steakhouse and The Capital Grille as well as new restaurant growth at Olive Garden and same-restaurant sales growth at Olive Garden and Red Lobster.
• Net earnings from continuing operations for fiscal 2008 were $369.5 million, a 2 percent decrease from net earnings from continuing operations of $377.1 million in fiscal 2007. Diluted net earnings per share from continuing operations for fiscal 2008 were $2.55, a 1 percent increase from diluted net earnings per share of $2.53 in fiscal 2007. Net earnings from continuing operations in fiscal 2008 include the acquisition and integration costs and purchase accounting adjustments related to the acquisition of RARE; these were approximately $44.8 million before income taxes, or 19 cents per share.
• Excluding acquisition and integration costs and purchase accounting adjustments related to the RARE acquisition, diluted net earnings per share from continuing operations were $2.74 in fiscal 2008, an increase of 8 percent compared to diluted net earnings per share from continuing operations of $2.53 in fiscal 2007.
• In fiscal 2008, net earnings from discontinued operations were $7.7 million, and diluted net earnings per share from discontinued operations were $0.05, related primarily to the sale of Smokey Bones Barbeque & Grill in January 2008, which resulted in a gain. Including earnings from discontinued operations, combined net earnings were $377.2 million in fiscal 2008, 87 percent above the combined net earnings of $201.4 million in fiscal 2007. Including earnings from discontinued operations, combined diluted net earnings per share were $2.60 in fiscal 2008 compared to $1.35 in fiscal 2007.
• Olive Garden's total sales were a record $3.07 billion, up 10 percent from fiscal 2007. This reflected record average annual sales per restaurant of $4.9 million, the addition of 39 net new restaurants and U.S. same-restaurant sales growth of 4.9 percent, which is favorable by 6.6 percentage points to the Knapp-Track industry benchmark estimate. Olive Garden also reported their 55th consecutive quarter of same-restaurant sales increases in the fourth quarter of fiscal 2008.
• Red Lobster's total sales were a record $2.63 billion, an increase of 1 percent from fiscal 2007. Average annual sales per restaurant were $3.9 million and U.S. same-restaurant sales growth for fiscal 2008 was 1.1 percent, which is 2.8 percentage points favorable to the Knapp-Track industry benchmark estimate.
• LongHorn Steakhouse's total sales from completion of the RARE acquisition on October 1, 2007 through the end of fiscal year 2008 were $575 million, a 7 percent increase from the comparable prior year period. This reflected average annual sales per restaurant of $2.9 million, the addition of 24 net new restaurants and an annual U.S. same-restaurant sales decline of 1.9 percent.
• The Capital Grille's total sales from completion of the acquisition on October 1, 2007 through the end of fiscal year 2008 were $170 million, a 12 percent increase from the comparable period the prior year. Average annual sales per restaurant were $8.1 million, four net new restaurants were added and U.S. same-restaurant sales declined 1.1 percent.
• Bahama Breeze's total sales were $135 million, down 2 percent from fiscal 2007 as a result of a same-restaurant sales decline of 1.8 percent in fiscal 2008 and average annual sales per restaurant were $5.9 million.
• Seasons 52's total sales were $45 million in fiscal 2008, a 15 percent increase from fiscal 2007.
• We continued the buyback of Darden common stock in fiscal 2008, spending $159 million to repurchase 5.0 million shares. Since beginning our share repurchase program in 1995, we have repurchased approximately 147 million shares of our common stock for $2.78 billion.

2008 Financial Highlights

Fiscal Year Ended (In Millions, Except Per Share Amounts)	May 25, 2008	May 27, 2007	May 28, 2006
Sales	$ 6,626.5	$ 5,567.1	$ 5,353.6
Earnings from Continuing Operations	$ 369.5	$ 377.1	$ 351.8
Earnings (Loss) from Discontinued Operations	$ 7.7	$ (175.7)	$ (13.6)
Net Earnings	$ 377.2	$ 201.4	$ 338.2
Earnings per Share from Continuing Operations:
Basic	$ 2.63	$ 2.63	$ 2.35
Diluted	$ 2.55	$ 2.53	$ 2.24
Net Earnings per Share:
Basic	$ 2.69	$ 1.40	$ 2.26
Diluted	2.60	$ 1.35	$ 2.16
Dividends Paid per Share	$0.72	$ 0.46	$ 0.40
Average Shares Outstanding:
Basic	140.4	143.4	149.7
Diluted	145.1	148.8	156.9

Fiscal 2009 Outlook

For Darden, fiscal 2009 will be a year of strategic continuity. Our strategy and the strategic goals we established at the time of the Darden leadership transition nearly four years ago remain the same. We also continue to believe that successfully executing that strategy involves transforming the Company. Changing the brand portfolio to include LongHorn Steakhouse and The Capital Grille is the most obvious step in that direction. And, continuing to integrate these brands successfully so that we fully realize their potential is a priority.

Beyond integration, we are focused on the priorities that helped prepare the organization operationally and culturally for the acquisition and integration of new brands. These priorities center on increasing collaboration across the Company in order to make better use of our considerable brand-building expertise, increasing the efficiency and effectiveness of the brand support we provide and enriching the professional and personal experience we offer our employees – all of which complement and support the brand- specific priorities of our operating companies.

These brand-specific priorities can be summarized as follows:

• Olive Garden – Continue new restaurant growth while maintaining same-restaurant sales excellence and growth.
• Red Lobster – Solidify and broaden appeal in order to grow same-restaurant guest counts and support new restaurant growth.
• LongHorn Steakhouse – Regain sustainable same-restaurant guestcount growth while delivering value creating new restaurant growth on a path to national penetration and the advantages that come with it.
• The Capital Grille – Regain guest-count momentum while developing the organizational capacity to sustain elevated new restaurant growth with excellence.
• Bahama Breeze – Deliver on the brand's potential by enhancing same-restaurant excellence while preparing for meaningful new restaurant growth.
• Seasons 52 – Successfully transition from a developmental orientation and model to a proven concept geared to drive new restaurant growth with excellence.

Conclusion

We are convinced that Darden's success as a public company since our spin-off from General Mills in 1995 and the enviable competitive position we currently enjoy are the product of a strong collection of brands, great brand building and great brand support, all resting on a solid foundation that includes competitively superior leadership and a supportive and motivating culture. We continue to believe, however, that to achieve our ultimate aim of building a great company – one that is the best in our industry now and for generations – meaningful change in each of these aspects of our organization is essential. We are committed to the transformation that is required, and we see the progress we made in fiscal 2008 as powerful evidence of that commitment.

We believe our plan for fiscal 2009 reinforces and extends the progress made to date in transforming the Company. And in doing so, it puts Darden even more confidently on the path to sustaining strong profitable sales growth, becoming a special place and realizing our potential for greatness.

Thank you for being a shareholder and placing your trust in our ability to build a great company that will perform strongly and ethically for generations.

Clarence Otis, Jr.,
Chairman and Chief Executive Officer

Andrew H. Madsen,
President and Chief Operating Officer