Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion and analysis should be read in conjunction with our consolidated financial statements and related notes found elsewhere in this report.
    As of May 25, 2003, Darden Restaurants, Inc. operated 1,271 Red Lobster, Olive Garden, Bahama Breeze, Smokey Bones BBQ, and Seasons 52 restaurants in the United States and Canada and licensed 33 restaurants in Japan. We own and operate all of our restaurants in the U.S. and Canada, with no franchising. Our fiscal year ends on the last Sunday in May. Fiscal 2003, 2002, and 2001 each consisted of 52 weeks of operation.
    On March 21, 2002, our Board of Directors declared a three-for-two split of our common stock. The stock split was accomplished through a 50 percent stock dividend, which was distributed on May 1, 2002 to stockholders of record as of the close of business on April 10, 2002. All applicable references in this discussion and analysis to number of shares and per share amounts of common stock have been adjusted to reflect the stock split.

Results of Operations for Fiscal 2003, 2002, and 2001
The following table sets forth selected operating data as a percentage of sales for the periods indicated. All information is derived from the consolidated statements of earnings for the periods indicated.
                Fiscal Years
  2003   2002   2001  
  Sales 100.0 %    100.0 %  100.0 % 
  Costs and expenses:                
     Cost of sales:                
      Food and beverage 31.1     31.7   32.6  
      Restaurant labor 31.9     31.5   31.6  
      Restaurant expenses 15.1     14.3   14.0  
         Total cost of sales, excluding                
         restaurant depreciation and                
         amortization of 3.8%, 3.6%,                
         and 3.5%, respectively 78.1 %    77.5 %  78.2 % 
     Selling, general, and administrative 9.4     9.6   9.8  
     Depreciation and amortization 4.1     3.8   3.7  
     Interest, net 0.9     0.9   0.8  
     Restructuring credit –     (0.1 )  –  
         Total costs and expenses 92.5 %    91.7 %  92.5 % 
  Earnings before income taxes 7.5     8.3   7.5  
  Income taxes 2.5     2.9   2.6  
  Net earnings 5.0 %    5.4 %  4.9 % 

Sales
Sales were $4.65 billion in fiscal 2003, $4.37 billion in fiscal 2002, and $3.99 billion in fiscal 2001.
    The 6.6 percent increase in sales for fiscal 2003 was primarily due to same-restaurant sales increases in the U.S. and a net increase of 60 company-owned restaurants since fiscal 2002. Total sales, although higher than the previous year, were less than anticipated due to lower than expected guest counts for fiscal 2003. Guest count growth was restrained by a competitive environment that was more challenging than expected, less effective advertising than in fiscal 2002, and a more severe winter than normal. Red Lobster sales of $2.43 billion were 4.1 percent above last year. U.S. same-restaurant sales for Red Lobster increased 2.7 percent due to a 3.1 percent increase in average check and a 0.4 percent decrease in guest counts. Average annual sales per restaurant for Red Lobster were $3.7 million in fiscal 2003. Olive Garden sales of $1.99 billion were 6.8 percent above last year. U.S. same-restaurant sales for Olive Garden increased 2.2 percent due to a 3.7 percent increase in average check and a 1.5 percent decrease in guest counts. Average annual sales per restaurant for Olive Garden were $3.9 million in fiscal 2003. Red Lobster and Olive Garden have enjoyed 22 and 35 consecutive quarters of U.S. same-restaurant sales increases, respectively. Bahama Breeze generated sales that exceeded $137 million and opened five new restaurants during fiscal 2003. We continue to make changes to Bahama Breeze that we anticipate will improve its sales, financial performance, and overall long-term potential. These changes include testing lunch operations, creating a new dinner menu, and slowing new restaurant development while we reduce the size of these restaurants and our related capital investment. Smokey Bones opened 20 new restaurants during fiscal 2003, more than doubling the total number of Smokey Bones restaurants open at the end of fiscal 2002. Sales for Smokey Bones in fiscal 2003 were $93 million.
    The 9.4 percent increase in sales for fiscal 2002 versus the prior year was primarily due to same-restaurant sales increases in the U.S. and a net increase of 43 company-owned restaurants since fiscal 2001. Red Lobster sales of $2.34 billion were 7.1 percent above fiscal 2001. U.S. same-restaurant sales for Red Lobster increased 6.2 percent due to a 2.8 percent increase in average check and a 3.4 percent increase in guest counts. Average annual sales per restaurant for Red Lobster were $3.5 million in fiscal 2002. Olive Garden sales of $1.86 billion were 9.5 percent above fiscal 2001. U.S. same-restaurant sales for Olive Garden increased 6.3 percent due to a 3.1 percent increase in average check and a 3.2 percent increase in guest counts. Average annual sales per restaurant for Olive Garden were $3.9 million in fiscal 2002. Bahama Breeze opened eight new restaurants during fiscal 2002 and generated sales of over $125 million. Smokey Bones opened ten new restaurants during fiscal 2002 and generated sales of over $42 million.