Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)


Costs and Expenses
Total costs and expenses were $4.31 billion in fiscal 2003, $4.00 billion in fiscal 2002, and $3.69 billion in fiscal 2001. Total costs and expenses in fiscal 2003 were 92.5 percent of sales, an increase from 91.7 percent of sales in fiscal 2002. The following analysis of the components of total costs and expenses is presented as a percent of sales.
     Food and beverage costs as a percent of sales decreased in fiscal 2003 and fiscal 2002 primarily as a result of lower product cost, pricing changes, and changes in the mix of sales among our various restaurant companies. Restaurant labor increased in fiscal 2003 primarily as a result of a modest increase in wage rates, higher promotional staffing levels and increased sales volatility, which made it more difficult to predict staffing needs. These factors were only partially offset by the impact of higher sales. Restaurant labor decreased in fiscal 2002 primarily due to efficiencies resulting from higher sales.
     Restaurant expenses (which include lease, property tax, credit card, utility, workers’ compensation, insurance, new restaurant pre-opening, and other operating expenses) as a percent of sales increased in fiscal 2003 primarily due to increased insurance, new restaurant pre-opening, workers’ compensation and utility costs. These cost increases were only partially offset by higher sales. Restaurant expenses in fiscal 2002 were higher than fiscal 2001 primarily due to increased workers’ compensation, new restaurant pre-opening, credit card and other operating expenses, which were only partially offset by lower utility expenses and higher sales volumes.
     Selling, general, and administrative expenses as a percent of sales decreased in fiscal 2003 primarily due to decreased bonus costs and the favorable impact of higher sales. These amounts were only partially offset by increased marketing expense incurred in response to the challenging economic and competitive environment. Selling, general, and administrative expenses in fiscal 2002 were less than fiscal 2001 primarily as a result of decreased national television marketing expenses and the favorable impact of higher sales in fiscal 2002. These amounts were partially offset by our fiscal 2002 donation to the restaurant industry’s Dine Out for America benefit and higher fiscal 2002 donations to the Darden Restaurants, Inc. Foundation.
     Depreciation and amortization expense increased in fiscal 2003 and 2002 primarily as a result of new restaurant and remodel activity, which were only partially offset by the favorable impact of higher sales.
     Net interest expense in fiscal 2003 was comparable to fiscal 2002 primarily because increased interest expense associated with higher average debt levels in fiscal 2003 was offset by the favorable impact of higher fiscal 2003 sales. Net interest expense increased in fiscal 2002 primarily due to increased interest expense associated with higher average debt levels, which was only partially offset by the impact of higher fiscal 2002 sales.
     Pre-tax restructuring credits of $0.4 million and $2.6 million were recorded in fiscal 2003 and 2002, respectively. The credits resulted from lower than projected costs of lease terminations in connection with our fiscal 1997 restructuring. No restructuring credit was recognized during fiscal 2001. All fiscal 1997 restructuring actions have been completed as of May 25, 2003.

Income Taxes
The effective income tax rates for fiscal 2003, 2002, and 2001 were 33.2 percent, 34.6 percent, and 34.6 percent, respectively. The rate decrease in fiscal 2003 was primarily a result of ongoing tax liability adjustments that were made as a result of information that became available in fiscal 2003 and lower fiscal 2003 pre-tax earnings. The comparability of fiscal 2002 and 2001 effective rates was primarily a result of increased tax expense associated with higher fiscal 2002 pre-tax earnings, which was offset by fiscal 2002 deductions that were not available in fiscal 2001.

Net Earnings and Net Earnings Per Share
Net earnings for fiscal 2003 were $232 million ($1.31 per diluted share) compared with net earnings for fiscal 2002 of $238 million ($1.30 per diluted share) and net earnings for fiscal 2001 of $197 million ($1.06 per diluted share).
     Net earnings for fiscal 2003 decreased 2.3 percent and diluted net earnings per share increased 0.8 percent, compared to fiscal 2002. The decrease in net earnings was primarily due to increases in restaurant labor, restaurant expenses, and depreciation and amortization expenses, which were only partially offset by the impact of higher sales. The increase in diluted net earnings per share is due to a reduction in the average diluted shares outstanding from fiscal 2002 to fiscal 2003 because of our continuing repurchase of our common stock.