Financial Review 2004 OVERVIEW OF OPERATIONS  Management's Discussion and Analysis of Fi nanc i al Condition and Results of Operations 22  Darden Restaurants  Increasing same-restaurant sales can increase operating margins,  since these incremental sales provide better leverage of our fixed  costs. Same-restaurant sales increases can be generated by increases  in guest traffic, increases in the average guest check, or a combina-  tion of the two. The average guest check can be impacted by menu  price changes and by the mix of menu items sold. For each concept, From a financial perspective, we seek to increase sales and profits.  To evaluate our operations and assess our financial performance,  we use the following two key factors: Our mission is to be the best in casual dining, now and for genera-  tions. To achieve this goal, we focus on four strategic imperatives:  leadership excellence, brand management excellence, service and  hospitality excellence, and culinary and beverage excellence. Our sales were $5.00 billion in fiscal 2004 and $4.65 billion in fiscal 2003, a 7.5 percent increase. On a 52-week basis, after adjusting for  the $90 million of sales contributed by the additional 53rd operat-  ing week in fiscal 2004, total sales would have been $4.91 billion  for fiscal 2004, a 5.5 percent increase from fiscal 2003. Net earnings  for fiscal 2004 were $231 million ($1.36 per diluted share) com-  pared with net earnings for fi scal 2003 of $232 million ($1.31 per  diluted share). Net earnings for fiscal 2004 decreased 0.3 percent  and diluted net earnings per share increased 3.8 percent compared  to fiscal 2003. Although Red Lobster's string of 23 consecutive  quarters of U.S. same-restaurant sales gains ended during fiscal 2004, Red Lobster has made progress in some important areas. Red  Lobster improved its operating efficiency during fiscal 2004 through  improvements in labor management and other cost controls, as  well as implementing a less-disruptive promotional strategy in the  second half of fiscal 2004, which resulted in higher operating profit  than in fiscal 2003. Results from guest satisfaction surveys also  improved as the fiscal year progressed. Red Lobster retained a new  advertising agency in fiscal 2004 and is in the process of developing  a marketing plan designed to achieve more sustainable benefits  than have been obtained in prior years. Red Lobster also is develop-  i ng new entree offerings in the $10-$ 15 price range to strengthen  In fiscal 2005, we expect to increase our number of restaurants by  approximately 50 to 60 restaurants. We expect combined same-  restaurant sales growth in fiscal 2005 of between one percent and  three percent for Red Lobster and Olive Garden. We believe we  can achieve diluted net earnings per share growth in the range of  8 percent to 12 percent for fiscal 2005. In fiscal 2005, we also expect  Bahama Breeze to be accretive to earnings, and Smokey Bones to  remain dilutive to earnings. However, we expect Smokey Bones to  be accretive to earnings in the second half of fiscal 2005. As with  same-restaurant sales growth, there can always be some quarter-to-  quarter variability in operating results, where specific factors put us  above or below the expected range of diluted net earnings per share  growth. We believe our strong balance sheet and cash flows will be  important factors in helping us reach our goals. Our business operates in the casual dining segment of the restau-  rant industry, primarily in the United States. At May 30, 2004,  we operated 1,325 Red Lobster, Olive Garden, Baham a Breeze,  Smokey Bones Barbeque & Grill, and Seasons 52 restaurants in  the United States and Canada and licensed 38 Red Lobster res-  taurants in Japan. We own and operate all of our restaurants in the  United States and Canada, with no franchising. For financial reporting, we operate on a 52/53 week fiscal year end-  ing on the last Sunday in May. Our 2004 fiscal year, which ended  on May 30, 2004, had 53 weeks. Our 2003 fiscal year, which ended  on May 25, 2003, and our 2002 fiscal year, which ended on May 26, 2002, each had 52 weeks. We have included in this discussion cer-  tain financial information for fiscal 2004 on a 52-week basis in order  to assist investors in making comparisons to our prior fiscal years. the value offered to its guests. Olive Garden's sales gains in fiscal  2004, combined with lower food and beverage costs, restaurant  expenses, and selling, general and administrative expenses as a  percent of sales, more than offset increased restaurant labor  expenses as a percent of sales. This resulted in a double-digit  increase in operating profit for Olive Garden during fiscal 2004  along with record annual operating profit and return on sales. should be read in conjunction with our consolidated financial  statements and related notes found elsewhere in this report. • Same-restaurant sales - a year-over-year comparison of each period's  sales volumes for restaurants that are open more than 16 months; and • Operating margins - restaurant sales less restaurant-level cost  of sales (food and beverage costs, restaurant labor, and other  restaurant expenses).