Financial Review 2004 Management's Discussion and Analysis of Fi n a n c i a l Condition and Results of Operations Olive Garden sales of $2.21 billion were 11.1 percent above last  year. U.S. same-restaurant sales for Olive Garden increased 4.6 per-  cent due to a 3.0 percent increase in average check and a 1.6 percent  increase in same-restaurant guest counts. Average annual sales per  restaurant for Olive Garden were  $4.1 million in fiscal 2004 (on a  52-week basis). Olive Garden has enjoyed 39 consecutive quarters  of U.S. same-restaurant sales increases. Bahama Breeze sales of $176 million were 28 percent above last  year. Bahama Breeze opened four new restaurants during fiscal 2004,  including its new prototype restaurant in Pittsburgh, PA. Bahama  Breeze also closed six restaurants during the fourth quarter of  fiscal 2004 as a result of a comprehensive analysis performed dur-  ing the fourth quarter of fiscal 2004 that examined restaurants not  meeting our minimum return-on-investment thresholds and certain  other operating performance criteria. Average annual sales per  restaurant (excluding the six closed restaurants) were $5.2 million  (on a 52-week basis). Smokey Bones sales of $ 174 million were  87 percent above last year. Average annual sales per restaurant  were $3.2 million (on a 52-week basis). Smokey Bones opened  30 new restaurants during fiscal 2004. Total costs and expenses were $4.66 billion in fiscal 2004, $4.31 billion  i n fiscal 2003, and $4.00 billion in fiscal 2002. Total costs and expenses  The 6.6 percent increase in company-wide sales for fiscal 2003 ver-  sus fiscal 2002 was primarily due to same-restaurant sales increases in  the U.S. and a net increase of 60 company-owned restaurants since  fiscal 2002. Red Lobster sales of  $2.43 billion were 4.1 percent above  fiscal 2002. U.S. same-restaurant sales for Red Lobster increased  2.7 percent due to a 3.1 percent increase in average check, partially  offset by a 0.4 percent decrease in same-restaurant guest counts.  Average annual sales per restaurant for Red Lobster were $3.7 mil-  lion in fiscal 2003. Olive Garden sales of $ 1.99 billion were 6.8 per-  cent above fiscal 2002. 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 same-restaurant guest counts. Average  annual sales per restaurant for O live Garden were $3.9 million in  fiscal 2003. Bahama Breeze opened five new restaurants during fiscal  2003 and generated sales that exceeded $ 137 million. Smokey Bones  opened 20 new restaurants during fiscal 2003 and generated sales of  $93 million. Restaurant expenses (which include lease, property tax, credit card,  utility, workers' compensation, insurance, new restaurant pre-  opening, and other restaurant-level operating expenses) increased  $64 million, or 9.1 percent, from $704 million to $768 million in  fiscal 2004 compared to fiscal 2003. Restaurant expenses increased  $75 million, or 11.9 percent, from $629 million to $704 million in  fiscal 2003 compared to fiscal 2002. As a percent of sales, restaurant  expenses increased in fiscal 2004 and fiscal 2003 primarily due to  increased utility, workers' compensation, insurance, and new res-  taurant pre-opening costs. These cost increases were only partially  offset by the favorable impact of higher sales volumes. Restaurant labor increased $ 116 million, or 7.8 percent, from  $ 1.49 billion to $ 1.60 billion in fiscal 2004 compared to fiscal 2003.  Restaurant labor increased $ 112 million, or 8.1 percent, from  $1.37 billion to $ 1.49 billion in fiscal 2003 compared to fiscal 2002.  As a percent of sales, restaurant labor increased in fiscal 2004 primar-  ily as a result of a modest increase in wage rates at Red Lobster and  Olive Garden, and higher manager bonuses at Olive Garden as a  result of their increased operating performance in fiscal 2004. These  factors were only partially offset by the favorable impact of higher  sales volumes and lower health insurance costs as a result of fewer  claims. As a percent of sales, restaurant labor increased in fiscal 2003  primarily as a result of a modest increase in wage rates, higher pro-  motional staffing levels, and increased sales volatility, which made  it more difficult to predict staffing needs. These factors were only  partially offset by the favorable impact of higher sales volumes. Food and beverage costs increased $78 million, or 5.4 percent, from  $ 1.45 billion to $ 1.53 billion in fiscal 2004 compared to fiscal 2003.  Food and beverage costs increased $65 million, or 4.7 percent,  from $1.38 billion to $ 1.45 billion in fiscal 2003 compared to fiscal  2002. As a percent of sales, food and beverage costs decreased from  the prior year in fiscal 2004 and fiscal 2003 primarily as a result of  pricing changes, and favorable changes in promotional and menu  mix of sales, which was partially offset by higher seafood costs and  by crab usage and additional plate accompaniments at Red Lobster  during its crab promotion in the first quarter of fiscal 2004. Other  commodity costs, such as chicken and shrimp, decreased modestly. in fiscal 2004 were 93.2 percent of sales, an increase from92.5 percent  of sales in fiscal 2003. The following analysis of the components of  total costs and expenses is presented as a percent of sales. COSTS AND EXPENSES  24  Darden Restaurants 