達登餐飲 (DRI) 2001 Q2 法說會逐字稿

Welcome to the Darden Restaurants, Incorporated second quarter earnings release. At this time all lines are in the listen-only mode. Later there will be an opportunity -- if you should require assistance at any time from an AT & T conference specialist please press zero followed by the star.

I will turn the conference call over to senior director of investor relations Mr. Matthew Stroud. Go ahead.

Thank you, Allen.

Good morning. With me are Joe Lee, Brad Blum, president of Olive Garden, Bob Mock president of Smokey Bones BBQ Sports Bar, and Clarence Otis, CFO. We welcome those of you joining us by telephone or the internet.

During the course of this conference call Darden's may make forward looking statements concerning the company's object give restaurants option, various financial parameters or similar matters.

By their nature forward looking statements involve risks and uncertainties that could cause actual results and those anticipated in the statements.

These risks and certain tease include competition in the restaurant industry, economic and market, food and labor cost, the availability of suitable sites, changes in consumer tastes and demographic trends.

Weather can't and acts of god and other risks at uncertainties discussed in the SEC files.

Made by or on behalf of the company.

By way of information, we plan to release same restaurant sales results for fiscal December 2002 on Thursday, January 3, after the market closes.

We plan to release same restaurant sales results for fiscal January 2002 on Tuesday, January 29, after the market close.

We plan to release fiscal 2002 third quarter earnings and same restaurant sales for February of 2002 on Thursday, March 21, after the market close.

We released second quarter earnings yesterday afternoon results were available on First Call, PRI. Now for an

overview of the quarter I would like to turn it over to Joe.

Thank you, Matthew.

Good morning everyone. It's a pleasure to be with you this morning. I would like to update you on the second quarter briefly and turn it over to others for more detail.

The earnings results were outstanding, particularly given the extraordinary conditions that existed during the quarter. We reported second quarter diluted EPS, a 21% improvement over last year on earnings after-tax of $35.1 million.

That's including the [INAUDIBLE] of the charitable donation that was special on "Dine Out For America".

The operating performance that our teams and court companies, Red Lobster, Olive Garden have never been better.

We continue to invest in our future by expanding our merging companies Bahama Breeze and Smokey Bones BBQ and Sports Bar.

You know started the quarter with terrorist attacks on September 11th, included the war in Afghanistan, the anthrax incidents and ongoing fear of further terrorist activity, which all served to accelerate the economic slowdown which began sometime prior to the September 11th events.

Our teams met these challenges by focusing on operational excellence and developing sound marketing strategies that were well executed.

They continued to -- I know that our financial resources are unmatched by any other company in this segment.

Every quarterly call for a while now I have said we are strong and very excited about the future.

That's as true now as when I first said it. We are in a great industry. One which has a number of powerful long-term factors at work that should continue to benefit the industry and us for many years to come.

We are determined to build a great company, one that's the place to be in casual dining.

Now Clarence will talk more about the financial results for the second quarter followed by detailed comments by Dick and Brad on their businesses. Then I'll come back in with

final comments. Clarence.

Thank you, joe.

As Joe mentioned we reported excluding a $1.4 million restructuring credit earnings after-tax were $35.1 million or 29 cents per diluted share.

That's a 21% increase in diluted EPS. With the credits added diluted EPS is 30 cents a share. We were able to leverage our 8.8% sales gross to produce operating margins 50 points higher this year than last.

Food, labor expenses, selling, general and administrative expenses were all lower on a sales percentage basis.

Although they were offset by higher restaurant expenses. Food and beverage expense declined because of favorable seafood costs.

Those more than overcame increases in the dairy and produce costs. We expect seafood costs to continue to be favorable for the remainder of the fiscal year and we believe that that provides meaningful constitution against other food cost pressures.

Labor expense declined as a percentage of sales and that's because we continued to enjoy increased productivity in our restaurants and because despite the fact that labor markets remain relatively tight, our turnover rates were stable.

We did see a slowing in -- it was 1.5 to 2% this quarter which is down considerably from the approximately 4% rate of increase that it was this time last year.

The higher restaurant expenses as a percent of sales were the result of higher pre-opening expenses and higher utility costs.

We opened 12 restaurants in the quarter this year.

That's against four in the second quarter last year. As we have discussed before our new restaurant expansion will continue to be more aggressive this year than last. On the [INAUDIBLE] front, we expect comparisons to turn favorable from this point with year-over-year decreases in the third and fourth quarters.

Selling general administrative expenses were lower as a percent of sales as I said.

This is indicates even though the expenses as Joe said our $1.5 million contribution to the Red Cross Disaster Relief Fund as part of our participation in the industry's "Dine out for America" benefit.

The favorability we have in this line item is a result of reduced market spending at Olive Garden versus last year second quarter when we had significant Olympic advertising.

The "Dine Out For America" contribution reduced the diluted EPS we are reporting for the second quarter by about one-fifth.

Both Red Lobster and Olive Garden enjoyed strong growth in the quarter each delivering results that were above the industry average.

These performances drove Darden's outstanding results.

In addition Gary Heckel and the Bahama Breeze opened two restaurants one in Broomfield [INAUDIBLE], Colorado both in the Denver area.

Bob Mock and the team at Smokey Bones BBQ Sports Bar opened two restaurants as well.

One in Chicago and the other in Orlando. They both had some sales softness as a result of the extraordinary challenges that arose during the second quarter.

Neither has achieved the established market presence that Red Lobster and Olive Garden enjoy. Nor do they have the same marketing power. At this point in its development Bahama Breeze does have a significant presence in convention and tourist markets.

Those have been especially hard hit by the terrorist, air safety issues.

The combined from Bahama Breeze and Smokey Bones was about $500,000 less this year than last year.

That's about 1% more dilution than we expected. We were pleased to see sales build at both companies throughout the quarter.

In addition same restaurant sales average sales per restaurant at Bahama Breeze continue to be among the highest in casual dining.

Sales at Smokey Bones continue to exceed our pro forma expectations. Finally we repurchased over 400,000 shares of our common stock in the second quarter.

Since the beginning of our repurchase program in December 1995. We have now repurchased 54.7 million shares under authorizations totaling 64.6 million.

Given the momentum in our business we continue to be confident in our growth objectives. We recognize the uncertain economic environment we are in, the continuing terrorist threat the country faces increase the potential for unexpected, adverse developments.

Absent any unforeseen shocks we continue to be confident in the long-term annual EPS growth that's within the 15 to 20% range.

That's what we have

discussed for some time now. I now turn it over to Dick to talk about Red Lobster.

Thank you, Clarence.

As Joe and Clarence have already indicated, we are really pleased with the Red Lobster results this quarter. We were able, in difficult times to perform well in all phases of our business.

Our restaurant teams remain focused on operational excellence. Our marketing team delivered some terrificly effective promotional communication and all of that resulted in some pretty good results forever us.

In fact the 16th consecutive quarter of same restaurant sales growth. Record second quarter sales, Red Lobster's best ever second quarter operating profit ant continued strong improvement in RLS compared to last year.

We think our strategies are working.

We continue to focus on enhancing the dining experience through hospitality you can taste and hospitality you can touch.

Increasing adult beverage sales and providing spirit value. Our strategies are working. We tend to stay with them. The same restaurant sales growth we had a 6.1% increase, in light of the events surrounding the second quarter we are particularly pleased with that.

I mention it comments on top of robust growth last year and the year before that.

In fact it helped us achieve a better than 5% same restaurant guest count growth for the garter.

I mentioned operational excellence as one of the focal points. Our guest satisfaction records are high results. Our overall score is at a record high.

13 of the 14 attributes we mentioned are at or above all time highs. Our hospitality drink initiative and our bar [INAUDIBLE] efforts have helped increase adult beverage sales by approximately 12% in the second quarter.

Our wine sales were up 27% in the second quarter compared to laughter.

You might recall in the fourth quarter of last year we completed the rollout of our new wine list to all of our restaurants. While wine sales remain a relatively small portion of the overall beverage mix we are pleased to see the continued increase in wine sales.

We opened four new restaurants during the quarter two of which were new restaurants, two were relocations. We are on track to meet or exceed the developments plans for the year.

We intend to open six or eight new restaurants during the year and relocate four restaurants. Our bar remodels continue to do well generating incremental sales approximately 5% above the company average.

The slim' and crab prices are turning down more than enough to offset higher dairy and produce prices.

In closing I will just say we are excited about our results, proud of our teams for the work they did and the results they achieved.

As I mention we are confident in our plans. We continue to strengthen our leadership team from the restaurant level to the support center and we have a singleness of purpose about achieving operational excellence with an emphasis on hospitality.

As far as our whole focus is about offering terrific food and providing superior val aou to our guests. Let me turn it over to Brad.

Thanks, Dick.

Despite the economic and global uncertainties following September 11th Olive Garden achieved the best second quarter financial performance in our 19-year efforts with report operating profit, -- they achieved a that's over seven years of consistent growth.

We were up 5.9% compared to an industry decline of my news 0.8% as measured by map track.

We see the gap continues to widen. Half of our same restaurant sales was driven by guest counts increases.

Olive Garden -- up between 8 and 9%. Gain with 50 percent of the sales growth coming from guest counts. This performance was achieved while reaching out to communities and organizations in need.

For over a week so employees could deliver hot meals around the clock to rescue workers and we converted the restaurant into a Red Cross Rescue Relief Center.

Olive Gardens across the country -- participated in the October 11th "Dine Out for America".

Darden took a leadership role. Guest satisfaction, operating excellence and strong branding has never been more important.

During the second quarter guest -- strong against around food and service. Labor expense was substantially reduced.

We have for the previous six years and during the latter part of the quarter, Olive Garden introduced new advertising that featured [Romana] Neri.

It shows her visiting the institute and highlighted a significantly improved chicken marsala that did not carry a price discount.

Last year we promoted chicken parmigiana at $9.95.

Guest count continues to increase. The result of all this is the value retains its dominant competitive advantage for Olive Garden.

At times like this with softness in the economy it becomes more meaningful. With the same restaurant excellence in performance it has opened 16 new restaurants since this time last year.

We have many more high quality restaurant sites currently under construction. The Tuscan farmhouse design continues to get rave reviews with strong guest count and beverage alcohol is above the company average for these restaurants.

For the second quarter company wines sales were up 14%. Several improvements started in December which we are very excited about with wine sampling being moved from the lobby to a cafe to create a better experience.

Servers bring different wines to greet the table instead of just the Principato Red.

Our servers have been trained to suggest and endorse from our award-winning wine list of 38 wines.

We are pleased about our current brand position and performance. We are excited about where the business is going.

With that I'll turn it back to Joe for final comments.

Thanks Brad and Dick.

We are very enthusiastic about our business. We are enthusiastic, we think, for a very good reason. We are in a great industry and in a great segment within that industry that is -- it's an industry that's a good place to be during periods of uncertain provided that you are with a company that has a strong -- group of strong operating companies and knows what it takes to successfully manage through tough times.

We have two of the biggest, most powerful brands in casual dining, Red Lobster and Olive Garden.

Consumers are telling us the dining experiences they provide are among the best in casual dining and each of those companies are determined to get even better.

They are combining the great positioning with promotional strategies well suited for today's environment.

They are using creative messages that are getting better and better and marketing power that allows them to get the message to consumers with a great deal of frequency.

We have two of the most exciting new concepts in casual dining today. That's Bahama Breeze and Smokey Bones. As we he can expand them, each continues to raise the food and service bars for casual dining.

We have the experience, resources to maintain the concept integrity through tough economic times and that's what we are going to do.

Something that's not available to many emerging companies. The second quarter demonstrates the strength of Darden, outstanding balance between proven and emerging brands, experience and skill in responding to the challenges that arise in a dynamic business like casual dining and the financial resources that are unmatched in the segment.

I am pleased with how we are performing now.

I am very confident we will achieve our ultimate objective which is to be the best in casual dining now in future generations.

Thanks for your time and attention. Now we will open it up for

questions. Janice Meyer with Credit Suisse First Boston.

Hi.

Thanks. If you could talk a little bit the cost trends. For example a little more on the labor line with better same store sales than the first quarter and seemingly less wage inflation, you didn't get as much leverage as you did in the first quarter.

Does that -- is that more skewed to the weakness at Bahama Breeze or was there something else at Red Lobster and Olive Garden?

A little more that you said Bahama Breeze was hurt more than the others during the current events does that change the thought process on how big you want Bahama Breeze you want to be or in terms of your location strategies given that's a much different sensitivity than your core business?

On the labor front, Janice, actually it really does reflect some things that are going on add Red Lobster, in particular but also Olive Garden.

At Red Lobster we are taking this opportunity to get more competitive when it comes to attracting talent.

So we have increased our manager compensation both base compensation and target bonuses.

And so that contributed to some of what you see on the labor line. We think that that's absolutely the right thing to do, really to build a strong foundation for continued future growth and we have given the results that we are putting up, being able to do that in this environment we think is a real competitive strength.

We are seeing payoff there already.

Red Lobster on the last 12 months bases through November has seen tremendously strong trends on the turnover side, manager, general manager and front line crew turnover all declining at some pretty significant levels.

So we feel good about that. On the Bahama Breeze side, we continue, really as we expand the brand to get more and more learning about what are the optimal places to be in terms of sites.

We feel good about the strategy we have.

At this point in its development, as I said there is a pretty heavy waiting of tourist and convention locations. Part of that is simply because we first started to develop the concept here in Orlando where we are headquartered.

This is both a major tourist and major convention location. That will start to dissipate as we expand the company.

So it will be a lot more resilient as that starts to dissipate. So it really doesn't change our thinking a whole lot.

We had had some learning already in advance of the current slowdown that suggested that we wanted to have less reliance on tourism and convention oriented spots.

) ) I would add to that, Janice, that the recovery in the quarter, the September 11th events hit Bahama Breeze harder than any of our other operations, and yet month-to-month that is coming back and we are almost back to last year with the last month.

Next question?

That will come from Mitch Spicer with Lehman Brothers. Go ahead, please.

Thanks, good morning.

First on the real estate front can you give us an expense if real estate prices and just finding subcontractors is easing a bit? And second, just this recession versus the last recession it seems like Olive Garden and Red Lobster are stronger.

I know you have addressed some of the issues but just

generally maybe you can reflect back to the previous recession what you have seen is different maybe from a macro stand point and perhaps what you are doing differently this time around versus 10, 11 years ago.

Let me hit the last part of that first and ask Dick and Brad to add to it if they care to.

I would say the teams are stronger than than they have ever been. I would say the companies and the concepts, themselves are stronger.

The guest satisfaction levels are higher. We learned from our previous situations. As this one began to -- as we were hitting the peaks, if you will, of economic positives a couple years ago we began to look for what might happen whenever a slowdown began, whenever it might.

We went back and looked at what happened, what worked well before.

So it's a combination of all this experience coming into play along with the brands that are number one in their

respective segments and teams that are stronger than they have ever been. Now, do you want to add anything Dick or Brad?

I don't have anything to add. I think you caught it all.

Brad?

The other question about real estate, I will address that.

For Olive Garden our plan this year is to open between 17 and 20 new restaurants. Net new restaurants. And the costs of those are pretty much set as it relates to the sites for this fiscal year.

However as we continue to accelerate our new restaurant expansion with this kind of economic environment, we feel we may and are already starting to get some optimal better deals as we move forward for '02 and potentially some '04 option.

) ) We have seen the favor built already is less to do with the cost of real estate and more on the construction side where we are seeing some positive trends.

Next question?

That comes from the line of John Glass from Deutsche Banc.

Two questions if I may.

If you can cut the P & L in a different way can you look at the impact of the month of September and what the run rate of restaurant margins are now excluding the month.

The second question on food costs you didn't get as much of a lift on food costs as you did in the first quarter. You cited a couple of items.

Could you break out what the different components were? How much seafood? How much did produce and dairy impact you negatively? Thanks.

Let me start on the food cost side.

I mean seafood, as we have been saying for some time now strong positive trends for us. You know with this quarter making all kinds of adjustments so we compare apples to apples because usage is different it's roughly $12 million savings with half of that going back with higher dairy and produce costs.

The produce side, though is not just costs cost inflations.

Again, we think it's a great time, really to invest in business and Red Lobster has made some major improvements in the quality of the vegetable sides that they offer on their menu.

And so we are buying better product, and as a result,

spending more. We think that's the right thing to do to continue to build strength for the future. Anything to add Brad or Dick?

The only other thing and this was modest as it related to costs on food at Olive Garden is we made some very significant improvements to products lobster, spaghetti and the Tuscan T-Bone.

Those are higher priced items.

Much like what Clarence said it really builds the brand quality over all.

And it was a slight uptick because of those two products.

I would comment with respect to the shrimp promotion.

We made sort of a strategic decision early on to sell the 30 shrimp promotion at $9.99.

That was due to a significant shrimp we were able to make at lower prices. When that came through, we made the decision to pass roughly half of the gain on to the guest directly compared to what we normally do with the shrimp promotion.

We did that for two reasons to maintain the momentum, to build it during a rough time and to create a more difficult environment for our competitors but also to sort of emphasize the value portion of what we do.

And it paid off in higher guest counts [INAUDIBLE] in the history, improved margins and a big jump up in our value ratings as we look at guest satisfactions.

We think it was the right thing to do.

In terms of the month-to-month through the quarter, I guess would I would tell you is that clearly September was a weaker month against our expectations than were October and November.

But nevertheless it was quite a strong month.

Red Lobster, as we disclosed had exceptional same restaurant sales quote in the month of September. Olive Garden same sales growth took a little bit of a dip where they were in August and where they got to in October and November.

But we have had very high absolute levels of specialty

against the industry where they were five or six points higher than the industry average. Next question?

That will be from Robert Darrington from Morgan Keegan.

Could you give us a little bit of background on Red Lobster and Olive Garden's remodel plan?

What the time line is for the balance of completion of

each of the two systems. And then what the dynamics are for the economics of those. Has the cost of investment changed any? Are you seeing what kind of sales improvement?

I'll lead off with that at Olive Garden.

We will be completing the remodel program at the end of this fiscal year. We have continued to reduce the capital investment simply because we are doing them better.

It's the same design but we keep doing a better job and get them completed quicker. And we, over time, have seen strong sales in guest count list from the remodel.

Of course now we can't compare it to controls because we are just about completed with the project and our business just continues to grow and become even stronger based on the earlier questions, September was out distanced by October, and October has been outdistanced by November.

So it keeps getting stronger and stronger.

We have extremely strong feedback from our guests. They have had the highest atmosphere ratings we have ever had at Olive Garden based upon the repositions with the remodel.

) ) At the end of this year we will have about one-third of our restaurants remodeled. They will represent about 40% of the sales. Our costs on average have remained about the same from the time that we started.

As I mentioned in my earlier remarks we are getting a five to six percent incremental sales boost compared to control groups where these restaurants are.

And we think that it will be probably a four-year time line to get the rest of the companies done.

) ) Next question?

That will be from Jeff from Wacovia Securities.

Could you give us some more details on the percentage of sales details on the marketing spending.

And also what you're seeing in terms of reaching growth

rating points. My other question is if you could just update us on the current Cap-X and DNA targets for the year.

Sure, Jeff.

On the Cap-X side, we are still looking at capital spending total for the year that will be somewhere between 350 and 400.

Probably pretty close to the middle of that range. That is up modestly from where we were last year. ) ) On the marketing side, our marketing the percentage of sales has consistently gone down at Olive Garden across each of the last six years.

And it's now going down further because of the sales leveraging as well as the various invasions that are taking place within the marketing department -- marketing area.

As far as growth rating points on a weekly basis, the range would be somewhere between 100 and 150 range points a week.

) ) Actually we were able to leverage increased sales and actually this year lower cost of the media.

The combination of the two has resulted in us getting significantly lower percentage of sales as it relates to marketing, but also adding two additional weeks of media.

So we have a stronger program than we had last year for -- on a percentage basis with significantly

less money -- Go ahead.

I was goin g to say on a percent of sales basis SG & A roughly -- the bulk of that was in the marketing side.

On the SG & A side we did see some favorability, 10, 15 basis points or so even with a $1.5 million contribution reflecting our participation in "Dine Out For America.

So we feel pretty good about the leverage on the marketing side but also on the SG & A side.

) ) I was going to add to that that we have all talked with you before about the fact that media is costing less this year, giving us more option of management of that to hit the markets in situations that we think need more media, or to have some savings in the media costs and it's actually a blend of those two that's occurring.

Next question?

That will be from Jack Russo of AG Edwards.

Two quick questions.

Clarence, can you talk about store opening costs in the quarter? What they were and what you expect they will be for the year with the aggressive new store opening. Secondly on Florida, you've got some concentration of stores, obviously down in Florida.

That's where your roots are. I'm curious that probably didn't help you in the quarter, if you can quantify

that and what you are looking for in the third quarter because supposedly tourism and the snow birds are going to be off in terms of numbers as we go forward this year.

Yes.

Just to start on the pre-opening side, Jack. This quarter incrementally for opening expenses against same quarter last year, probably about $2.5 million.

I actually don't have with me right now where our expectations are for the balance of the year on that. But, we are expanding our new restaurant opening schedule.

So it will continue to, you know, to be more on a year-to-year base is in the

third and fourth quarter. I just don't have those numbers with me.

In terms of Florida -- One thing I would say before we turn it to Dick and Brad.

We also have restaurants everywhere in the country. If they are not traveling to Florida, that probably means

they are eating out more back home. We will make sure we advertise well enough to remind them we are there. Go ahead.

I think that's the point. We have some parts of the country that are stronger than previously, then Florida the point is taken that it is off a little bit because of less tourism.

Dick?

Same thing for us.

You know, the truth of the matter is our casual dining sector is pretty large. The way we think about it is tourist business may be off a little bit it's an opportunity for us to maybe take it from somebody else.

So while we are still up, we are not up as much here as in other parts of the country like Brad said, but we think we can hold our own

here.

I would note that Florida Olive Garden is up significantly above what [INAUDIBLE] is for the entire country.

When we say it's not as high

it's not as high as the 6% roughly that everybody else is doing.

Okay. Thanks for that added comment. Next question?

That will be from John Ivanco from J.P. Morgan.

Just two questions, I guess.

One is on Smokey Bones. If you could talk about whether, you know, you are weakened -- if you are weak in certain markets and whether that changed kind of September, October, November if it followed a different progression then, your two core brands.

And secondly I noticed

inventories on the balance sheet went up. Does that give us a large amount of visibility on cost of goods sold as related to seafood going forward?

Take the inventory question.

You are absolutely right.

The inventory levels really reflect our trying to lock inasmuch of the favorable pricing as we can. Again, balancing that against an outlook that sees you know, pretty positive trends in pose costs.

But again there is a notion that we need to hedge. Also, this is the quarter where we begin to build toward the end of the year Lobsterfest which is obviously Red Lobster's signature feature that comes within the fourth quarter.

) ) On Smokey Bones and geography, Smokey Bones is primarily located in areas that are neighborhood areas as a neighborhood sports bar and BBQ place.

So it's not in as many tourist/convention spots as Bahama Breeze is.

And the volumes there are a little off of our plan, but they don't have the marketing -- the size for the marketing backup to bring the sales back to our normal levels immediately.

But we are looking at some localized marketing plans to do that.

As far as geography goes, there's not at this time showing up a significant variance that would cause is to move away from our plans

of expansion that we have had communicated earlier.

I would just add that, again, with the September 11th events what we saw was recovery by the following weekend and strength from that point on.

And the rate of recovery at the two emerging brands has been slower.

But the trends have been strong through the quarter. For both Bahama Breeze and

Smokey Bones. ) ) They are improving, just not at the same rate. Next question?

That will be from Jonathan Wade of McDonald Investments. Go ahead, please.

Hi.

I have a couple questions. First off, I was surprised and it sounds like some others were that you didn't get as much leverage on the restaurant level. Wondering what your expectations are on the back half?

What kind of leverage can you get? I guess to what degree can you improve that restaurant level margin? Then also what are the same

store sales assumptions in the back half of this fiscal year?

Well, again, I think that we will continue to make some of the investments that we think make sense to strengthen the business because we think we have the opportunity to do that.

And it always is a balance between doing that, building for the future and delivering strong current period earnings.

We think we have achieved that balance with this quarter with 21% earnings growth with the back drop that just is extraordinary is, you know an understatement.

But what's occurred over the last three months. In terms of same restaurant sales on a go-forward basis, we continue to think that a long-term target range of three to five percent makes sense.

We had been saying that in the environment of economic weakness that we have been seeing really before September 11th, that we would be looking, expecting to be toward the bottom of that range.

Obviously we have gotten above it in this quarter but that three to five percent range continues to shape our thinking. ) ) Next question?

That will be from the line of Joe Buckley with Bear Stearns. Go ahead, please.

Good morning.

Thank you. A couple of questions. On the marketing, is it fair to say that what you are doing is keeping or increasing the weights but in absolute dollars spending a little less given the trend in advertising rates and if so, is that kind of the game plan going forward?

And then, also question on the inventories.

You mentioned crab and shrimp costs, are lobster costs trending down? As we see the inventory build, are you starting to cover some of your fiscal

needs as well?

I'll start on the marketing question.

We are basically at the same levels of marketing this year as we were last year with the exception in the second quarter, as Clarence indicated earlier, that we had stronger expense last year, higher expense last year because of the Olympic advertising.

However with that said we are continuing to look at innovative ways to build our business.

As a for instance at Olive Garden we have started doing hispanic advertising in markets like Dallas and Houston.

We started there. We will be rolling out soon to additional markets and that has been extremely powerful for us bringing various new guests into our restaurants and really motivating our employee team as well.

So we're reinvesting some of those savings, as joe aid earlier and we are taking some of the media savings to the bottom line.

) ) Actual media spending in the quarter was basically flat.

And we anticipate it will be pretty much flat for the year.

Do you want to talk about inventories for the balance of the year or Clarence to you want to take that?

I will take it.

On the inventory side we will continue to look pretty closely at trends and hedge to the extent we think it makes sense if we see continued favorable pricing and that could cover us into files equal year 2003.

We haven't started that yet. On the lobster side?

Lobster pricing, I guess is roughly flat for a year-to-year basis.

Yes.

Next question?

We have a question from Karen Lemark from First Union National Bank.

My questions have been answered.

Thank you. ) ) Good. Any additional questions?

We have a question from Marian Coultis, please go ahead.

You spoke about the increases in alcohol and in wine, can you give us what alcohol represents as a percentage of sales now?

It's very good news in that question and we'll shift it to Brad.

I'll start off at Olive Garden.

We have consistently been increasing our percentage of sales with beverage alcohol. I said we were up 14% in our wine sales. The thing is our food sales keep going up so much too our percentage of sales is going up but not as much as other wise you would think.

We were up 20 basis points last quarter. We are moving into the between 9 and 9.5% for the percentage alcohol sales.

And -- which was up about 200 basis points versus several years ago when we really started this program.

) ) Red Lobster we are just under 9% and we are up 40 basis points from the prior year. Our remodel restaurants are running about a point ahead

of that.

Very good.

Thank you. Can you give us an outlook for the next six months as to how you think the industry's going to be, and

how you think you are going to perform?

I'm sorry.

Outlook on the next six months in terms of where we think the industry's going to perform and how --

How we are performing?

I still think there's a lot of strengths behind the industry. It's been disrupted somewhat a little by the economic slowdown, in particular this terrorist, Afghanistan, anthrax, all these issues that we have been dealing with in the last quarter as an industry.

But in these -- in times of stress, there will be growth in the large brands, even with situation like we have.

That growth is going to be disproportionate to those companies who are performing better to the consumer, giving the consumer a better value, a better taste and a better level of service teamed with an ability to communicate that strength to the consumer.

So for that reason we think Darden will outpace the industry for the balance of this year and the next six months and on in.

But there is -- when you look behind these kind of temporary problems, you see that the heaviest user of casual ding restaurants are people that are 40-plus in years.

And you see that there's a huge growth in people that are 50-plus and that's the strongest user group in casual dining.

So you can expect to see the casual dining is going to continue to grow disproportionately fast to other sectors of the economy.

And then you can look at the leaders to grow disproportionally fast to the industry, to the casual

dining industry and we expect and plan, are striving to be the leader in the industry for now and generations.

I would just add on that, too, that a real focus on operating excellence for each of our companies, and continuing to have very strong marketing and continuing to have very strong value ratings are offering a great value to the consumers leads to a very strong and trusted brand.

Trusted brands are what really stand out, particularly in times like this as we work through these changes.

) ) Just to quantify that we talk about the three to five percent saying our sales growth target.

We do think that that will continue to be pretty well above where the industry would be performing over the next six months or so.

) ) Next question?

We have a question from Mike [Nissenstock], please go ahead.

You have answered most of my questions. In the second half of your

fiscal year do you plan any new promotions or will they all be the same year or year?

We don't want to telegraph our exact promotions because we know most of our competitors are listening.

So we don't want to tell them what we are doing. ) ) I will say this. As I mention in my comments, opening comments, we introduced some new advertising around Chef Romana Neri and in talking about the products that have been introduced to our menu.

We will continue with that advertising and are planning to continue with the advertising for the next several months. ) ) Dick do you want to mention anything sort of strategically about how you are doing yours?

I would say without getting into details, strategically, I guess one of the most things we are proud of at Red Lobster we are able to respond to the circumstances both in the first quarter and in the second.

I will tell you we intend to continue to do that. I don't know that it's going to mean any real departure from what has been our strategy for the last four years.

In general, we will keep a very close eye on what's happening and make marketing adjustments to take care of that while staying with the strategy that works very well as Brad stated.

Next question?

Next question is from the line of Scott Waltman from Merrill Lynch.

Please go ahead.

) ) Next question from Mark, go ahead.

Congratulations on a good quarter.

I wanted to ask two things. First with the restaurant sales up by 60 basis points I was just wondering how much of that was due to utilities and how much of that was due to pre-opening costs?

The second thing is it looks like the license for 34 Red Lobsters in Japan is changing hands.

I assume and want to check there's no material impact on your financials from that. But what I'm curious about, the price seems to work out for the equivalent of about $140,000 per restaurant which seems like quite a bargain.

Just wondering if you have any insight on why the

restaurants would change hands at such a bargain price?

Well, let me start and Clarence can assist me here.

We have had agreement with Eon in Japan to operate franchises and the 34 restaurants that are operating as Red Lobsters in Japan.

Eon is concentrating its businesses it's in over 150 lines of businesses it's a huge corporation and they are deciding to move out of the restaurants, auto retailing, and a whole bunch of other retailing related businesses they are in.

They have found a person that they would like for us to transfer the license to.

We are doing our due diligence at this time. I think it would be inappropriate to talk much more about what's going on during that due diligence process.

As far as the pricing, remember in Japan everything is leased there. So this is, whatever the cash price number is, is a number in a case where business just goes -- has made a strategic decision to exit a business and the properties and equipment are all leased.

Clarence?

Yes.

On the restaurant expenses, the pre-opening expenses were roughly 40% of the -- on a year over year basis.

Utilities about 15%. Most of the rest of that, really is we have mentioned a few times that we are upgrading our technology platform and moving to really resonate all our processes.

And we think there will be tremendous benefits out of that both in terms of direct cost and reduced cost of some of our back office functions like payroll and benefits and those sorts of things.

But also in terms of really relieving the administrative burdens of our managers in the restaurants to allow them to focus more time and attention on sales building.

And so the bulk of the balance would be part of that -- the part of that technology investment that needs to be expensed.

Mark, let me also add, I don't think I totally answered your question because there was a part about was there any economic impact on Darden?

The answer there is no. There's going to be, as you know we do have good due diligence.

So we will be sending some teams of people over to do our due diligence on the acquiring company. But, you know that's a trip to Japan.

So that's all the extra economic impact it will be on us.

We have a question from Scott Waltman from Merrill Lynch.

Couple questions on guest count trends and capacity. Given the strong trends you are seeing with guest counts can you update us on any capacity constraints and also the wait times?

We at Olive Garden, even though we have had so many consecutive quarters of guest count increases, we still have, you know, a fair amount of capacity left in our restaurants.

And the thing that I mentioned in my comments is that one thing that we are doing is trying to get people to move from the lobby to the cafe.

We are talking about having wine sampling being moved there and making that a more vibrant part of the restaurant.

That's helping us particularly on Friday and Saturday nights where we can have pretty long waits and it's making it a more enjoyable experience.

But we are projecting continued strong guest count increases as a major focus

of the company and continuing to improve the guest satisfaction is the primary way to get it there. Dick?

I echo that.

I think we have plenty of physical capacity and really it's up to us to continue to improve our both operationally in terms of what we offer to

guests, but also the restaurants, I think the opportunity is there.

We are cognizant at the time. We are about at market opening time and we'll probably take one or two more questions. Anymor e questions?

We have a question from the line of Mitch Spicer from Lehman Brothers, please go ahead.

Thanks, I'll be quick.

Brad two questions for you. On the Tuscan farmhouse format can you give us a sense of how the existing Olive Gardens are doing when you open up a Tuscan farm and do you think you can put stores closer to together given the atmosphere?

And second on pasta costs if you see any issues with pasta costs on a positive or negative basis going forward?

Let me start with the first one on the Tuscan farmhouses.

Our site strategy is to do everything in our power to reduce cannibalization from our existing restaurants.

By the end of this year we should be just shy of 500 restaurants. We think there are strong markets that will not steal from the existing restaurants.

That's something we pay very close attention to. And the formats co-exist beautifully.

A Tuscan farmhouse, it's the same guest, the same [INAUDIBLE], it's the same comfort level even though they do look and feel different. That's part of our family of local restaurants' positioning.

As it relates to pasta costs no issue at all. Not a big change up or down it's basically flat from

where it has been in the past.

That is the end of our question and answer session. Please make your closing remarks.

Sorry, I couldn't hear that last statement.

At this time we have no more questions in queue, sir, please make your closing remarks.

We certainly appreciate everybody joining us this morning.

We feel we have had a fantastic quarter. It's driven off the stand point of doing a job better in our restaurants.

These teams continue to improve the quality of the experience for our guest and on the marketing side we continue to give them better and exciting and taster foods and we communicate with them in unique ways and innovative ways and it's all paying off in more sales and move profits.

We will be doing that, saying with those strategies ant continuing to offer value meals when they are needed to make sure we keep our restaurants full.

Thank you very much look forward to talking to you

next quarter.

Ladies and gentlemen this conference will be available for replay starting today at 11:15 A.M. Eastern time zone until Friday, December 21, 2001 at 11:59 P.M. Eastern time zone.