達登餐飲 (DRI) 2002 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Darden Restaurants third quarter conference call.

At this time all participants are in a listen-only mode.

A question and answer session will follow, instructions will be given at that time.

Should you need assistance press star zero.

As a reminder this conference is being recorded.

Now I'd like to turn the call over to Matthew Stroud (ph).

Please go ahead.

Thank you Paul.

Good morning everyone.

With me on this conference call, are Joe Lee, Linda Dimopoulos, Clarence Otis, and Richard Rivera.

We may make forward-looking statements describing the company's expectations goals or objectives.

These forward-looking statements could address future economic performance and similar matters.

By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to materially differ from those anticipated in the statements.

These risks and uncertainties include existing economic and market conditions, food and labor costs, regulations and policies, changes in consumers taste and demographics, other risks and uncertainties.

Because of these numerous variables you're cautioned against placing undue reliance on any forward-looking statements made by or on behalf of the company.

We plan to release same restaurant sales for fiscal March 2003 on Tuesday April 1st.

We plan to release same restaurants sales results for fiscal April 2003 on Tuesday April 29, and we plan to release fiscal 2003 fourth quarter and annual earnings and same restaurant sales for fiscal May 2003 on Thursday, June 19th.

We released third quarter earnings yesterday afternoon, results were available on First Call, PR Newswire, and other wire services.

Now for an overview of the quarter I'd like to turn it over to Joe.

Okay.

Thank you, Matthew.

First of all I'd really like to sincerely thank and express my appreciation for everyone's interest and presence on this call this morning what with the early stage of the war on Iraq occurring, and terrorist threats which I know have got to be particularly concerning to those of you that are in New York or Washington.

And so we really do appreciate you joining us this morning and we'll be talking about our third quarter results as Matthew said and some comments about some things that are coming up.

Yesterday we reported that the third quarter had an EPS of 35 cents diluted, that's a 3 percentage point decrease from last year.

It was in line with the earnings projection that we disclosed in mid-February and the consensus that was out on the street.

I want you to know we are very disappointed, I am very disappointed with the performance even in spite of the fact that we are doing this in a very challenging economic environment.

We are a better company than these results indicate and we're making changes that will help us resume solid earnings growth.

Clearly some of the decisions that we made this quarter did not deliver for us as we'd anticipated on top of that tremendous success that we had last year with double digit increases in same restaurant sales and the resulting good profit from that.

It was a difficult environment this year, but we had some things that we did or didn't do that contributed and Linda will dimensionalize (ph) all of these issues for us here in just a minute.

Olive Garden had a strong quarter, very strong quarter and that was in spite of this difficult environment.

Red Lobster remains fundamentally strong as evidenced by the critical indicators of operating excellence and high guest satisfaction scores and decreasing employee turnover.

Bahama Breeze and Smoky Bones continue to have great consumer appeal, but we are making some necessary refinements to ensure that each one remains exciting and appeals to a broader customer.

We are remaining confident in their long-term potential.

Our newest test restaurant is Seasons 52, it's now open and it's operating well, but it is a test restaurant.

Some of you have already been there and experienced it through the unique food offerings that we have and the great wine selection.

We are excited about the test.

We look forward to sharing its results with you in the future but remind everyone it is a one-restaurant test at this point.

Casual dining, though, continues to be a vibrant industry with excellent long-term growth prospects and so does Darden remain to be a company that can take advantage of those prospects.

Despite recent consumer uncertainty, a weaker than expected economic recovery, geopolitical unrest and fears of terrorism and war, casual dining has held up much better than most all other industries.

And while there is clearly been some slowing in the growth rate of sales and traffic over the past several months, the industry is sound.

It's got a healthy balance between supply and demand and the industry should only improve once the uncertainties facing consumers are solved or resolved.

I'm really confident that we'll take advantage of this situation and the opportunity that is in front of us, the opportunity that our industry offers by delivering consistent strong growth.

We continue to have excellent in-restaurant operations.

We have a great leadership team, strong leadership in our restaurants, and it's getting better all getting better all the time.

So Linda will now provide some detail about the financial results of the third quarter and I'll come back with some final closing summary comments, and Dick and Clarence are here to assist in answering any questions you have after that - Linda?

Thank you.

As Joe mentioned we reported that earnings after tax in the third quarter were 61.8 million or 35 cents per diluted share, which is a 3% decrease in diluted EPS.

Operating profit grew at Olive Garden, setting a third quarter record, while they declined at Red Lobster.

Bahama Breeze and Smokey Bones were diluted to earnings this quarter as our combined operating profit continued to be negative.

Darden's total sales increased 5.1% in the third quarter as a result of same restaurant sales growth at Red Lobster and Olive Garden, and our operations of 61 more new restaurants than in the prior year.

Both Olive Garden and Red Lobster reported positive same restaurant sales during the quarter.

Red Lobster had a 1.2% increase, its 21st consecutive quarter of same restaurant growth, and Olive Garden which achieved its 34th consecutive quarter of same restaurant sales increase was up .3%.

Both companies had a detrimental impact from a shift in the Thanksgiving Day holiday, which moved from our fiscal second quarter last year into the fiscal third quarter this year.

The shift negatively affected same restaurant sales by approximately 1 percentage point in the third quarter for each company.

Weather also had a negative impact on sales.

We calculate that the severe weather caused approximately a 1 percentage point decline in sales and traffic at Red Lobster and also Olive Garden in the third quarter.

In terms of margin analysis, food and beverage expenses were 30 basis points lower than last year on a percent of sales basis for mostly two reasons -- first a favorable sea cost trend that began last year continued, and second, seafood as a percent of total food and beverage expense at Darden continued to decline, and that's because a combination of Olive Garden, Bahama Breeze, Smokey Bones is becoming a bigger portion of our business.

Looking to the fourth quarter and next fiscal year we continue to see a relatively benign seafood cost environment although we expect our costs to be higher than they have been year to date.

Our current expectation is for a modest low single digit percentage increase.

Labor expenses were 10 basis points lower than last year on a percent of sales basis -- lower bonus pay outs and modest wage inflation contributed to this favorability.

The favorability in the food and beverage, and labor expenses categories was offset by a higher restaurant and selling expense as a percentage of sales.

Restaurant expenses were 130 basis points higher than last year on a percentage of sales basis.

There are several reasons for this.

As we mentioned in January, we were once again hit with unexpected workers comp and public liability expenses.

Together the unplanned component of these expenses totaled 5.2 million or approximately 2 cents per diluted shares.

These costs are catch-up expenses that we did not expect to incur this year as we had assumed our liability was fully accrued.

We feel we are now fully accrued for these items and we expect to incur no significant additional charges of this kind this fiscal year and we have increased our pull (ph) rate for the balance of the fiscal year.

In addition we anticipate that next year the current bearing component workers comp and public liability accrual will be for claims arising next year, and will increase based on analysis from our insurance provider.

We also experienced higher utility expense in the third quarter than prior year which resulted from higher natural gas prices and more severe winter weather that increased usage.

We estimate its impact to be 2.6 million or approximately 1 cent per share over the third quarter.

The last major impactive (ph) category was pre-opening expense -- we have accelerated our new restaurant growth at both Olive Garden and Smokey Bones.

In the third quarter this year, we opened 19 new restaurants, nine more than the prior year.

We estimate this impact to be 2.5 million or approximately 1 cent per diluted share.

Selling, general and administrative expenses were lower as a percentage of sales by 10 basis points due entirely to favorable general and administrative expenses on both an absolute and as a percent of sales.

As we disclosed in mid-February, marketing expense was higher by 80 basis points this quarter than last year because of our effort to deliver solid same restaurant sales growth on top of last year's double digit same restaurant sales growth.

We spent approximately 10 million in incremental marketing expense this quarter.

This equates to approximately 3 cents per diluted share.

Obviously this strategy did not deliver from an earnings perspective as we had anticipated and we plan to return to normalized spending levels in the fourth quarter.

At our emerging companies Bahama Breeze did not open any restaurants during the quarter and expects to open two restaurants in the fourth quarter for a total of five openings this fiscal year.

As we've said previously, sales at Bahama Breeze are annualizing several hundred thousand dollars lower than we projected coming into the year.

While we had expected that Bahama Breeze would be diluted to earnings this year -- would be less diluted to earnings this year than last year this will not occur because of the sales shortfalls we are experiencing.

Smokey Bones opened seven new restaurants during the third quarter, four restaurants opened in the Atlanta metro area, with others in Pittsburgh, St. Louis and Chicago.

And since the end of the quarter they opened two more restaurants, one in Indianapolis and one in Boca Raton.

Smokey Bones plans to open a total of 20 restaurants in fiscal '03, once again doubling in five.

We now anticipate that the dilution from our emerging concept and new business division this fiscal year will be approximately one to two cents higher than last year -- we expect this trend to reverse itself in fiscal '04.

The tax rate for the third quarter was down again versus last year.

This reflects tax strategies that were put in place sometime ago.

Although we expect the rate to be up on a year over year basis in the fourth quarter because of a meaningful non-recurring tax benefit in the fourth quarter of last year.

Finally we repurchased 1.7 million shares of our common stock in the third quarter.

Since beginning our repurchase program in December of '95, we've now repurchased 92.7 million shares.

In dollars, this amounts to over 1 billion dollars of shares repurchased.

We believe this is a powerful testament to the significant cash flow we generate.

We are authorized to repurchase up to 115.4 million shares, leaving approximately 22.7 million shares remaining in the current authorization.

Given the challenging economic environment we find ourselves in, we believe our same restaurant sales growth for fiscal '03 will be at the low end of our long-term target range of 3 to 5%.

We still expect to increase our restaurant base by over 60 restaurants this year, which put us near the top of the 3 to 5% new restaurant sales growth range we target for the long term.

Achieving the sales growth would normally enable us to get within our long-term annual EPS growth range of 15 to 20%.

As was indicated however, this year has been more challenging than we anticipated due to several factors some of which were of our own making and some of which were external issues beyond our control.

Given this back backdrop and the increased geopolitical uncertainty we now expect diluted EPS growth this fiscal year toward the low end of the 5 to 10% range we discussed in mid-February.

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

Thanks Linda.

So as you review what Linda and I have said so far, we think that despite our short term issues, we're really excited about our business and about the opportunity we have to really build a great company.

This opportunity drives our focus, which is to manage through this intermediate environment and deliver strong consistent growth over the long term.

Red Lobster and Olive Garden are proven companies with strong growth potential, they're leaders in their categories and they continue to deliver guest satisfaction at higher levels than before.

The expansions Bahama Breeze and Smokey Bones represent our commitment to strong, consistent long term growth of our emerging brands.

As we expand them we're taking time as necessary to make refinements and to ensure that they remain exciting and broadly appealing.

And while Seasons 52 has only recently opened its doors we are pleased with the early results.

I do remind again that it is a test.

I am pleased with the composition of the business.

I'm pleased with the balance we have between proven and emerging brands and between a focus on operating excellence and a focus on effective brand-building.

I believe we're on track to achieve this long term success now and for generations.

So we'll take your questions at this time.

Ladies and gentlemen if you wish to ask a question please press the 1 on your touch tone phone.

You will hear a tone indicating you've been placed in queue.

You may remove yourself from queue at any time by pressing the pound key.

Once again if you have a question please press the 1 at this time.

It's been requested that you limit yourself for one question.

For additional questions you'll need to queue up again.

And one moment, please.

First question today is from the line of Carly Whitter at Goldman Sachs.

Hi.

I wanted to ask about Red Lobster and the marketing strategy there.

You've been doing some of your promotions for a number of years -- Lobsterfest I think I've seen it five years.

The question is how do you keep generating interest with these promotions that have been running for a while, or do you need to start to modify the message that you're sending to consumers?

Hi, Carly.

This is Dick.

You know, actually Lobsterfest is sort of a hallmark for Red Lobster.

It's been one of the most successful events that we've had for sometime.

And we actually think of it as an event even more than a promotion because there is no pricing associated with it per se, there is no discounting for sure.

Sometimes we'll mention price points.

But I think the way we view that is that it's about sort of the celebration of lobster and everything that goes with it, and the way we maintain freshness and vitality in the event is by bringing new food items to the table.

So for example, this year we have lobster pizza.

Two years ago we introduced lobster chops which has since become a menu item for us because of its great acceptance.

Those are just two examples, lobster lovers dream, lobster in paradise are items that have come on the menu within in the last couple of years and had great acceptance.

So it's about development of new items all featuring primarily lobster but then all things that go with it and that's how we keep it fresh.

It's been great for us and has actually gotten good results year over year.

Question from the line of Jeff Omahandru with Wachovia.

I wonder if you could run through with us your thoughts on this 15 to 20% long term EPS growth rate target.

And in particular, what your thoughts are in terms of driving that range in terms of internal versus external sources needed to achieve it.

Our 15 to 20% range has always been a long term range, Jeff, and we recognize there might be periods that will bring us to the low end of that range or in the case of this year completely out of that range.

With the expectations we have, our strategies of building same restaurant sales growth in our existing large companies by expanding and having growth in our existing large companies with more new restaurants and some of that activity is some of the things that helped to press this third quarter earnings.

We had some pre-opening and opening expenses in there with higher openings.

But we think that we will be able to be in that range over the long haul with some years that we might be at the bottom or out of it.

And Clarence, you've been with us since we began developing all of the strategies and backups behind this.

If you and/or Linda would like to make a comment.

Sure, Jeff, this is Clarence.

Really there are a few pieces to it.

First as we've talked about for some time it's important that we do have good strong same restaurant sales growth from our established companies.

And we look at a long-term range of 3 to 5%.

And again there are periods when we would expect to be towards top of that range or even above it.

Because of macroenvironmental conditions and there are periods where we expect to be toward the low end and this is certainly one of those periods.

In addition to that we are looking for 3 to 5% growth coming from new restaurant expansion.

And we think that over the next three to four years, we have the vehicles we need to get that internally.

We certainly recognize that when we get out further we're going to need additional concepts and that's why we do the work that we do on things like Seasons 52.

The third piece is that those internally developed concepts need to meet our expectations when it comes to path to profitability, and we'll work really hard on that.

We had disappointment on that in terms that Bahama Breeze not being on the path he that we expected so that certainly affects our growth rate but we're getting to work it back to where it needs to be.

Janice Meyer with CSFB.

To follow up on Bahama Breeze, when you are saying we're working to get it back to where it needs to be, can you give us metrics where you need to be, to start to expand again, what do you see that might cause you to actually pull back from Bahama Breeze as another growth vehicle for you?

Let me make an overview statement then turn it to Dick.

Of course for some time we've talked about the fact that we have a large building that's very expensive and we've tested it indifferent markets and from those tests we found that it takes a very, very special market to support the large expensive building.

We are looking for ways to change that building and positioning enough so we can move into lower markets and less expensive buildings.

Dick, talk about what you did for holding back advertising and those sorts of things.

I've got two comments.

One is that we continue to have although we said we're following several hundred thousand dollars short of what we projected.

We continued to have very high absolute levels of sales which indicates good consumer appeal.

We got great acclaim when we opened the restaurants, critical acclaim reviews they get et cetera.

We feel good about the overall acceptance of Bahama Breeze.

We do have issues as Joe mentioned with investment in the building and we would like to see higher frequency.

So the things we are doing are aimed at replicating that Bahama Breeze environment that we think is very successful.

Consumers tell us that in every bit of research we do.

But to be able to do that in a footprint and a cost that is more compatible and consistent with the volumes we are seeing.

And so what it would take for us to really start picking up the development pace again would be to open, we have a new prototype underway that we think would achieve some of those objectives from the investment perspective and keeping the design appeal and so what it would take to see us build frequency in our existing restaurants and to demonstrate that we can build this restaurant and operate it and get the volumes that we are getting today so we feel good about that.

But do it in a prototype that what would really ensure we can get the returns that we need.

And the sum of all that I believe is it is going to be successful I think, good initiatives underway and we are implementing them on a test basis and over the next month, 45 days, and we're in the last stages of planning for the prototype.

The result of that could well be that it could actually have a higher build-out potential than we had been anticipating.

So we're pretty excited about the overall consumer appeal, the quality of operations that we have in restaurant, we think we're going to be able to resolve these --essentially it's an asset turnover problem but at a high base of sales.

So we're pretty excited about it still and looking forward to getting some of these tests under way.

We have a question from the line of John Glass with CIBC.

Red Lobster, this is the second quarter in which Red Lobster profits have declined.

And in this quarter Olive Garden comps are actually lower than Red Lobster and yet profits increased there.

Can you go through that dynamic and perhaps have we seen peak profitability at Red Lobster given these food prices now are beginning to rise again or can you still grow profits in a low single digit environment at Red Lobster.

Thanks.

It is the second quarter and you know, we -- I think there's some connection there, because I think part of what we saw in the quarter encouraged us to do what we did in the third.

And so there is some relationship.

But to answer your question, although seafood costs are going to be up slightly in the fourth quarter the overall cost environment is the benign, maybe not benign but used to deal with and better than years we have.

We think we can get ourselves back on track in terms of continuing to build same restaurant sales and getting the flow that we need.

So I guess I would say the answer is we're excited about Red Lobster, starting to rate it at or near all time heights on guest satisfaction, accrual retention, we feel good what's going on in the restaurant, we have had a little bit of a blip here in the last two quarters and so we have some things to tend to but we're confident we will.

And I would just add to what Dick said I mean, again, we did make a marketing investment in the third quarter because as Dick said some of what we saw in the second and we didn't get what we expected there.

We also made some investments on the labor side to make sure that we really were staffed well enough to deliver great experience.

And so there were some issues there that were of our own making.

I mean decisions we made to try to build the business that didn't work out as well as we'd like them to have worked out.

Probably the only thing I would like to add is we feel so strongly about the capacity of Red Lobster to grow.

That's why we're making the investments because we feel it has the upside and the future.

We clearly think there is a very bright future for Red Lobster and we need to figure out how to make these leveraged investments work harder for us.

We have a question from John Emrich (ph) from Rickler (ph) Capital.

What will the higher rates and dilution from the new businesses cost you in the fourth quarter year-over-year?

We don't give those -- we don't give those specifics out.

We will be happy to talk about them in June in our fourth quarter call.

Question from Joe Buckley from Bear Stearns.

Bahama Breeze and Smokey Bones kind of together, you mention necessary refinements to the concepts.

And obviously, it's you're referring to Bahama Breeze but I'm wondering if you are also referring to Smokey Bones, same things going on there in terms of fine tuning the concept.

Secondly sounds like your sales forecast for the fourth quarter is unchanged, you know, the low end of 3 to 5% same store sales, your earnings forecast is skewing to the lower end of the forecast and I'm curious what's driving that.

First of all, let me top line, comment about Bahama Breeze and Smokey Bones, the work that we do all of our concepts we are constantly look for refinement opportunities.

And when a company that is as new as Smokey Bones is or Bahama Breeze, we will find some of those opportunities.

Clarence may wish to speak to some without divulging competitive information.

But they're not as significant nearly at Smokey Bones what we're talking about with Breeze as far as asset base at Breeze that is way too high for the generation.

Reflecting all our learning and make sure the menu has the benefit of that learning.

You want to add to that Clarence?

I would just say, Joe, we at Smokey Bones have a very, very strong concept.

And we've got 34 restaurants open.

As you know, the first seven of those we really had a different location strategy, more so to see trade areas as opposed to A and B. And the last 27, are A and B locations.

And when you look at those 27 and where sales are annualizing it is actually very high and our investment turnover ratio is quite strong.

With all that said we do a lot of consumer research to try to get an understanding of what are the things that are driving that appeal, that people really find so attractive.

And then what are the things that we can do to improve.

And we've done that research and we think we could have even greater appeal and even higher sales and so that's what we're looking to do.

That's not unlike most of what is happening there is not unlike what happens in an Olive Garden or Red Lobster.

I'll use Olive Garden because it's doing so well right now is the fact that we're constantly looking at that menu to see what are the lowest ranked items and how do we either improve them or replace them with something that is even higher value.

Question from the line of Mike Smith (ph).

Before we go there if I could if there is another point to that question about the fourth quarter.

This is Dick.

I would just say coming from a little bit higher level just say that one of the things that's working there is there is two basic things.

One is we're going against a tough comparison last year.

We have labor costs that were unusually low last year?

More normal run rates this year.

Seafood costs were somewhat higher in the fourth quarter which is a reversal of the trend that we've been seeing so that's a little bit of an issue in the fourth quarter as well and then restaurant expenses are up somewhat because of some of the things Linda mentioned, utilities, insurance and all this.

Most significantly, because of the ongoing investment that we're making in relocations and rebuilds particularly in this case at Olive Garden, which we view as a very positive investment in building the business and building the brand.

And so that's just on an operating basis some of the things that are raising the issues you brought up regarding the fourth quarter.

Mike Smith of Comstock.

Good morning.

I have three questions I guess actually going back kind of back on the Smokey Bones.

The rumor on the street among some of your competitors is that you're pulling the sports bar part of that concept out which I guess sounds to me like it would be more than tweaking and is there any truth to that?

Mike, this is Clarence.

There is no truth to that.

One of the things people love about Smokey Bones is the opportunity to come in and watch sports on televisions.

We have got individual sound boxes and that is one of the things that people find attractive.

They also find attractive the barbecue we do, customers say we do a great job with it.

Those are pretty core elements.

You're right if we were changing them that would be more than a tweak but we're not.

Question from the line of Brian Elliot (ph) with Raymond James.

Good morning, excuse me.

Just wanted to touch on a couple of issues with Red Lobster and sort of its you know position and outlook, there's certainly some concern out there.

If from the profitability standpoint, if you Xed out the advertising and as a clarification with most of the incremental discretionary advertising you pushed towards Red Lobster and other concepts and the workers comp increase adjusted for that have we seen two down quarters in profitability, and secondly if you could address the traffic declines at Red Lobster, maybe are they more lunch than dinner, is there any kind of color you can give to help us understand the magnitude of that number?

Yes.

The question was, I'm just not sure --clarify the question, are the margins declining from quarter to quarter?

They are not.

Margins are really from both quarters have stayed relatively strong.

We have made as we said more investment in marketing and so that was clearly a more negative factor from the second quarter.

And as Dick just talked about, we are making investments that are -- that are part of the restaurant expense category that, you know, are not delivering for us as yet.

And I believe the question was, lunch-dinner?

Yes, I'll answer that Brian.

Somewhat higher at lunch than at dinner.

Just to clarify, also, for you, Brian, on the marking, this is Matthew.

On the marking spend was not all entirely related to Red Lobster.

Make that clear.

There was also some incremental spend at Olive Garden as well.

That cannot be all 100% attributed to Red Lobster.

Okay.

The final point would be on the quarter I think for the traffic decline, if you adjust for the holiday shift and the weather I think traffic was basically flat at Red Lobster.

That's correct.

Question from the line of Dennis Forest of McDonald Investments.

I wanted to get an idea of the opening schedule for '04 and maybe some guidance on capital expenditures.

Dennis, this is Matthew again.

Again our opening schedule we don't break it out by quarter for you but again we're looking at as we have for the last year, Red Lobster is looking 8 to 12 restaurants a year, Olive Garden 20 to 25 restaurants per year, Smokey Bones or excuse me Bahama Breeze six to ten restaurants a year and Smokey Bones 20 to 25 restaurants a year.

As far as capital expenditures go we are looking anywhere from 370 to 400 million this year.

Plus or minus 20, 25 million this year.

Question from the line of Howard Penny (ph) from Suntrust.

What's changed from February your guidance from mid February to the lower end of the range?

For some of the reasons you cited seemed to be operational in nature and things that you should have anticipated in the first beginning of the fiscal year.

Thank you.

I'm not clear on the understanding on the guidance question.

Clarence or Linda, do you -

Well, we had given 5 to 10 now, it's continued.

We've had continued winter weather that's affected us, we've had the operate workman's comp for the last quarter of the year, we've got more restaurants as Dick indicated in the case of Olive Garden will be opening in the fourth quarter of the year.

And if we've looked at balancing all those out, along with the potentials of down sides with the consumer anxieties and consumer fears that are in the marketplace today, we feel that this is a prudent guidance.

Just to add again, when Joe says more restaurants at Olive Garden, more than were planned.

Accelerated what were at the beginning of the year at Olive Garden as far as new restaurant openings.

And the consumer sentiment continues in theory and so that gives us some pause.

Question from the line of John Ivanhoe at (ph) J.P. Morgan.

Ask the question again yet in a different way.

Obviously in the fourth quarter as least what I interpreted from Linda's comments is basically 3% comp to use a round number in flat earnings.

Could you just kind of give us some reasons as to what's going to change in fiscal '04 especially the first half of fiscal '04 relative to the fourth quarter of fiscal 2003 to allow you to return to double digit, what's going on in other operating expenses and SG&A as you currently understand it in the fourth quarter, what's going to change in the first half of '04 to let you post solid earnings growth assuming that those 3% comps do continue?

Thanks.

We have some things that are going to strengthen our brands in both cases of the big companies.

We have things under way that is going to we think impact positively the smaller companies as well.

But some of these things I really don't want to get into because they are having to do with strategy positioning in the consumer's mind and then in fact in the menus, et cetera of Red Lobster and Olive Garden primarily Red Lobster.

I'd rather not get into some of those specifics.

Additionally, we have been vested over the years when times have been good and real good, and we've been able to outperform those good times in the level we have.

We've made several investments in our business such as you've heard us talk about our leadership development and things of that before.

We have other developments that are under way that will tend to reach the end of their cost expectancy in this year.

And we will start up fewer of new types of investments in the coming year.

So we're prioritizing to pull back on some of the new investment ideas that would maybe have normally gone into place if we'd have been continuing to integrate external environment.

Anything else to add to that Linda or Dick?

I think we expect to have about a utility environment.

We will get beyond that.

We look to improving tax trends, labor force and better retention, those have a benefit for us as well in terms of labor comparisons.

There's a lot of activity we put in place around workman's comp.

You've heard us say before that we've had our workman's comp managed by Liberty Mutual primarily, and our restaurant managers have not been as active in involvement around those claims and we have changed that where management now is actively involved.

We have a group together looking at anti-skip floors and things of that sort that would hold down injury rates.

We've already seen some dropping of injury rates.

So while this will take time to work through the system, it should have some - it could have some positive effects as early as next year.

And a final piece is, we do expect to have an improving operating profit trend at Smokey Bones.

So we're dilutive this year, we expect to be dilutive next year but less dilutive and for that to be meaningful.

Question from the line of Mitch Spicer (ph) of Lehman Brothers.

Red Lobster you mention that marketing is going to go back to normalized levels yet things seem to be a little bit more difficult in this fiscal fourth quarter than the third quarter.

So perhaps maybe what gives you confidence you could at least sustain same-store sales given less marketing?

And I guess that leads me to the next question.

Just a point of clarification.

I believe you said 3% comps, low end of the range for the year for Darden.

That implies fourth quarter comps I believe more in the one and a half to two and a half percent range.

I just want to make it clear what you're saying about fiscal third quarter comps, then lastly on workers comp as I think you mentioned but just another point of clarification, I believe you were just looking at workers comp once a year.

Is it now going in order, you're going to accrue for it?

Or look at it more on a quarterly basis so that we won't get blind sided again like we have over the past two years.

I'll take the marketing question first then I'll defer all the rest.

I guess I would just point out that in the third quarter we made a conscious decision to step up on marketing.

Whenever you do that for starters you end up paying a lot more because you're buying on a spot basis than on an annual basis.

That's one answer.

We ended up marketing into some bad weather so even though we were -- we have great awareness of our advertising but it just turned out that we had several things coming together that sort of worked against us in that quarter.

So we -- that's I guess sort of my way of saying that I don't think we would have to continue, and we don't plan to continue, at those levels in order to be effective.

And the answer to your other question or the implied question about can we be effective with our marketing at sort of our historical levels of spending, we think the answer is yes, we continue to grow our business both on a same restaurant sales basis and new restaurants.

And as we do you know our percent of sales has been about the same at Red Lobster for some time, marketing expense may be down just a touch.

And so that generates more dollars and we think the answer is with better product offerings and more compelling messages we can be really effective.

So we don't think that we're going to have to increase marketing expense in this environment.

Mitch, this is Matthew.

On the comps we don't want to get out and start projecting comps by quarter or by company.

We're going to stick to that position here.

We'll just defer back to saying that 3%, 3 to 5% range is a blended comp number and leave it at that.

As it relates to workers comp, just to clarify, we are attempting to accrue to the ultimate liability.

And the one-time charges we have taken in the past two years have been related to prior-year developments.

So it's cost development in those prior years.

And so we are obviously very closely looking at our accrual rates for the current year and trying to reflect that more appropriately, and besides all the efforts Joe talked about in terms of prevention and managing and getting our folks back to work sooner.

So we will expect to certainly accrue -- these costs are increasing, we've said that, they're going to be higher next year, we are working very hard to manage and mitigate these escalating costs.

Next question.

Matthew Debrisco (ph) with Gerard Klauer Mattison.

The weakness in the comps fourth quarter not to beat a dead horse, what's the holiday shift, I would think you would have gotten bigger Friday business, the lent following into your fourth quarter a little more and also these are some of the easier year-ago comparisons that you had in it some time now at least two quarters and also looking at your post September 11th quarters you guys put out pretty good numbers, casual dining became a meeting place, 12% and 6% numbers at Red Lobster in particular.

What are you seeing in the current numbers now is it something the consumer's reacting or perhaps the brand is slowing somewhat momentum wise and why the muted comp outlook for the fourth quarter?

Well, first of all I think we tried our best here to explain that the are not slowing in the eye of the consumer.

Our consumer guest satisfaction levels are running equal or all time highs.

We have mystery shoppers that go in and shop our restaurants for us, those scores are high.

We are winning best of in communities, best seafood, best Italian.

We are having critical acclaim in Zagat (ph) and other areas that criticize restaurants, our critics of restaurants including newspapers and magazines.

There is absolutely no indication that either of these two large companies or the small ones either, none of our companies are slipping at all in consumers' acceptance and views.

Now, the difference between 9-11 and what happened there and here is, is sizable.

And Matt, your right if during that time after 9-11 our restaurants, particularly, and all the casual dining, did become a haven of safety and comfort for people after they got through the shock of the startup of the war, in that case the terrorist activity.

It could work out that way again but we wouldn't be prudent to program it.

And we certainly are doing everything we can.

We've got voice mails out already to all our management.

We're putting out further communications today.

And I guess I shouldn't say what all we're doing there for competitive reasons.

But basically we're reminding our employees of how valuable they are, our concern for them in this situation, and asking them to show that same concern and respect to all of our customers so that we, again, are the place that people will come to once they're ready to get out of the house and stop watching the TV.

Next question.

Hil Davis with Thomas Weisel Partners.

My questions have been answered thank you.

Carly Whitter, with Goldman Sachs.

3% you intended that to mean for the full fiscal year is that correct?

That's correct.

Okay.

And then secondly just thinking through what happened in the quarter, how do you, I guess, react more quickly going forward?

Do you need to make any changes in processes or controls, can you, if you see that marketing isn't working can you pull back quicker?

Can you just run through that a little bit, please?

Well, the -- on the latter part of that question, on marketing, we are on top of the market now here like never before.

As you know, we get daily reports.

And so activity and actions around marketing will -- are done faster than we did do it in the third quarter if we should need to.

So I guess that's the best and most complete answer I can give you, that we can make some marketing and advertising changes very quickly.

Some are slower.

But now we'll be on top of everything, so that those things we can do fast if necessary we will do fast.

And remember also, that in the last quarter, when we did our heavy-up marketing we were declining right into the face of blizzards that were regarded as the worst in 20 years or something.

I understand they are having one as we speak in Denver, Denver is shut down completely.

March really many people don't realize is the snowiest month of the year.

Question from the line of Mark Kelanowsky (ph) with Smith Barney.

Darden has had a number of management changes in recent months and just want to get your take onto what extent those changes on issues we see cropping up on the expense side.

And second I don't know if you're willing to answer this but I did want to specifically ask about fiscal 2004, and whether you believe the 15 to 20% earnings growth rate does or does not apply to that particular fiscal year.

Okay, well, let me first comment about the management changes and get Dick and Clarence because they're also close to them as well to comment.

First of all, we have for years looked at having two people to back up each of our key senior jobs, two folks that are confident and ready to take over our key jobs.

And that strategy has played out well here as we've had changes.

So we still have very good people in new jobs.

Now, any time someone's in a new job there will be an opportunity to learn that job, learn the relationships, and understand the informal communications and rules that was going on maybe wasn't really formalized or understood before.

So I'm -- while I can't point to anything of size I can say human nature would take us to the point that we're not as efficient with that new team in place as we will be in a few more months.

But it's not because of incompetence, it's more just time and grade to get their arms around a new business.

And on the second question having to do with -- let me get Dick and Clarence's view of that as well.

Thanks Joe.

I would just echo what Joe said but I would say that maybe echo it twice to say that I think it's a testimonial to the strength of leadership that we have that we're able to do all the changes we did internally.

And I think that that's playing out to have some big advantages in the sense that the people that come on may have new jobs to learn and they do including myself.

But we all know Darden and we know each other.

So we think that's going to work in our favor, already is working in our favor as the team comes together.

From my perspective I have to tell you I think I'm a hockey player with all the players on ice.

We're excited about our companies, we're excited about our leadership team.

There's sort of a renewed sense of energy and enthusiasm for our strategies, we know we have near term issues but we are confident we'll deal with them well as we have in the past.

I would kind of echo or emphasize or put an exclamation point behind what Clarence said.

Did you want to say anything?

No, I think Dick said anything that needs to be said.

Thank you.

Concerning your 15 to 20% growth question, I stated earlier that that's a long term goal.

There will be some years that we might be well above that as there has been the last five years we've been every year well above it.

And there will be some years that because of environmental situations and some issues within our own team, that we may be below it.

So I can't dimensionalize it any more than that right now.

We are putting our '04 marketing plans and business plans together.

And I think if I were to comment now it would clearly be too speculative.

So stay tuned on that one, Mark.

Next question.

Amy Green with Avondale Partners.

Thanks guys.

Mine have all been answered.

'04 am I correct that is an extra-week year and if so, what might that contribute?

It is an extra-week year.

And are we dimensionalizing what -

Yeah, we don't dimensionalize what it would contribute but it does contribute fairly significantly but 15 to 20% we're adjusting that week and comparing 52 against 52.

And so as we communicate in the future it will be on an adjusted basis.

We'll clearly fabricate that amount and let you know when it's appropriate but it is a 53-week year.

Forecast in the given year what is going to fall in and keep you abreast of how much effect it had.

We won't try to claim it to be, its performance that is not.

Other questions?

Mike Smith.

Just three quick questions.

One, what quarter will that extra week fall in, two, why was - why are the numbers in the 10-Q for the second quarter last year different than the ones that we're comparing with this year, and for Matthew, do I understand that workman's comp story has changed from the last time we talked about it or is it this same?

And item No. 3 and I guess the most detailed ones, you noticed that you needed the higher frequency which I translate to mean bigger volume.

What are you planning to build the volumes of Bahama Breeze?

Lot of questions there Mike.

First of all, the extra week, third week falls in the fourth quarter of the year.

And then what was some of the others?

Accounting change of our sales incentives are now deducted from sales instead of marketing.

I don't know if you could hear Linda on that one Mike but the accounting change that put us to deducting coupon type activity gift certificate activity from sales rather than charging it to marketing expense.

Historically most of us in the industry is, it was mixed.

About half and half.

We being from the General Mills days we are used to using a coupon as a marketing expense charging it against marketing now the coupons are marked against sales.

That is a restatement, restatement to reflect that.

It was restated to reflect that.

Now, the higher frequency at Bahama Breeze, you want to talk about that.

Hi, Mike this is Dick.

I don't want to talk about it in great deal because it really starts to get to the core of the strategy about Breeze.

While people love it, it has become something that is a little bit more special occasion or break in the routine than we would like for it to be.

And so just directionally, I would say we would like to see it be much more of a drop-in, more normalized casual dining than an event.

And so I'll leave it at that.

Okay.

Matthew I think he had -

Workers comp I don't think the story is any different from what we've been talking about here.

We've just tried to dimensionalize a little more the activities we have under way to make sure we control it better and know our expenses more quickly.

We have time for one more question that comes from the line of Lisa Teckler from H &R Block Financial.

A question regarding the workers comp.

Are you saying we should be modeling additional comp going forward and how much of earnings guidance is a factor of workers comp charge?

We dimensionalized it for the third quarter, it was roughly 2 cents and so that was the catch-up.

And so we would be back to more normalized levels in the fourth quarter.

But we would however expect next year to be increasing that amount, in our accrual rate because of what we are seeing now was escalating costs associated with workers comp and we have not yet dimensionalized that.

And just to add, there really are two parts to it again.

Again, the prior year component which is the catch up piece that we would expect to not be recurring.

That's correct.

Even though it has happened two years in a row, unfortunately that is not what we're looking to do.

We are looking to accrual to the ultimate liability to not be recurring but we will have the claims that will arise next year and those claims will be more extensive than the claims this year given the trends we are seeing.

Back to you for closing comments.

Everyone I'd like to add that we didn't make a big issue of this but I did want to bring it out that in addition to the winter weather and everything we've talked about in the environment have made it tougher.

We were comparing ourselves to very large increases last year.

Our comp restaurant sales last year were running in double digits or almost double digits at Olive Garden, 9.8 and over double digits at Red Lobster.

So when -- and that was so far in advance of the track average of casual dining restaurants that our comparables were harder and we attempted to top them out and in fact beat them in many cases but the cost of doing that with that marketing cost was exceptionally high.

And so while we're not where we want to be right now, we're a strong company, with strong brands, strong teams, from people, and a fantastic financial balance sheet and financial strength to do what we need to do to fix these problems, to continue to remodel our restaurants that need it, to grow at increasing rate with new restaurant construction, and still have the cash flows to buy stock back.

So I hope that you'll look at the total big picture with us, and we expect to be seeing you again soon and answering any questions as we travel around, and certainly be back to talk with you a quarter from now.

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