達登餐飲 (DRI) 2002 Q4 法說會逐字稿

Thank you for standing by.

Welcome to the Fourth Quarter Fiscal Year '03 Conference Call.

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

Later there will be an opportunity for questions and instructions will be given at that time.

If you should require an operator's assistance during the call press zero and then 'star'.

As a reminder the conference is being recorded.

I would now like to turn the conference over to Vice President of Investor Relations Mr. Matthew Stroud (ph).

Please go ahead sir.

Thank you Rita.

Good morning ,with me are Rick Rivera, Darden's President and COO, Linda Dimopoulos, Darden's CEO and with us on the local line is Joe Lee , Darden's Chairman and CEO.

During the course of this conference call, Darden's offices and employees may make forward looking statements considering the company's expectations ,goals or objectives.

These forward-looking statements could address future economic performance, restaurant openings, various financial parameters or similar matters by their nature forward looking statement involves risk and uncertainty that could cause actual result to materially differ from those anticipated in the statements.

These risks and uncertainties include competition in the restaurant industry, economic and market conditions, food and labor costs the availability of suitable sites for new restaurants, government regulations and policies, changes in consumer taste and demographic trends, weather conditions and acts of God and other risks and uncertainties discussed in the company's SEC filings.

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.

A copy of our press release announcing our earnings, the Form 8-K used to file the release with the Securities and Exchange Commission and any other financial and statistical information about the period covered in the conference call, including any information required by regulation G is available under the heading the numbers on our web site at www.darden.com.

We plan to release same restaurant sales results for fiscal June 2004 on Monday July 7th after the market close.

We plan to release same restaurant sales results for fiscal July 2004 on Monday, August 4, after the market close and we plan to release fiscal 2004 first quarter earnings and same restaurant sales for fiscal August 2004 on Wednesday, September 24th, after the market close.

We release fourth quarter and annual earnings yesterday afternoon.

Results were available on first call.

PR news wire and other wire services.

Now I'd like to turn it to Joe for a few comments.

Thank you, Matthew.

As Matthew said we reported the fourth quarter earnings yesterday and that was earnings after taxes, $61.1 million dollars.

Diluted EPS was 35 cents that's a 13% decline from last year.

And on an annual basis, we reported earnings after tax of $232.3 million diluted EPS of a dollar 31.

We're extremely disappointed with these results and even with the chAllanging competitive environment that we've experienced, we still have disappointment.

As I've said to you, many of you, several times we are a better company than these results indicate and we're making changes that will help us resume solid earnings growth.

We are still a very strong company with trusted brands and a growing industry and we're disappointed and we are looking to lead again and return to industry leading performance.

We view our company as we view the industry, a substantially good, long-term investment.

With that opening comment, I'll turn it to Dick who will take us through some further overview and summary comments and then Linda will take us into more detail.

Thanks Joe.

Good morning Olive Garden and Red Lobster reported solid sales growth in the fourth quarter and for the fiscal year.

At Olive Garden total sales were up 5.9% for the fourth quarter and 6.8% for the fiscal year.

At Red Lobster total sales were up 2.8% for the fourth quarter and 4.1% for the fiscal year.

Olive Garden had a solid fourth quarter in fiscal year, delivering results that met our internal expectations.

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

However, it failed to meet our expectations and we'll discuss those issues.

Both Bahama Breeze and Smokey Bones continue to have great consumer appeal while the Bahama Breeze's financial performance is not where it needs to be.

We're making necessary refinements to ensure that it remains exciting and becomes more broadly appealing and we remain confident in its long-term potential.

As Joe alluded, casual dining continues to be a vibrant industry with excellent long-term growth prospects.

The industry is sound with a healthy balance between supply and demand and the industry has improved as some of the uncertainties facing consumers have been resolved and that should only continue.

We are confident that we will take full advantage of the opportunity our industry offers by delivering consistent solid growth.

We continue to have excellent in-restaurant operations.

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

Linda will now provide detail about our financial results for the fourth quarter and our thoughts on fiscal 2004 and Joe will come back with some final comments and then we'll go to questions and answers --any questions you might have at this point.

Thanks, Dick.

As Joe mentioned, we reported that earnings after tax in the fourth quarter were 61.1 million, or 35 cents per diluted share, which is a 13% decrease in, diluted EPS.

Annual earnings after tax for the full fiscal year were $232.3 million, or $1.31 per diluted share.

Fourth quarter operating profit was down slightly at Olive Garden and off substantially at Red Lobster.

Bahama Breeze, Smokey Bones and our new business division including Seasons 52 were diluted to earnings this quarter with a combined operating loss that was greater than the same quarter last year.

Darden's total sales increased 5.6 % in the fourth quarter as a result of the same restaurant sales growth at Red Lobster & Olive Garden and operation at 60 more restaurants then in the fourth quarter of the prior year.

For fiscal year Red Lobster opened 11 restaurants and closed 5.

Olive Garden opened 28 restaurants.

Bahama Breeze opened 5 restaurants.

Smokey Bones opened 20 restaurants.

And Seasons of course opened their test restaurant.

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

Red Lobster had a .9 % increase, its 22nd consecutive quarter of same restaurant sales growth and Olive Garden which achieved its 35th consecutive quarter of same restaurant sales increases was up .1 %.

For the fiscal year, Red Lobster had same restaurant sales increases of 2.7 %. and Olive Garden had a same restaurant sales increase of 2.2 %.

Bahama Breeze opened 2 restaurants during the quarter.

One in Seattle and one in Cleveland.

We are slowing new restaurant expansion at Bahama Breeze in 2004 while we implement changes to improve its financial performance.

It plans to open four restaurants, including a new, lower cost prototype late in the fiscal year.

And we now expect Bahama Breeze to continue to be diluted to earnings in fiscal 2004.

Smokey Bones opened 5 restaurants during the quarter.

It plans to open a total of 25 to 30 restaurants in fiscal 2004, which is an increase in its expansion pace.

With the ramp up of new restaurant openings, Smokey Bones will also remain dilutive to earnings in 2004.

Seasons 52 opened its first restaurant in the fourth quarter.

We are pleased with the other results we are experiencing and remind you that this is still very much a test restaurant.

We will continue to monitor its progress and update you accordingly.

In terms of margin analysis in the fourth quarter, food and beverage expenses were 12 basis points better than last year on a percentage of sales basis, primarily because TP costs as a percentage of total food and beverage expense at Darden continues to decline.

This is because the combination of Olive Garden, Bahama Breeze and Smokey Bones is becoming a bigger portion of our business.

Looking to fiscal 2004 we continue to see a relatively benign food cost environment and we expect as a percent of sales to be directionally flat in fiscal 2003.

Fourth quarter labor expenses were 109 basis points higher than last year as a percentage of sales due to two factors.

Olive Garden, Smokey Bones and Bahama Breeze are becoming a bigger portion of the business and they run higher labor as a percentage of sales, and Red Lobster hours were higher than anticipated because of its sales volatility.

Restaurant expenses in the fourth quarter were 48 basis points higher than last year on a percentage of sales basis.

There are several reasons for this.

We continue to experience higher utility expenses, particularly natural gas, due to the reduced supply and increased demand in North America.

We also experienced higher credit card expenses due to increased usage and processing fees.

Selling, general and administrative expenses were higher as a percentage of sales.

By nine basis points.

Due to unfavorable general and administrative expenses, as we wrote down the carrying value of some assets this quarter.

A majority of these assets relate to restaurants that will be closed and relocated in fiscal 2004.

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

This reflects tax strategies that were put in place some time ago.

For fiscal 2004, we expect the tax rate to be up on a year-over-year basis.

Finally, we repurchased over $5.8 million shares of our common stock in the fourth quarter.

Since beginning our repurchase program in December of 1995 we've now repurchased $98.5 million shares under authorizations totaling $115.4 million shares.

In dollars this amounts to almost $1.3 billion of share repurchase, including the $213 million we spent in fiscal 2003.

This is certainly a powerful estimate to the significant cash flows we generate whether it's a period of strong performance or in more chAllanging times.

We're clearly disappointed with the lack of momentum in our business this past year.

And we have discussed previously, we target same restaurant sales growth of 3 to 5 % over the long-term.

For fiscal 2004, we believe that same restaurant sales growth of 1-3 % is a reasonable expectation given the current state of our businesses and the chAllanging economic environment.

Of course there will always be some month-to-month variability where specific factors put us above or below that range during the year.

In fiscal 2004, we again expect to increase our restaurant base by over 60 restaurants.

Similar to the net new restaurants we added in 2003.

This will put us at the top of the 3-5 % new restaurant sales growth range we target for the long-term.

We expect to open 8 to 12 Red Lobsters, 20 to 25 Olive Gardens, 4 Bahama Breezes and 25 to 30 Smokey Bones.

While we continue to believe in a long-term annual diluted EPS growth rate of at least 15 % in a normalized economic environment, present circumstances make a lower near term growth range more likely.

Dilutive EPS growth in the range of 8 to 12 % is our expectation for fiscal 2004 based on where business stands today.

And of course as with same restaurant sales growth there can always be some quarter-to-quarter variability whether there are specific factors that put us above or below the range.

In terms of the pattern of earnings growth in fiscal 2004, the first half of the year, particularly the first quarter, is much more chAllanging than the second half.

We do not expand year over year earnings growth in the first quarter but we do see gradual improvement in the second quarter leading to solid improvement in third and fourth quarters.

In fiscal 2004 one thing to note is we have an extra operating week that polled in the fourth quarter.

This 53rd week happens every six years and should expect to generate five to six cents in diluted earnings per share for the year with the full effect in the fourth quarter.

However, we expect that investments in operating programs to strengthen the business for long-term success will offset much of the financial benefit from the additional operating week.

This investment may be in areas ranging from incremental spending on building our marketing capabilities to trading enhancements to developing more efficient restaurant support processes.

Now I'll turn this back to Joe for final comment.

Thank you, Linda.

So despite our short-term issues, and we actually have more than we would like to have, we're still excited about the business, and we're excited about the opportunity to build this into a truly great company.

That opportunity drives our focus, which is to manage with the intermediate environment and deliver strong, consistent growth over the long-term.

Red Lobster and Olive Garden are proven companies, with strong growth potential.

They are leaders in their categories.

They continue to deliver guest satisfaction at higher levels than before.

And they have goals to improve these levels to even higher positions.

The retooling of the Bahama Breeze and the expansion of Smokey Bones represents our commitment to strong, consistent, long-term growth in our emerging brands.

And while Seasons 52 has been only operating a few months we're quite pleased with what we see so far.

It's an idea that's very timely.

I'm pleased with the composition of our business, which includes a balance between these proven and emerging brands.

And between the focus on operating excellence and a focus on effective brand building.

I regret we did not respond as effectively and as quickly as we should have to the chAllanges that arose in fiscal '03, but I do believe now that we're on track to achieve long-term success now and for generations.

So at this time we'll open it up for questions and Dick I'll ask you if you'll, Matthew I'll ask you to field the questions and Dick and I will answer.

Or anyone that they're directed to..

Ladies and gentlemen, if you would like to ask a question, you may queue up by pressing the number 1 on your touch-tone phone.

If you pressed 1 prior to this announcement we ask you please do so again at this time.

You will hear a tone indicating your line has been placed in queue and you may remove your line from queue at any time by pressing the # key.

Thank you.

Our first question is from the line of Coralie Witter with Goldman Sachs.

Please go ahead.

Hi.

Could you provide a little bit more information on the cost structure in fiscal '04 ,in which line items we are seeing the bulk of the increases given food costs are going to be flat year-over-year, how much of this is due to insurance and workers comp, how much of this is due to perhaps needing to get that cost structure down more in line with the now lowered sales level?

If you could talk through that and what you're doing to establish better cost controls going forward

Thanks Coralie, I think Linda is probably the best to answer that question.

We'll let Linda take that.

Sure.

We are continuing to see pressure, as I indicated, with utilities in that area, certainly insurance, while we think we have it well estimated and targeted but it is at an increasing rate so those areas continue to put pressure on us.

Other areas we're working very diligently to really leverage our scale as a business and so we have a lot of focus on process improvement and we'll be doing a lot of that work this year trying to strengthen things that really benefit us across the board.

So also -

If I could add to that, what was said in the earlier statements about doing things that will impact our marketing and make it much more efficient.

I'd rather not go into specific details for competitive reasons but there are things that will we'll be doing in the marketing arena.

There are things we'll be doing in the service arena.

Again, I don't want to go too far into detail on those but primarily in restaurant operations around service and brand building around marketing.

Probably the other thing I would mention Coralie is also depreciation is where we're continuing to invest in and unit growth and refurbishment.

Next question.

Our next question is from Joseph Buckley Bear, Stearns & Company.

Thank you.

Actually I have two questions.

Joe, you mentioned, I guess in the release and also in your comments that you didn't think you responded as effectively as you could have to some of the pressures.

Would you talk about, if you had to do over what you might have done, how you would have responded?

And then why don't we start with that one and then I have one more.

Well, what we do differently, if we were starting over, we would move more quickly that's one thing.

We would not allow ourselves the excuse of, well, things are going on in the economy and the - with terrorist activities, scares and rumors of war scares when this was all beginning and we would have move faster, to say, that we're having at our check averages we're having softness and we need to move faster and that some of the promotions and creative messages that we have had out from our advertising department and agencies weren't as strong and we would recognized also that in the restaurants, while we were running roughly the same overall experiences that we have been running, they had no longer continued to climb up.

So those are the three broad areas Joe that we should have moved faster on.

I also would say that in making the substantial number of management changes that we've made with good people going into slots that there were different slots and we could have provided some better oversight for the integration of the new people into the new jobs.

Second question, Joe.

His line is no longer in queue.

Next question we have Janice Meyer with Credit Suisse First Boston.

This actually is the follow-up to that.

A couple of things.

Can you just sort of a little more clear say what your thesis is on why traffic weakened so much at Red Lobster and Olive Garden and why the Surf and Turf promotion didn't work whatever you know you theorized as being the main problems and when you look at your 1 to 3% comp increase, how much do you think of that as now to be pricing and check and can you talk a little about your strategy with check going forward.

Dick will handle that question.

Janice, good morning.

I think there are a couple of things there and really it varies I would say with each of our two big businesses but you asked specifically about Red Lobster and I would say that one thing that we have to remember is we had a big year in '02 that we're going against.

I think that Joe's comment about moving faster, I think as we looked at the third quarter, in particular, and saw some of the results of our promotions there, that we were going against such a big quarter that it kind of threw us off a little there.

But in the fourth quarter in particular we had stayed down going against Lobster Fest and it wasn't just as strong.

I don't know how else to say it.

We thought it was a good offer stake hand on a conceptual basis, tested well, it didn't pull like we thought it would.

It may be related to price point, in other words, kind of the way the mind set of consumers at that point and what they were willing to spend but in any case it didn't pull.

I think our thesis, if you will, is, and I think this would apply to both businesses, is that we need really more compelling news in terms of our marketing and we need fresher marketing and so it's not, that's not the answer, but as Joe alluded to, the effort is to continue to improve our guest experience.

Although Olive Garden is at best ever level they still have some pretty ambitious goals with each year to move it up even further.

Red Lobster has really ambitious target to improve off an all time high but --and some of our businesses experience has been somewhat flat and we think it's important to show the confident improvement and then couple that with refreshed and more compelling marketing, you know, the advertising spending has gone up and there's more presence out there.

We think it's important to have breakthrough news.

We don't anticipate that we'll dramatically increase our spending but we do think we have a need to deliver messages that really get through and are more compelling.

Next question Jeffrey Omohundro with Wachovia.

Just a follow-up on the steak and lobster promo.

I am just wondering when you look at your execution on that product, if you feel like the training through the system was adequate, maybe you can talk a little bit about that and where the actual preference on the steak came out and than secondly you touched on the Bahama Breeze prototype.

I wonder if you could provide more details on what we can expect in terms of where you're going, specifically on the box.

With reference to the execution, Jeff, I don't have any reason to believe the execution was any less than we had anticipated.

I mean the data that we see don't indicate that from guest satisfaction scores, preference on the item came in, more or less where we had expected it.

And so I don't have any reason to believe that it was an execution problem.

I think it just didn't generate the incremental guests that we were expecting to see.

And so I think that's how I would answer your first question.

With respect to the prototype, we're pretty excited actually about where we are in that.

We think we will have a building that will deliver.

We've done a lot of research, let me start by that.

We've done a lot of research on specifically the facility itself and what guests like about it and what it communicates to our guests.

We feel pretty confident that we have retained the elements that are really strong about the building itself and the facility.

And been able to do that with, retaining the same look, the same level of finish out and yet through some really good cost engineering bring that cost down significantly.

We use a little bit less land, which will help also.

So we're pretty excited about what we've been able to do on paper anyway, the initial bid process, in terms of being able to reduce the costs of prototype to bring it more in line with what we feel are pretty strong Dinner Only sales.

I mean I think the sales at Bahama Breeze are sales that most people in casual dining would give their left arm to have on a dinner-only basis.

And so really what we have is a bit of an issue of matching up the asset, the investment, with the turnover.

And so we're pretty excited about towards the end of the year we get that built, what we think it's going to be able to do for us.

I'd like to add just a comment, Jeff.

On the steak promotion, there were two other factors there and one was just simply the timing of that promotion at the timing of the intensity of the war effort.

And then the other part of timing is gearing sort of in the middle of that promotion when Canada had its problems with that mad cow incident which spooked everybody short-term.

So just other factors that played into the success or lack of success.

In addition to the ones Dick mentioned. .

Next question.

Bryan Elliot at Raymond James.

Good morning.

A couple of follow-up questions.

You all mentioned I think Joe maybe that service hasn't continued to improve in the eyes of the consumer.

And that's a area of focus going forward.

And marketing, maybe not hitting.

Could you give us a little color on your thinking as to what has changed over the past year when sales were so strong, where the marketing seemed to drive a lot of traffic and has the consumer changed?

Is the audience different?

Is your mix of where you're buying eyeballs changing maybe?

And then on the service side, do you think -- what's the evidence that there's a service issue?

And two, do you think your efforts to attempt to get store level cost more in line with slower than expected sales and labor scheduling in particular, did that have an impact on the service?

I'll take that, Bryan.

Good morning.

I have to see if I can remember all those questions, Bryan.

Let me really do service first and then marketing.

I think you asked a question about media mix.

And the service part, it's really a little bit different story with each of our businesses that you might expect.

But particularly as we think about Red Lobster, I think what I said was that we were flat, all be it at a high level but still no improvement over prior year and the year before that it was sort of modest improvement, I would say.

For a couple years now we had less improvement than we would like to see.

And I think, since it's a thesis you're asking for, I will tell you that Joe referenced some of the changes that we made and people adjusting to new roles and new positions, mine among them.

And then as we got into the year, some of the urgency around sales and guest counts.

And I think truthfully that we may have lost a little bit of focus on it.

But that's not the case now.

I assure you we're very focused on improving our guest satisfaction scores and have specific plans in place and I think they're going to work.

It was not a labor hour issue.

In fact, labor hours were part of the cost issue that we had management of labor and we're looking forward to making some good progress there.

In fact, they've already started to see it.

So I don't think it was an issue of us cutting back, I think it was more an issue of dealing with the sales patterns we were seeing, trying to get staffed properly, etc.

I'm not concerned about us cutting back.

I do think we'll see significant improvements.

With respect to marketing, I think in both cases the theme will apply, although the specifics are different, that is to say we just didn't have new news.

I think we need to refresh in both cases the advertising that we're doing and in the case of Red Lobster, somebody offers, that we had promotions that work really well for us two, three, four years in a row.

They still work pretty well by most measures but not as well.

And so I think it's an issue developing new great tasty products that will be a little more compelling in terms of the offer.

The other thing I would say that was characteristic this year more so maybe than years gone by was again on the Red Lobster front, a lot more competitive advertising and a lot more advertising around sea food.

And so that changed a little bit also.

Also and I think -- you know internally I have to, my thesis is they saw the great success we had a year ago and said well maybe we can take some of that shrimp and sell it too.

So I think that the whole environment was a little bit tougher this past year and we're rethinking how we respond to it.

We have got some great products in the pipeline.

We're pretty excited about that.

But I think it was sort of the refreshing the marketing in both cases.

Although, again, different specifics.

And in the case of Red Lobster, in particular, really getting more focused on improving the guest experience.

One thing I might add to that Bryan is that Dick said it earlier.

We were running against those high comps.

And while I don't like to accept that or none of us do around here, is a reason not to continue growing at a good rate.

It did impact us in that we had this kind of environment we're dealing with this year, which made people a little more price sensitive at the same time we were trying to comp up over exceptional comps last year.

One thing I forgot -- thanks Joe.

One thing I forgot to mention while you asked about media mix.

The media mix was not significantly different last year than it has been.

We're always exploring new things.

So we might see a little bit of shift in media mix this year, but nothing I would say that is really dramatically significant or changed.

Next question, please.

: That would be John Glass.

CIBC.

Thanks.

Good morning.

In reiterating your 15 % long-term earnings goal.

Are you still thinking that will be derived from a 5% square footage growth and the comps and leverage, or are you now thinking that perhaps you need to accelerate square footage over the long-term to a rate that's more in line with your peers in order to achieve that growth?

And if you are, is '04 the year you're going to think about how you get to a higher square footage growth rate?

Thanks.

Excuse me, John.

As we said we expect, in terms of square footage rate, grow at roughly the same level that we did in 2003.

I mean into '04.

In '04 we expect to grow at the same rate we did in '03, which is at the higher end of that 3 to 5 % range.

We really look at that 15 % as because we believe this is such a great industry and a great opportunity.

But clearly our focus is in the short-term, delivering, improving confidence in our short-term ability to get these earnings to the bottom line and we have clearly an opportunity with our new businesses as they become less dilutive to contribute significantly to that EPS growth.

I would add to that that from looking at this thing over the long-term, after you get out of the kind of environment that we were in, and are in, in a normalized economy, with the drivers that are at the casual dining, that are in the casual dining market, and our step-up of new restaurant expansion then you would see that we could still be operating in that 3 to 5 range, but perhaps the balance as Linda indicated more towards more new restaurant expansion.

And we'd like to not go further on that right now, but that's the direction of our plans.

Next question please..

Mitch Speiser Lehman Brothers.

Thanks ,good morning.

Three quick questions.

First one-guest satisfaction scores, could we revisit that.

What type of satisfaction scores in particular did not go up or perhaps narrowed versus the competition.

And second could you comment on advertising rates, the year-over-year increases for fiscal '04?

And lastly, could you comment, if you've done research on take-out and if the take out focus amongst your competitors has perhaps affected your business in terms of comps or traffic in any way.

Thanks very much.

I'll comment.

Let me jump in here first on the GSS specifics.

We don't want to believe the execution was any less than we had anticipated.

I mean the data that we see don't indicate that from guest satisfaction scores, preference on the item came in, more or less where we had expected it.

And so I don't have any reason to believe that it was an execution problem.

I think it just didn't generate the incremental guests that we were expecting to see.

And so I think that's how I would answer your first question.

With respect to the prototype, we're pretty excited actually about where we are in that.

We think we will have a building that will deliver.

We've done a lot of research, let me start by that.

We've done a lot of research on specifically the facility itself and what guests like about it and what it communicates to our guests.

We feel pretty confident that we have retained the elements that are really strong about the building itself and the facility.

And been able to do that with, retaining the same look, the same level of finish out and yet through some really good cost engineering bring that cost down significantly.

We use a little bit less land, which will help also.

So we're pretty excited about what we've been able to do on paper anyway, the initial bid process, in terms of being able to reduce the costs of prototype to bring it more in line with what we feel are pretty strong Dinner Only sales.

I mean I think the sales at Bahama Breeze are sales that most people in casual dining would give their left arm to have on a dinner-only basis.

And so really what we have is a bit of an issue of matching up the asset, the investment, with the turnover.

And so we're pretty excited about towards the end of the year we get that built, what we think it's going to be able to do for us.

I'd like to add just a comment, Jeff.

On the steak promotion, there were two other factors there and one was just simply the timing of that promotion at the timing of the intensity of the war effort.

And then the other part of timing is gearing sort of in the middle of that promotion when Canada had its problems with that mad cow incident which spooked everybody short-term.

So just other factors that played into the success or lack of success.

In addition to the ones Dick mentioned. .

Next question.

Bryan Elliot at Raymond James.

Good morning.

A couple of follow-up questions.

You all mentioned I think Joe maybe that service hasn't continued to improve in the eyes of the consumer.

And that's a area of focus going forward.

And marketing, maybe not hitting.

Could you give us a little color on your thinking as to what has changed over the past year when sales were so strong, where the marketing seemed to drive a lot of traffic and has the consumer changed?

Is the audience different?

Is your mix of where you're buying eyeballs changing maybe?

And then on the service side, do you think -- what's the evidence that there's a service issue?

And two, do you think your efforts to attempt to get store level cost more in line with slower than expected sales and labor scheduling in particular, did that have an impact on the service?

I'll take that, Bryan.

Good morning.

I have to see if I can remember all those questions, Bryan.

Let me really do service first and then marketing.

I think you asked a question about media mix.

And the service part, it's really a little bit different story with each of our businesses that you might expect.

But particularly as we think about Red Lobster, I think what I said was that we were flat, all be it at a high level but still no improvement over prior year and the year before that it was sort of modest improvement, I would say.

For a couple years now we had less improvement than we would like to see.

And I think, since it's a thesis you're asking for, I will tell you that Joe referenced some of the changes that we made and people adjusting to new roles and new positions, mine among them.

And then as we got into the year, some of the urgency around sales and guest counts.

And I think truthfully that we may have lost a little bit of focus on it.

But that's not the case now.

I assure you we're very focused on improving our guest satisfaction scores and have specific plans in place and I think they're going to work.

It was not a labor hour issue.

In fact, labor hours were part of the cost issue that we had management of labor and we're looking forward to making some good progress there.

In fact, they've already started to see it.

So I don't think it was an issue of us cutting back, I think it was more an issue of dealing with the sales patterns we were seeing, trying to get staffed properly, etc.

I'm not concerned about us cutting back.

I do think we'll see significant improvements.

With respect to marketing, I think in both cases the theme will apply, although the specifics are different, that is to say we just didn't have new news.

I think we need to refresh in both cases the advertising that we're doing and in the case of Red Lobster, somebody offers, that we had promotions that work really well for us two, three, four years in a row.

They still work pretty well by most measures but not as well.

And so I think it's an issue developing new great tasty products that will be a little more compelling in terms of the offer.

The other thing I would say that was characteristic this year more so maybe than years gone by was again on the Red Lobster front, a lot more competitive advertising and a lot more advertising around sea food.

And so that changed a little bit also.

Also and I think -- you know internally I have to, my thesis is they saw the great success we had a year ago and said well maybe we can take some of that shrimp and sell it too.

So I think that the whole environment was a little bit tougher this past year and we're rethinking how we respond to it.

We have got some great products in the pipeline.

We're pretty excited about that.

But I think it was sort of the refreshing the marketing in both cases.

Although, again, different specifics.

And in the case of Red Lobster, in particular, really getting more focused on improving the guest experience.

One thing I might add to that Bryan is that Dick said it earlier.

We were running against those high comps.

And while I don't like to accept that or none of us do around here, is a reason not to continue growing at a good rate.

It did impact us in that we had this kind of environment we're dealing with this year, which made people a little more price sensitive at the same time we were trying to comp up over exceptional comps last year.

One thing I forgot -- thanks Joe.

One thing I forgot to mention while you asked about media mix.

The media mix was not significantly different last year than it has been.

We're always exploring new things.

So we might see a little bit of shift in media mix this year, but nothing I would say that is really dramatically significant or changed.

Next question, please.

: That would be John Glass.

CIBC.

Thanks.

Good morning.

In reiterating your 15 % long-term earnings goal.

Are you still thinking that will be derived from a 5% square footage growth and the comps and leverage, or are you now thinking that perhaps you need to accelerate square footage over the long-term to a rate that's more in line with your peers in order to achieve that growth?

And if you are, is '04 the year you're going to think about how you get to a higher square footage growth rate?

Thanks.

Excuse me, John.

As we said we expect, in terms of square footage rate, grow at roughly the same level that we did in 2003.

I mean into '04.

In '04 we expect to grow at the same rate we did in '03, which is at the higher end of that 3 to 5 % range.

We really look at that 15 % as because we believe this is such a great industry and a great opportunity.

But clearly our focus is in the short-term, delivering, improving confidence in our short-term ability to get these earnings to the bottom line and we have clearly an opportunity with our new businesses as they become less dilutive to contribute significantly to that EPS growth.

I would add to that that from looking at this thing over the long-term, after you get out of the kind of environment that we were in, and are in, in a normalized economy, with the drivers that are at the casual dining, that are in the casual dining market, and our step-up of new restaurant expansion then you would see that we could still be operating in that 3 to 5 % range, but perhaps the balance as Linda indicated more towards more new restaurant expansion.

And we'd like to not go further on that right now, but that's the direction of our plans.

Next question please..

Mitch Speiser Lehman Brothers.

Thanks ,good morning.

Three quick questions.

First one-guest satisfaction scores, could we revisit that.

What type of satisfaction scores in particular did not go up or perhaps narrowed versus the competition.

And second could you comment on advertising rates, the year-over-year increases for fiscal '04?

And lastly, could you comment, if you've done research on take-out and if the take out focus amongst your competitors has perhaps affected your business in terms of comps or traffic in any way.

Thanks very much.

I'll comment.

Let me jump in here first on the GSS specifics.

We don't want our competitors to know what we know about exactly where our weaker spots are, stronger spots relative to their specific measures.

So we talk in generalities around guest satisfaction scores against specific competitors.

In general, we have more opportunity to grow around service issues than, meaning that there's more distance for us to make up there but we also will be increasing our food levels and our beverage scores and general hospitality as well as-- well that's part of the service scores.

So I don't want to go into -- I don't want any of us to go into specific point-by-point information on GSS.

Go ahead, Dick.

No, I think that pretty much answers the GSS question and with respect to advertising we expect to see some increase in advertising costs this year largely as a result of inflation and media costs, offset by some change in mix as we go around and buy different opportunities and so --but we expect to be at relatively the same weights on the air in both of our big brands so relatively the same weights, some modest increase in cost.

And then the takeout question, you know, it varies so much from business to business.

OG, for example, does a pretty healthy take out, Red Lobster, more moderate, bones does pretty good, takeout, breeze not as much and so it really varies business by business and your question is have we done research not really targeted per se against takeout although we anticipate we will probably do some of that and do we think it's affecting our business?

It's hard to tell because --it's just hard to tell.

If you look at the sales increases attributed to takeout in some of the competitors and look at their actual same restaurant sales increase it's hard to tell how much of that is incremental and how much of it is sort of a trade from an inside dining to outside dining.

It's really difficult for us to know what's affecting us.

We know that something is and so we're going to get more compelling news out there.

We're going to do a better job in the restaurants and we will get some of our share growing again.

Just to be a little more specific.

Many of you are familiar with the numbers but we'll just reiterate them for you.

Dick said Olive Garden has pretty healthy amount of takeout.

They do about 6% of sales in takeout.

Red Lobster's takeout sales percentage is about 3 % that's with very little push or marketing from our end.

There's many [inaudible] the restaurants.

There's dedicated parking outside.

But we're doing these amounts without really, there's no advertising on television.

There's no radio around it either.

We're kind of pleased with what we're doing and can we do probably a little more?

Maybe, but I think some people are surprised as to how much we do.

Next question please.

Allan Hickok Piper Jaffray.

Hi, Good Morning, I have two questions, one on price point the second loss from the emerging concepts.

First on the price points.

We've heard actually for the last couple of quarters now that maybe a couple of the price points weren't quite right because of the current environment, etc.

And it seems to me you have been a little on the aggressive side with your price increases recently.

I'm wondering what's your strategy there that relates to an earlier question.

Then possibly might we see a rollback of some of the price points or more price-oriented advertising?

And then secondly, going to the loss from emerging concepts, that continues, continued in all three is going to continue in '04, could you give us more color on that?

What's the trend line there?

Thanks.

Good morning.

This is Dick.

I'll take the question on price points and let Linda talk about the emerging brands.

We are, in both of our big businesses I would characterize our approach there saying we want to make sure that we have a really strong what we call middle of the menu offering so that we offer a pretty broad range.

Speak specifically to Red Lobster first.

I mean if you're selling lobster and crab as your feature items, there's a certain price point you'll have to live with because it's a scarce resource and we think we offer lobster and crab at a tremendous value compared to its availability elsewhere.

By the same token it's going to be at a high absolute price.

So the chAllange for us is to create items that can better fill in that, what we call the middle of the menu range and be it the $8.95 to $13.95 range.

And that's a focus for us that we have those now but we don't feel like maybe we have quite the breadth of offering we would like or maybe they're not quite as compelling as we would like.

The chAllange for is to make sure that people can come to Red Lobster and have a casual dining experience at whatever price point they're ready to spend at and be delighted at whatever they choose.

And the same sort of idea applies at Olive Garden what we referred to as no the menu there might be a little different in terms of range of price because the offerings they have.

So I don't anticipate that we'll do more price point advertising than we have been doing.

I think that price point advertising will always be part of our mix, in terms of creating a compelling sort of method to get people out of the chair and into the restaurant.

But I don't anticipate we'll do more.

I do think we'll be working pretty hard this year to strengthen what we call our middle of the menu range of offerings and sort of appeal.

And having said that maybe I'll turn it over to Linda for the discussion on the Bones and Breeze.

As I indicated earlier, the emerging businesses were more dilutive this year than last.

And our expectation is in a go forward basis they'll be significantly less.

A significant part of beyond '04 our EPS growth.

Beyond that I don't think we want to get into a lot more specifics.

But it's clearly our expectation they are going to be contributors to our future success.

Next question please.

John Ivankoe, JP Morgan.

Yeah hi.

Several, if I may.

The first is on some of the investments that you're making in 2004 in terms of operating costs.

Are any of those expected to be over time structural cost savings?

And the second question is on Bahama Breeze, and perhaps a slightly different way to ask it.

I mean opening four units under current unit base in fiscal 2004 and still expecting to lose money would suggest that many of those units may actually be losing money at the store level.

Could you give some kind of color around whether there are a number of units in the Bahama Breeze system that are losing EPS and any initiatives that you may be putting into place that specifically address profitability there?

Thanks.

Yes, let me take the first one around investments.

Clearly we would expect the nature of our investments to be ones that we would expect to improve our profitability.

We want to get at some of the structural opportunities in our business and we talked some in the past about some of the process work that we think enables us to better leverage our scale across our business units.

And so those seem to be the kind of things, along with training sort of initiatives that we look to be possibly incremental but definitely working to build long-term momentum. .

Dick, you might talk about some of the things around lunch and new menus.

Yeah, Bahama Breeze, John, we are opening four restaurants next year, and but beyond that there's a lot of activity going on at Bahama Breeze right now, specifically we have a lunch day offering in Texas, Phoenix, Dallas and Rochester New York.

Based on the results we're seeing thus far we expect we're going to be rolling that out.

So there's a tremendous amount of training and start-up expense associated with that.

We also have a totally redesigned dinner menu in test in Atlanta.

And so far having pretty good success with that.

In addition, some little things as we go through make those changes during the course of the year there's a lot of associated training that really in some way resembles new restaurant opening kind of activity in terms of the kind of training that needs to take place, the hiring, staffing, the getting up to speed in those efforts.

And so that is fairly significant in terms of the activity this year.

In addition to that, we think there's an opportunity to do a little bit more marketing than we have done in the past.

We'll spending a little money there to announce get the word out about some of the changes we are making and so I would say that the effort there is to make breeze a little more approachable, little more every day kind of occasion.

We think lunch is going to help in both regards first on the revenue side, generating traffic that we're not getting now and introducing the business to people.

We think it will also help further the promotion that it is an everyday use kind of place and we're seeing that.

In fact dinner business is up in the places where we've introduced lunch, in addition to doing better than expected lunch sales.

And so again it's a small test so far but we're pretty pleased with what we're seeing and all of that effort added up is like opening restaurants and so -- but we expect it to pay off now.

We don't see the results until we actually get through the year as we roll through and start to implement lunch system wide, get the dinner menu in, start to get the marketing out.

It will take some time to get that all done and we don't see the results until later in the year.

Next question, please.

Robert Derrington Morgan Keegan.

Hi Good morning.

In the past we've seen some good success for the company for both Olive Garden and Red Lobster from the remodel program and from increased alcohol sales.

Could you give us an update on one, where the brand stands as far as alcohol sales year-over-year and what's going on with the remodel program and what kind of sales benefit we could expect from either of those two programs.

Hi, Bob.

We continue to emphasize the remodel program at Red Lobster and alcohol sales at both Red Lobster and Olive Garden.

Unfortunately, we haven't seen as much movement on alcohol sales as we would like.

We're still in sort of that nine to 10% as a percent of sales range.

As you know, we've been there in that area for the last few years.

We just haven't been able to move the needle much.

But that doesn't mean we're not going to stop trying.

Olive Garden this past year introduced I think four or five additional, maybe six additional wines to their list.

We're always working on improving the wine list at Olive Garden and the drinks at Red Lobster.

So we will continue to focus on that area and continue to see if we can increase our sales.

On the remodel side, we continue to see some good experience at Red Lobster.

We've remodeled about half the chain.

We're going to continue to remodel this year and on into next year for the next few years.

We're pleased with what we're seeing and we're not going to discontinue the operations.

In the past we've been seeing roughly 4 % incremental sales out of the remodels and hopefully we'll continue to see that going forward.

Next question.

Jonathan Waite McDonald Investment.

Good morning.

I was wondering, just from on the press release, I was wondering why you guys continue to beat yourselves up on the same store sales issue, considering the fact you guys have the most difficult comparison on a one-year and two-year basis versus the other large casual dining players and then on a related note, if you think this 3-2-4 % long-term same store sales target isn't a little high given the maturity of the concepts and the amount of volume you're already doing?

And then I wanted to also get an update on the workers comp, how that's going with holding the managers at the unit level more accountable for that.

I think we'll have Linda answer the --

My favorite one, workers comp conversation.

Well, thanks Jonathan for the question.

We're making some meaningful progress on that front.

And although we are still seeing the rates increase, the incidents per labor hours is going down.

And it's going down actually at a pretty good pace, but the actual costs continue to be high and we're hoping that all of our efforts this year around floor maintenance and friction programs around shoe programs, will really get after this in a meaningful way and I look forward to hopefully having some better news in the future.

But it would be premature.

We've estimated costs we think are appropriate for the year and we'll be accruing to those throughout fiscal '04.

Don't miss the fact that she said the incidents are going down.

It does take a while whenever you change a trend in this area.

Because you have many outstanding claims that have to work their way through completion.

Our people heal and come back to work.

Those claims are affected by medical cost increases and they'll continue to rise even though it's very important that we're cutting the incidents already and there's still more programs to be put in place.

On the same restaurant sales, since I'm speaking already, I'll just go ahead and comment some there.

On the long pull, we are seeing, let's look at next year and we're saying 8 to 12 % growth for next year and we're saying that we'll be at the 1+% range, 1 to 3, maybe, on same restaurant sales increases.

So we are being realistic in the environment we're in then as we look to a better environment, which is hard to see right now, whenever by many of the people who track us, because of our recent experience, on a long-term basis we can and will bring up the guest satisfaction levels and get our marketing working as it has worked in the past.

But the main thing to hear out of this is we're at the high end already on the three to five percent expansion rates and Smokey Bones is doing so very well that between it and other opportunities at Red Lobster and Olive Garden will be operating at or above that 3 to 5% range on the restaurants and so what we're saying is as we look long term with the expansion of casual dining occurring, the drivers behind casual dining, the good balance between casual dining demand and numbers of restaurants we see an environment that should allow us to grow at the 15% range but for now you should look at and expect that 8 to 12 %.

Anybody want to add to --?

I think we had three questions we answered two.

I think we have got them there Joe.

I will take the next question, please.

Aaron Daniel, Principal Capital.

Thank you.

Can you comment on your capital allocation strategy for 2004, capex and specifically share buy back and dividend strategy if you have one for 2004 as well.

Thank you.

Sure Aaron.

On capital spending, capital expenditures next year we don't anticipate being much different from what you see this year, which was roughly $420 million or so.

So give or take, $20 million, something like that, that's probably what we're going to continue to spend again this year.

As you see our new restaurant growth and remodel program are essentially in line with what we did last year so that should be the range that we're going to head into.

Share repurchase, we continue to be in the market repurchasing shares opportunistically.

As we've noted, we've got capacity left in the authorizations that we've been given from the board of directors.

So we will continue to be out there buying shares.

As for dividends, with the new tax laws, certainly we're examining the issue.

But at the moment we really don't have any determination one way or the other to go.

So we're just going to sit tight and monitor the situation and see what develops in the environment among other publicly traded companies.(inaudible)

I just wanted to add on the dividend.

We certainly have seen, with the new tax plan, the bias against dividend versus capital gains has obviously been reduced under the flat tax rate.

But it's not really eliminate the manage[ph] capital gains still has in determining when investor pay their taxes.

So that's probably the main area we're looking for some better clarification of how companies are responding to that.

So I would note we did have a dividend increase in 2003, though.

We held our dividend level payment after the split and so there was a 50% increase that happened in fiscal 2003.

Next question.

Mark Kalinowski, Salomon Smith Barney.

Two questions I want into ask about first, investment offsets to the 53rd week earnings benefit, were those offsets come entirely in fiscal Q4 or will they be spread out throughout fiscal '04?

And second question on the menu rollout at Olive Garden for June 23rd.

Does that include a menu price increase and what type of menu price increase might it be lapping?

Mark, I'll handle on the menu roll out, the new menu at Olive Garden, let me say we don't forecast ahead what our price increases will be.

We'll give you the information after the fact.

And I expect you'll see something from us as when we talk about June, same restaurant sales in a few weeks.

On the investment offsets, I'll let Linda handle that.

Yes, we'll be evaluating meaningful sort of opportunities throughout the year.

We expect for the most part will take place in the back half to the extent they would, any would take place or we would certainly dimensionalize that at the appropriate time.

And I think Mark, it's important to mention that those are very incremental.

We spend every year throughout the year on improving our business and the extra spending you're going to see is just from that 53rd week is incremental spending to what we normally do.

Next question, please.

And we have time for one last question.

That is William Nobler with Atlanta [inaudible].

I wonder if you could add a little bit of color on Smokey Bones similar to what you expanded on Bahama and specifically since last year you doubled an operation which had $93 million in sales and this year half of your total units are going to be again for this operation, which is loosing money and I guess loosing more money this year than last year.

What is it that makes you so confident about devoting so much of your expansion resources to this relatively small concept?

Okay.

As to the question of loosing money, I want to make sure that we clarify this.

But at the unit level these restaurants are profitable.

We fully allocate the administrative base and they are significantly burdened by the start-up costs that are related to training all the new managers and all of the opening costs that are related to getting these new restaurants open.

So that is the nature of the dilution and so if you slow it down you will be more profitable but you won't get the kind of leverage you want with the scale over the long-term.

So clearly we are acknowledging acceleration of this business because we do have the confidence in its financial performance for the long-term.

I would just say that the other thing that gives us a lot of confidence is the rate at which the volumes at which these restaurants are opening up and the volumes they're maintaining.

And so we think that Linda covered it and sort of looking at -- sort of the restaurant level economics of it and level of performance.

Kind of consumer appeal we're generating there makes us both those things make us, gives us confidence going forward.

But if you think about opening in the 25 to 30 restaurant range and start thinking about the number of managers you have to add and assist and train during the course of the year and the pre-opening as it goes to Linda's comments about the that puts on P & L

I guess that's it for questions.

Joe, want to wrap it up.

I'll wrap it up and again just thank everybody for their interest in Darden and for joining us this morning.

We're committed to making this a different kind of year than we just ended.

And we think we have we have reasonable goals and we have had a great team of people to make them happen.

And we are a better company than we performed last year and we intend to prove it this year.

Thank you.

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