達登餐飲 (DRI) 2004 Q2 法說會逐字稿

Good morning, ladies and gentlemen.

Thank you for standing by.

Welcome to the Darden Restaurants second quarter earnings conference call.

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

Later, there will be a question and answer session, and just as a note, at that time you may ask one question initially and you may re-queue for any additional questions.

And should you require assistance during the conference, press star, zero - an operator will assist you.

As a reminder, this conference call is being recorded.

I'll now turn the conference call over to Vice President of Investor Relations of Darden Restaurants, Mr. Matthew Stroud.

Please go ahead, sir.

Thank you, Barb (ph) .

Good morning, with me today are Joe Lee, Darden's Chairman and CEO, Dick Rivera, Darden's President and Chief Operating Officer, Linda Dimopoulos, Darden's Chief Financial Officer, Drew Madsen, President at Olive Garden, and Clarence Otis, President of Smokey Bones.

We welcome those of you joining us by telephone or the Internet.

During the course of this conference call, Darden Restaurants' officers and employees may may forward-looking statements concerning the company's expectations, goals or objectives.

These forward-looking statements suggest future economic performance, restaurant openings, various financial parameters or 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 statement.

These risks or uncertainties include competition in the restaurant industry, economic and market conditions, food and labor costs, the availability of [Inaudible] sites for the 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 are 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, Investor Relations, on our Web site at www.darden.com.

We plan to release same-restaurant sales results for fiscal December, 2004 during the week of January 5th.

We plan to release same-restaurant sales results for fiscal January, 2004 during the week of February 2nd, and we tentatively plan to release fiscal 2004 third quarter earnings and same-restaurant sales results for fiscal February, 2004 during the week of March 22nd.

We released second quarter earnings yesterday afternoon.

Results were available on First Call, PR Newswire and other wire services.

Now, for an overview of the quarter, I will turn it over to Joe and Dick.

Good morning.

Thanks very much for joining us today.

We reported second quarter earnings after tax of $31.3 million and diluted EPS was 18 cents.

These results were consistent with the high end of our previous guidance for the quarter.

I'll ask Dick now to give an overview of the quarter and Dick will be followed by Linda, and Linda will be providing you detail about the financial results for the quarter.

Then, after that, Drew will talk about the successes that we're seeing at Olive Garden.

Dick will be back to update on the progress of Red Lobster and Clarence will share some facts about Smokey Bones.

I'll have a few final comments and we'll take questions.

Dick?

Thanks, Joe.

Olive Garden had another tremendous quarter, with results that once again exceeded our expectations.

Total sales were up 9.7%, and the company achieved record second quarter sales, operating profit return on sales and return on capital for its 20-year history.

Red Lobster's total sales were down 70 basis points from prior year.

Operating profit was also down, due primarily to high restaurant selling, general and administrative cost and depreciation as a percent of sales.

I'll provide more detail on Red Lobster following Linda's remarks.

Smokey Bones continued to expand as they opened nine restaurants here in the quarter, and an addition two restaurants since the end of the quarter.

It has been well received in a wide variety of markets and we're confident in its long-term potential.

Bahama Breeze opened three restaurants here in the quarter in Towson, Maryland - suburb of Baltimore, Cherry Hills, New Jersey, and King of Prussia - both suburbs of Philadelphia.

They also completed the introduction of their lunch menu throughout the system, and early results are promising and we believe that this effort will improve the company's overall financial performance and position the business for long-term success.

Seasons 52 is performing well.

We have plans to extend that test and open two more restaurants in Florida.

One will be located in Orlando and the other near Ft. Lauderdale.

Casual dining continued to be a vibrant industry with excellent long-term growth prospects.

The industry has found a healthy balance between supply and demand, and the industry has improved somewhat as the economy has rebounded, and that should only continue.

We're 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 and we have a great platform for long-term success.

I'll turn it over to Linda to review the financial results.

Thank you, Dick.

As Joe mentioned, we reported that earnings after tax for the second quarter were $31.3 million, or 18 cents per diluted share, which is three cents below the prior year.

Second quarter operating profit increased at Olive Garden and declined at Red Lobster.

Bahama Breeze, Smokey Bones and our new business division including Seasons 52 were dilutive to earnings this quarter, with a combined operating loss that was greater than the same quarter last year due to events since (ph) the sales build initiatives at Bahama Breeze and the accelerated expansion of Smokey Bones.

[Inaudible] increased 6.6% in the second quarter as a result of same-restaurant sales growth at Olive Garden and our operation of 67 more restaurants in the second quarter of the prior year.

Olive Garden reported positive same-restaurant sales during the quarter, with a 4.3% increase, its 37th consecutive quarter of same-restaurant sales growth.

Same-restaurant sales for Olive Garden and Red Lobster would have been approximately 0.2% higher this quarter, but were adversely affected by this year's shift at Halloween from Thursday in 2002 to Friday in 2003.

As Dick said, Bahama Breeze completed the introduction of its lunch menu across the system.

In addition to the three restaurants that it opened this fiscal year, Bahama Breeze plans to open one more restaurant, which will be a new lower-cost prototype that should open in May.

We will evaluate the results of this new prototype before we make any further decisions on expansion.

Smokey Bones opened nine restaurants during the quarter and has opened three more since the end of the quarter.

It plans to open a total of 25 to 30 restaurants in fiscal 2004.

In terms of margin balances in the second quarter, food and beverage expenses were 50 basis points better than last year on a percentage of sales basis, primarily because food and beverage costs at Red Lobster and Olive Garden were lower.

Looking at fiscal 2004, we continue to see a relatively benign food cost environment and expect food and beverage costs as a percent of sales to be relatively flat to fiscal 2003.

Second quarter labor expenses were 10 basis points lower than last year on a percentage of sales basis.

We have attribute the favorability to better scheduling and labor management at our several (ph) concepts.

Restaurant expenses in the second quarter were 80 basis points higher than last year on a percentage of sales basis.

There are several reasons for this.

First, total sales were not as strong as anticipated at Red Lobster, resulting in less leverage on these fixed costs.

Second, as we said previously, we are accrued (ph) for higher working comp compensation this year, while at the same time aggressively working to reduce our exposure going forward.

Third, we've experienced high utility expenses, particularly natural gas, due to reduced supply and increased demand in North America.

Selling, general and administrative expenses were 90 basis points higher than last year on a percentage of sales basis due to media cost inflation, increased administrative expense as a percent of sales, the [Inaudible] of our new businesses and the timing of certain administrative expenses.

The cash rate for the second quarter was down slightly versus last year.

This decrease is primarily due to lower free cash funding.

Finally, we repurchased almost 800,000 shares of our common stock in the quarter.

Since beginning our repurchase program in December of '95, we have now repurchased 100.7 million shares under authorizations totally 115.4 million shares.

In dollars, this amounts to $1.3 billion of share repurchase, which demonstrates the significant cash flow we can generate in good or bad times.

Looking ahead, while we expect modest earnings growth this year, there is significant variability in our current performance that creates uncertainty about our future results.

The current range of estimates of diluted earnings per share for this fiscal year is of $1.31 to $1.43 is relatively broad.

The [Inaudible] quality of Red Lobster recovery and other factors, we think that's appropriate.

I'll now ask Drew to comment on Olive Garden.

Thank you, Linda.

This was a great quarter for Olive Garden.

Same-restaurant sales comps increased 1.5% for the quarter.

Same-restaurant sales were up 4.3% on top of 3.5% growth achieved in the second quarter last year, which represents our 37th consecutive quarter of same-restaurant sales increases.

The combination of 25 net U.S. restaurants since last year and a 4.3% same-restaurant sales growth increased total sales by 9.7%.

Our entire organization did a tremendous job translating the strong top-line growth into record financial performance.

We achieved a double-digit increase in operating profit that represents a new second quarter record for Olive Garden.

Sales leveraging and effective cost management also helped increase return on sales and return on capital to new second quarter records as well.

Operational excellence continued to be the foundation of this strong performance.

In particular, sales flow (ph) traction, quality assurance and turnover in all restaurant conditions (ph) has improved versus last year, and have reached at or near best-ever levels.

Our advertising strong new commercials with compelling food news.

We began the quarter with our Never Ending Pasta Bowl promotion at $7.95.

Currently, we are featuring two new dishes, Stuffed Chicken Marsala and Stuffed Chicken Siena in our advertising.

In addition, we moved some soup, salad and breadstick advertising from December last year into November this year.

During the second quarter, we opened seven new Tuscan Farmhouse restaurant and were on fold (ph) to open 20 to 25 new restaurants in fiscal 2004.

We've also made some strategic investments to further strengthen our leadership.

This includes new development programs for high-potential restaurant managers, and the addition of a few new directors of operation to ensure continued operational excellence in the 80 new restaurants that we've opened in the last four years.

Olive Garden has a proven strategy, a trusted brand, and industry-leading operating performance.

We're focused on maintaining profitable guest count growth by delighting our guests with a genuine Italian dining experience and delivering outstanding financial results.

Now, Dick will comment on Red Lobster.

Thanks, Drew.

Well, as you can imagine, we've been reassessing our entire business over the course of the past six months.

Let me start by saying that we have some tremendous strengths.

First, we have a strong brand.

Red Lobster stands for seafood and casual dining.

In our latest brand monitor research, 70% of respondents said that Red Lobster is the first restaurant they think of when they're in a mood for seafood.

Red Lobster is a brand that's liked, it's a brand that's trusted.

It's regarded as dependable and as a restaurant that consistently serves great foods.

Second, we have a strong team.

We have a talented, skilled and tenured crew from the support center to the restaurants, and they have a high level of commitment to and pride in the Red Lobster brand.

Our guest satisfaction ratings remained at high levels and in recent months have begun to improve.

Our new restaurant openings, from Times Square to Brooklyn to Charleston, West Virginia, Asheville, North Carolina, are all opening at high volumes.

Having said that, we clearly have some challenges to deal with.

We've experienced flat or declining guest counts for the past five quarters and in the second quarter, after 23 consecutive quarters of same-restaurant sales growth, we experienced same-restaurant and company sales declines.

There are four key issues behind the decline and the volatility in our sales.

First, our underlying base guest count has softened.

We believe this is due to lack of clarity around the brand promise, weaker value perception and the fact that prior to last quarter's improvement, as I noted in my opening remarks, guest satisfaction ratings have been flat.

This year's promotional offers have not performed as they have in the past.

Some of the guest count shortfall is attributable to a difference in the timing of promotions, but the majority of the shortfall is due to offers that were not as compelling as those offered in the comparable period last year.

Maybe even more important in the short term, advertising recall is lower than in past years, and brand recognition from that advertising is low.

In short, the advertising's not working as hard for us as it once was.

I want to emphasize that this was not a spending issue and it's not a share of voice issue, it's about advertising effectiveness.

Although the quality of the guest experience has been at high levels historically, guest satisfaction scores had leveled out until the recent improvements I just mentioned.

Our action plan is straightforward.

We will rebuild our base business by first reinforcing Red Lobster's position as America's place for seafood by being more food-focused and deal-focused and being even more innovative than we have been in the past.

And we'll rebuild our base business by creating greater value on the menu.

As the check averages increased, we've created a void in the so-called middle of the menu, those entrees priced in the $10 to $15 range.

We're hard at work to make the value that we offer today more visible to the guest and to bolster the middle of the menu offerings, both of which, we believe, will boost trial and frequency of visit.

We expect to be in test with phase one of that effort in January.

Beginning in January, we will have aligned our promotional calendar more closely with what we have done in past years, although we expect the December sales trends to mirror what we saw in October and November.

In addition to aligning the calendars, we will continue to work to make the new [Inaudible] consumers more compelling.

We've strengthened our marketing team in the past month with the addition Ken Lockgrip (ph) as our our Executive Vice President of Marketing.

He brings a tremendous - a wealth of experience, a tremendous background to us.

We think he's a great addition to our team.

Strong advertising has been a hallmark of Red Lobsters in the past, and it will be gain.

We expect to see improved advertising effectiveness with our next series of ads, starting in January.

In the past four months, our restaurant teams have been able to show improvement in guest satisfaction in key targeted areas.

We expect that to continue, and we view that improvement as a leading indicator for guest count growth.

I have directed my remarks to the consumer issues, because resolving them is key to regaining profitable guest count and sales momentum.

We believe we have identified the issues and we've taken the right actions to deal with them.

Nonetheless, while we expect to see trend improvement in the second half of the year, we know that reversing these trends will take time and that it's likely that we'll see continued traffic and sales declines before we get a turn.

The other parts of our business are in relatively good shape.

From a cost of goods sold perspective, we've managed through a difficult year of higher seafood costs and significant supply challenges.

Our labor costs are favorable to last year.

Total management and front-line crew turnover remains at low levels.

We know we have challenges ahead of us, but we're confident that we have the right people and the right plan in place to deal with them.

With that, I'll turn it over to Clarence to speak about Smokey Bones.

Thanks, Dick.

We're very excited about what's happening with Smokey Bones, and that's because we're delivering on something that really is being enthusiastically received by consumers and the company is very solid from a financial perspective.

We now have 56 restaurants in 16 different states, and we did an excellent consumer satisfaction rating everywhere we operate.

People are telling us that they love our combination of authentic, slow-cooked barbecue, friendly service, an inviting, rustic lodge environment, and the excitement our televisions and sports viewing introduced to build (ph) experience.

In terms of our restaurant level financial dynamics, we start with a strong top line.

We expect average sales per restaurant to annualize between $3.2 and $3.6 million, and our current average is within that range.

On the restaurant investment side, while we started the [Inaudible] with a heavy reliance on converting existing closed properties, as we've expanded, new, ground-up buildings have become an increasingly larger part of the mix.

This year, for example, about a third of our openings will be conversions and the remaining two-thirds are going to be ground-up prototypes.

As we refined our ground-up prototype and developed more experienced more experience building it, construction cost per restaurant is coming down, and we're now at an average investment that's between $3.2 and $3.4 million.

As we think about the appropriate pace of expansion, our focus is two-fold.

First and foremost, we want to expand at a pace that enables us to maintain the high levels of operating excellence that have made Smokey Bones so successful to this point in history.

At the same time, we're very much interested in becoming financially significant for Darden, which we define as contributing meaningfully to the actual earnings that we generate and to deliver earnings growth.

Our goal of achieving financial significance within a reasonable period of time really shapes our current profitability dynamics.

There are three factors at work.

First, it starts with restaurant earnings, which reflect the number of restaurants in operation and how we'll they're doing, and with 56 restaurants and annualized sales growth on average above $30 million, we're pleased with the amount of restaurant earnings we're producing.

Restaurant earnings, though, are offset by new restaurant pre-opening expenses, which are pretty visible as you look at Darden's P&L, and those will be roughly $9 million for us this year.

And the additional offset are other not as visible work-related overhead costs, such as our manager recruiting expenses, manager training costs, the appreciably heavier-than-usual operations supervision that is [Inaudible] as we expand rapidly, the cost of our new restaurant labor and food inefficiencies.

All of those are examples of that, and this year those expenses will total about $13 million.

So even though our restaurant earnings will be very strong, because of the pre-opening and other growth-related costs of nearly doubling our number of restaurants and preparing for at least 30 [Inaudible] , we're still generating operating loss this year to be about as dilutive to Darden's earnings per share as we were last year.

We're seeing great potential here, and we've chosen an expansion pace that reflects that, and we're able to sustain that pace, we recognize, because of the cash flow and balance sheet strength that Darden has, even with our current challenges.

Now Joe will close with some final comments.

Joe?

Thanks, Clarence.

So, in summary, I would say we know we have some near-term challenges, and I'm pleased that we have strong leadership teams in place to effectively deal with the challenges, and we'll do what's necessary to fix any problems we find and we'll not be deterred by the investment needed, nor the time required.

Red Lobster is on the path to regaining guest count momentum and this will take some time, but I'm confident that the team at Red Lobster will successfully position the brand so that it remains America's favorite place for seafood.

Bahama Breeze continues to build its business and set up and take actions that will build the business, and with the recently completed introduction of lunch across the system, plus a new lower-cost prototype, we feel that they're on their way to future profitability for Darden.

Smokey Bones, as Clarence has indicated there, represents a meaningful business opportunity for Darden - is maintaining a strong operational focus and the guest experience is not being compromised as they continue to expand rapidly.

Olive Garden is very strong, very vibrant, hitting records.

It's an example of what an established growth business can accomplish when they're focused on delivering a great consumer and guest experience and managing the entirety of the business exceptionally well.

We remain excited about our business and about the opportunity we have to build a great company.

That opportunity drives our focus, which is to manage through our challenges and deliver strong, consistent growth over the long term.

We have a balance between proven and emerging brands and between a focus on operating excellence and a focus on effective brand building.

We are responding to the challenges that we've seen in our business, and I'm confident that we will achieve long-term success now and for generations.

And now we'd like to open it up for questions.

Very good, ladies and gentlemen.

At this time, if you have a question, please press star, one on your touchtone 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.

If you have a speakerphone, please pick up the handset before pressing the numbers.

Again, as a reminder, please ask one question initially.

You may re-queue for any additional questions.

This question in queue is from the line of Matt DiFrisco from Harris Nesbitt.

Please go ahead.

Hi, I wonder if you guys can give us some greater color through the first six months of the year, what you saw in the dilution from the new brands.

I think, Clarence, you touched on it with Smokey Bones with the expectation for the year, it should be equal to fiscal '03.

Can you just refresh us on what Smokey Bones' dilution was for fiscal '03, and does that imply for the first six months it's been equal as well?

Linda, you take that?

Yes, Matt, we really don't give that information.

We were just trying to get you directionally where we're headed at Smokey Bones for the year.

Clarence, do you have any further ...

Yes, I think the only additional comment I would add is that the new businesses are certainly more dilutive in the first half of this year, perhaps, than they were in the first half of last year.

We expect that to flip a little bit as we go to the back half of the year.

Next question?

Next question's from Mitch Speiser from Lehman Brothers.

Please go ahead.

Thanks very much.

On Red Lobster, you mentioned that the SG&A or the G&A side was up.

I was wondering if that's more on the G&A side or the S side, and what's driving that year over year increase?

And then separately, just on the extra week, you did mention that you were going to reinvest that last quarter.

I was wondering if this new guidance does include all or almost all reinvestment of the extra week.

Thank you.

Well, on the latter part of that question, the reinvestment notion of the extra week, we're still operating on a similar principle as we were last quarter, that we would reinvest some as we go through the year and are in fact beginning to do some of that, and then we would be seeing about half of it come on in to earnings.

Dick, you want to?

Yes, I think on the SG&A, we've got a significant portion that was on the S side, and the largest part of that had to do with timing, I would say, and the brand launch we've had in the second quarter.

But for the year, we don't expect to have a real significant uptick in marketing.

Next question?

Next question's from John Glass from CIBC.

Please go ahead.

Thanks.

On Red Lobster, I wondered if you could reconcile the comments you made about wanting to more closely match up the promotional calendars in Red Lobster going forward with your desire to move away from more promotional activity and more on the food - and understanding also how you view and maybe want to eliminate the all-you-can-eat aspect of promotions.

But how do you feel about couponing in the brand going forward.

How do you feel generally about price-point promotions in the brand going forward?

Thanks.

OK, John, Dick will take that.

And Dick did not say that we're going to eliminate all promotions.

We are still going to be active.

It's going to be a matter of balance.

But go ahead, Dick.

I'm trying remember which - I think I've got it.

As I - just without getting into the real specifics of the calendar, I would say one of the things we do every year is Lobsterfest, and that typically over the course of the years has not been a price point promotion.

Although occasionally, if it's running eight weeks on the back half of them, we might feature an item and mention a price.

But - so I would say that directionally we would move more towards things like Lobsterfest, and less towards all-you-can-eats, as an example.

So from a directional perspective, that's what I would say.

I do think price point is an important part.

I mean, it's part of the news.

I think that - again, directionally, I want to say that we want to make the news more about the overall Red Lobster experience and a great meal, dining experience and the food that you can get there, the innovation of it, and by the way, the price is part of the news, but not all of the news.

And so it may sound like a subtle shift, but I think as we see it come to pass that it will be recognizable by you and by other consumers.

Next question?

Next question from Amy Greene from Avondale Partners.

Please go ahead.

Hi, guys.

Just wanted to see if you could give us some color on what you're going to internally do differently so that you can see things like the slowdown at Red Lobster, or the problems at Red Lobster, happen before they get to the magnitude that they did this time.

Dick, you want to take that?

Well, let me just say we've been doing a lot of soul-searching on that very subject.

I think that we had several things come together here over the course of the last 18 months, and I think that I would say one of the things that added to our difficulties was some significant churn in our marketing area, and so I think as I look long-term at this solution, it's about building a stronger bench and doing a better job with succession planning and leadership development, and I think we've made some big strides already in that arena - bringing Ken Lockgrip (ph) in and just recently appointing a Vice President of Consumer Insight.

So it's really about strengthening our whole marketing and brand management effort and doing a better job with succession planning.

And I know that sounds kind of long-range in scale, but I think that's the long and the short of it, that we found ourselves - marketing and brand management is a key piece, just like operational excellence and paying attention to the financials of success in our business and Olive Garden's businesses.

And we had a leg of the stool that was out of whack, and so it's about paying closer attention to those legs and making sure that we have the right kind of talent and the right kind of succession planning going on.

I'd like just to add a little bit to that.

Adequate staffing and leadership are the real keys, and Dick said that.

I just wanted to reinforce it.

The facts are, we said last quarter - we advised you then - that we had drifted from using some of the tools and processes that we had traditionally used and we had failed to add some that had been innovated over at Olive Garden.

We are now putting those back in place and taking advantage of Olive Garden's innovation and staffing the marketing arena, as Dick said.

So we feel pretty confident that we're doing the right things now, that it will pay off soon.

I think I would also add, we really have strengthened and tightened our focus with the financial bids (ph) within Red Lobster to be very closely aligned with the marketing efforts and to make sure that we've got visibility of moving or disappointments earlier on.

So I think that's going to happen as well.

Next question?

Next question is from Mike Smith from Oppenheimer.

Please go ahead.

Good morning.

Well, let me just stay on this same subject for a moment.

You indicated that the guest satisfaction scores had improved recently.

Historically, I guess you have more experiences in this than we do, but what is the lifetime between an improvement in those scores and an improvement in your guest counts?

Well, Mike, there's no exact formula, but after you improve your satisfaction levels in the restaurant, then you have to have that noticed by repeat-frequency visits, and so it's important as to how fast you can also get the advertising lined up to bring in more visits after you've made those change.

And I'd rather not give a specific timetable, because it might imply that we can pin it down to the week or month, but it follows - I can give you this to help you try to guess at that number.

We generally have a repeat frequency, on average, of about once a quarter.

So if you take all our customers and determine how often they come in on average, it's about once a quarter.

So it would be norm to expect three months or more before meaningful changes will show up.

Our next question is from Jeff Omohundro from Wachovia.

Please go ahead.

Yes, thanks.

My question also on Red Lobster.

I'm curious with the sales performance in the period, why we didn't see negative leveraging of food and labor.

And given the guest satisfaction scores, I'm just wondering how that was achieved without negatively impacting the guest experience?

We can do both when we're running the restaurants well.

Dick might want to comment on that.

Yes, I think on the cost of goods, it had to do with, I think, both a mix of business, the promotions that we were running and the fact that we were featuring mainly shrimp, and we've had shrimp prices pretty well locked in for some time.

So I think that was part of it.

The mix was part of it.

Pricing was a little of it.

And then there was some unfavorability in raw materials, but again, not that significant.

And then the labor, I think just I would attribute that to our teams just doing a better job of anticipating the business, reacting quickly to what was going on in the restaurants.

And just staying on top of it, and the guest experience - I think what has enabled us to make that move, and actually it began with the fiscal year plan, but I would say it kind of got stepped up in the last four months is just targeting very critical areas that we know are correlated to the overall rating and just making sure we're delivering on those.

And so I think our teams have done a great job of being very focused, keeping our head in the game in what has been, frankly, very difficult circumstances in the restaurant, but I think our restaurant managers, management teams, our directors of operations, have done a good job of staying focused and it's starting to show up in our guest experience.

So it's interesting that we find that those restaurants that manage their labor costs, by the way, the best, also have the highest guest satisfaction rating.

So it's not the case that it takes more labor, necessarily, to produce guest satisfaction.

It takes a well-run restaurant.

Next question?

Question from Joe Buckley from Bear Stearns.

Please go ahead.

Hi, thank you.

You mentioned working on the deal part of the menu at Red Lobster, you said in the $10 to $15 entree level.

Does that suggest that you're seeing some check resistance?

Is that part of the issue here?

And then secondly, would you comment on how gift card sales have been going so far this year?

You want to talk about the middle of the ...

Yes, I'll talk about the grow the menu piece.

Linda can talk about the cards.

I think price - I would say that we have seen some price resistance in terms of if you look at who's falling out of our guest - tends to be lower income consumers.

And so I think that signals that as our check has gotten higher.

But I think maybe even more significant.

What we do hear pretty loud and clear is as the check goes up, the expectations go with it.

And so I mentioned earlier that for some time, our guest experience ratings, while they had been at high levels, had been flat.

If you had flat guest experience levels at a time when consumer expectations are going up, then that we experienced your delivery is not going to have the same value.

And so I would say that the lack of having that range has gotten people into a price point where they either say, I like it, but I can only afford to do it once or twice a year instead of four times a year, or some just feel like maybe the value's not there.

So I think it's a combination of improving the experience, but also offering a range of really appealing, inviting items that basically the way we talk, that put a lobster in people's mouth for $10 to $15.

Yes - just comment on the gift card sales.

For this season, we are clearly ahead of last year in our sales, but we're heading in this week and this next week is really a huge week for us.

Certainly hoping to be up even more.

So so far it looks good.

Next question?

The next question's from Bryan Elliott from Raymond James.

Please go ahead.

Hi, good morning.

I'd like to circle back with Clarence and get a little more color on the unit economics, just make sure I understand the message you were trying to give.

It's a couple-part question, so if you keep the line open, that would be helpful.

The $3.2 to I think $3.4 million range for opening, does that - I assume that includes land, fee simple, full building - does it include pre-opening costs?

That's all of them, excluding pre-opening costs, Bryan, and that is for the prototype.

We continue, as I said, to do some conversions.

We like conversions.

They're cheaper and they're faster in terms of permitting.

And so they would be a little lower than that, but that's the all-in for the ground-up prototype construction.

Are we still on, Bryan?

I don't believe his line is open, so ...

Line's open, go ahead, Bryan.

The square footage on our prototype, refresh out memory, is what about?

It varies, but roughly 10,000 square feet.

OK.

And given the intensity with which you're continuing to move on this, would it be - is there any reason not to assume that ex-ing all these growth costs that you very well articulated identified that kind of at the store level at a normalized, post-honeymoon kind of situation, you're earning above industry average returns from an ROI basis?

Is there any - that's what I would conclude from your comments.

Did I miss anything or misinterpret what you said?

Let me ask it that way.

No, you didn't, and we are - our sales have earned very strong returns on invested capital.

I don't know what you're thinking about when you say above industry, but we certainly are earning very solid.

We aren't at Olive Garden's level, which - that is industry leading.

But we're close.

It's very strong.

It's - we look at these on a time-weighted basis and say what month of operation are they in and how are they doing versus the capital project requests that we put together in a disciplined way to determine if we're going to expect a good ROI out of these businesses, and all of those measures are running wonderfully well.

And this time, I think you'll think through what Clarence said here.

We're giving you more information to help you lead to some costs that we're experiencing as a cost of this rapid expansion, which will get lesser and lesser every year as a percentage of our business, and a burden.

Next question?

Next question's from Janice Meyer from CSFB.

Please go ahead.

Hi, thank you.

I'm going to show my age here a little bit, but about five years ago, maybe six years ago, Red Lobster went through a similar time when then it was couponing, but you said it had high-low, and you needed to sell in the middle.

So you did that.

You added those mid-level items, and you experienced - if I'm correct in remembering, a very unfavorable mix shift, initially, because I guess people liked the items.

Do you think that this situation now is similar to what happened in the - I guess it was the late '90s?

Why do think - I guess, if it is similar, it happened again?

And you're modeling I guess flat food costs, but you're saying you need to give more value.

How can you be so precise on the food costs when you are changing your promotions, you are putting sort of lower priced or mid-priced items on the menu?

Why are you so sure you won't get that sort of same negative mix shift, and what are you thinking about your average check at Red Lobster for next year?

Let me take the first of that, and Dick and others can add to it, Janice, since I was here during the period when we did have the substantial struggles which Dick came in to and helped us resolve.

But back then, we had restaurants that were too close to each other.

We had to have some rationalization and closing of restaurants.

We had several additional things that are not in the mix today.

And we were also heavily couponing, running - freestanding [Inaudible] coupons extensively, and we're not at that level today.

So there's a significant difference in where we are now and where we were then.

And this middle of the menu that we're discussing is just acknowledging that as we have moved items on the menu on the low end, we've moved items in off the high end, but we have an area in the center that doesn't have as many as we have traditionally have, so we'll put some back there.

It's not the kind of menu shifting that we had to do, back, '96 or so.

Dick, do you want to add to that?

Yes, I would just say we're starting off a different plane with respect to the guest experience, also.

For all my comments about it being flat for a period of time, and it was flat at significantly higher levels than it was back in '97, so we're just starting from a different place, Janice.

I also think that one of things that's in my mind as we go through this is, if you look back over our calendar over the last 18 months to 24 years, there has been an awful lot of low price point promotion, and so if you think about this in terms of sort of an everyday value idea - if we're on TV for half the year, for example, offering shrimp at $9.99 or $10.99, there's an opportunity there without much dilution of margin to find ways to offer value on a full-time basis on the menu.

And so as we think through the middle of the menu, some of that thinking is guiding us.

And I said we're going in a test in January.

It is something that we tested pretty carefully, but we think that there is a big opportunity there to stabilize the whole calendar and how we talk about our food, not have quite as much churn in the restaurants in terms of promotional effort, and so I do think we're going to be able to do that and do it in a way that is does not have dramatic margin implications.

Next question?

Thank you.

From Coralie Witter from Goldman Sachs.

Please go ahead.

Hi.

I had a couple of related questions on the smaller brands.

You mentioned you were pleased with the early results from the lunch test at Bahama Breeze.

Hoping you can be a little bit more specific about how much that is helping the average unit volumes, and whether at those volumes, combined with your expectation of having 20% lower buildout costs with the newer prototype, if that's going to get you to the types of unit economics that you need to see to justify continuing with this brand.

OK, Dick will take that.

Well, I would say, Coralie, first of all, the consumer response to the lunch offering has been great.

The average is somewhat below what we think the potential is, but overall we're pleased and we're seeing a pretty broad range of performance, so I would say we're overall we're pleased with the result.

One of the side benefits that we're seeing is our dinner sales have picked up once we introduced lunches.

People got more exposed to the Bahama Breeze business.

Dinner sales have come on a little bit, and so we're pleased with that.

And then I think that it is a - from two perspectives, it's important to the brand itself.

One is that it positions it a little more as a frequent-use kind of business, like other casual dining restaurants, and - so that's one.

And then two, clearly, the revenue.

And we'll just have to wait until we open the restaurant because we have some other sort of cost - I should say business model things at work as we look to open that restaurant in the Pittsburgh market.

It's going to be the lower-cost prototype.

We do think that the sum of those things is going to give us something that we can go forward with, but we have to prove it out.

I think everybody knows that we are no longer putting new investment in it until we can read out this new prototype.

Next question?

Thank you.

Next question, from Dennis Forst from McDonald Investment.

Please go ahead.

Yes, I would like you to spend a little time maybe fleshing out your comments on the corporate SG&A being up 90 basis points.

You mentioned media and then just some general comment about I guess higher administrative costs.

Well, obviously administrative costs are higher if SG&A is higher, but can you flesh that out for us?

Linda?

Yes, well, we did talk some about the S part of it, and clearly some of the higher media costs, particularly at Red Lobster, and the disappointing top line performance created some lack of sales leverage there.

And that was really the biggest driver of the difference.

Just a minute - there was also some timing from G&A type of expenses and we feel those will work themselves out for the year.

Depreciation is up also a little as a result of more new Smokey Bones coming on the partial year performance, that sort of thing.

Next question?

Next question's from Glenn Guard from Legg Mason.

Please go ahead.

Thanks.

I guess - get a little bit of insight on food costs.

Obviously shrimp is pretty favorable for you guys.

Could you talk about some of your other commodities, both for Red Lobster and Olive Garden, and why you think the costs will be benign for you?

Well, overall, our projection of food costs are pretty flat for the year.

As we've said before, within that, obviously there are certain mixes of items that are going up and others that are going down, and I don't what we could say beyond that.

We could go to specifics.

I mean, lobster cost is higher, shrimp cost is lower.

You have some others Linda ...

Giant crab has been up, as we talked about.

The answer is, we have some long-term contracts in place on a lot of things that we buy, so we have some pretty good visibility on our cost structure - typically for the next six months, Glenn, and that's why we can come out and say we think the food cost environment for Darden is benign, despite what you may be seeing in the commodities markets.

So we've got long-term products in place, where we've bought product and put it inventory, so we're in pretty good shape.

Next question?

Thank you, next question from Jason Whitmer with FTN Midwest Research.

Please go ahead.

Good morning, thanks.

Considering the general market is getting a little bit better, economy's getting market, even seafood demand seems to be pretty good.

Do you see any shifts going on or concerns for just general market share for Red Lobster, and in the greater scheme of things, just the longer-term outlook for maturity or saturation with those brands?

The brand relevance - brand strength, as Dick indicated in his comments, for Red Lobster, and certainly you see it evident in both the comments that Drew made, but also the performance he turned in, to show that we have two large companies that have very relevant brands that people love.

From a standpoint of Red Lobster being affected by - how Red Lobster's market share is working, our market share is not growing at the rate of seafood consumption.

We are, as a seafood restaurant enterprise, Red Lobster's market share of seafood restaurants is about the same.

What's happening is that -- and Dick has covered this before - that some of the non-seafood competitors are adding seafood and picking up some of the plural (ph) on seafood eating occasions.

And if Red Lobster were doing better, we would obviously have an even greater share.

So our task is to make sure that we remind people of the goodness and the likes that they have at Red Lobster, and also give them some more exciting, innovative new products to try at a price point that's in the $10 to $15 range.

You want to add anything to that, Dick?

Well, I would say that it is true, the incidence of seafood occasions is rising, and you've seen other casual dining restaurants put seafood on their menu.

I think that the opportunity we have is that we have legitimacy with the consumer with a wide range of seafood that others don't have and can't have.

It's difficult for them to have.

And so when I talk about reinforcing Red Lobster's position as America's place for seafood and the fact that when asked the question, when you think about seafood and casual dining, what restaurant do you think of first - 70% of the respondents said Red Lobster.

By the way, that's higher than any other cuisine category - than any other restaurant company achieved in any other cuisine category.

And so we feel like we've sort of just gotten ourselves disjointed here over the course of the last 18 months, and that the brand is strong and if we get our operations growing, improving, again as we have the last four months and we get our advertising to be more effective.

If we make the value changes and the positioning changes I've discussed, we can get back on track.

It's just going to take a little bit of time.

Next question?

The next question is from Robert Derrington (ph) from Morgan Keegan.

Please go ahead.

Yes, hi, good morning.

A question about - in the past, Joe, you had talked about alcohol sales, particularly - and about how favorable those had been in the past.

And I'm just wondering, you had I believe continued the remodel program at Red Lobster, which logically you would expect would have a beneficial impact on alcohol.

Can you give us any kind of an update on the brands and how the alcohol sales have been over the last year or two?

I'll talk specifically to Red Lobster and then maybe let Drew talk about Olive Garden.

I would say on a sales per guest basis at Red Lobster, we're up somewhat.

But frankly, as an overall percentage, we're pretty much flat from where we were.

So even on a per-guest basis, we're up - that has not gone up as much as our check has.

So a percentage overall is pretty much flat, which is a disappointment to us.

We've not made the kind of headway that we'd like to make there now.

I will say that in the Red Lobster case, the remodel efforts have moved more focus to the dining room and a little less to the bar, but I don't think that's what's driving that.

I think we need to continue to focus on it and continue to build an environment where people feel comfortable having a cocktail with their meal.

At Olive Garden, total beverage alcohol sales have increased significantly over the last couple of years, and it outpaced our total sales growth, so beverage alcohol as a percent of sales, it increased - we still think there's significant opportunity there, particularly in the wine area, to make sure guests are complementing their meal with a great glass of wine.

Because we know it's part of our brand promise and we know it's very positive in terms of guest satisfaction and the overall guest experience.

Next question?

The next question is from John Ivankoe from J.P. Morgan.

Please go ahead.

Yes, hi, thanks.

Hi.

Thanks.

Actually, Dick, it's a question kind of related to a point that you made earlier, having more promotions in the style of Lobsterfest, and I'm very curious as to what you meant about that.

I mean, we've seen kind of Festival of Crab, and we've kind of seen the shrimp promotions done with varying levels of success over the past couple of years.

Fish isn't really a big part of Red Lobster's menu or promotion strategy, at least now.

So could you give some clarification of what it is that you mean and what you think you can do to kind of have a - kind of like a - I don't know how to say, but a Lobsterfest type of brand equity with some other promotions that can be sustainable for a number of years?

Thanks.

Well, I would just start off by saying that this year we're having our 20th year at Lobsterfest, and in the early days, when we first started Lobsterfest, we didn't necessarily immediately have brand equity with it, and you're correct in saying that our efforts at crab - we had a Festival of Crab and we had a World of Crab.

Our efforts at crab have not started off with the same kind of pull that Lobsterfest has today.

On the other hand, crab, we know is - there are two things driving that, by the way.

But crab, we know, is a very powerful draw.

I mean, there's a whole segment of people out there that love snow crab and crab legs, and when we offer it, they come.

And we need to find ways to make that more apparent other than all-you-can-eat.

Because I don't think that's where we want to go.

And actually, the crab supply and cost kind of prohibits it anyway at this point.

So we haven't had it.

That doesn't discourage me from thinking we can do it, because there is a segment of consumers out there that would be attracted by crab.

The challenge, of course, when I said we needed to be even more innovative than we have in the past, just like we came up with lobster chops and lobster pizza and other lobster lovers' dream items that have really sort of reinvigorated the Lobsterfest promotion, we think we need to continue to work with crab and come up with new items.

And we think we're onto some of that - everything from sourcing programs to then from a culinary perspective.

Same applies for shrimp, although small shrimp are ubiquitous, large shrimps are not, and creative culinary applications to them.

And so we just need to challenge ourselves on the food side a little more.

I'm confident we'll do it.

I think you'll start seeing some of it later this spring.

It's important to realize that what we're seeing is an evolution, and we're not just walking away from value promotions.

We're branding it - value promotions and all that brand-building work and festival promotions, as Dick indicated.

So it's a matter of tone and balance going forward.

We have time for maybe one or two more questions.

Next question?

Next question is from Andy Barish from Banc of America.

Please go ahead.

Just two quick expense questions.

On the media side, can you help me understand, is this a - have you seen an increases in cost per rating point?

Did that kind of start with the new television season?

And then secondly, on the labor side, have you sort of adjusted near term to a lower same-store sales kind of number at Red Lobster, thus if and when you get the comps stabilized, there might not be as much leverage in that business, as you'll have to add a little bit of labor back to manage higher volumes in the Red Lobster business.

I'm going to speak to the media in Red Lobster.

We did see some inflation of media, but it was really more about timing - additional media, and timing of spending in the second quarter.

Additional in the sense that we put some effort into the Share the Love brand launch in terms of national billboards and some - a bit of a shift, actually, in the quarter from radio to television, which caused the net effective cost cardio (ph) point to be up.

But I think, again, on the year that's pretty much going to balance itself out.

We'll be slightly up on the year in dollars and as a percent of cost not up - well, we might be up a little bit as a percentage, but then the sales the back half.

But on a dollar basis, we'll be pretty close to flat.

So it was really more about the second quarter effort and the launch.

And then our marketing information, as we reported out, it includes efforts around marketing research.

There's room for more research to better understand our situation at Red Lobster, which is improving in this quarter.

Next and final question?

Your next, final question from Larry Miller from Prudential.

Please go ahead.

Thanks.

I was just wondering, can you talk about what gives you a little more confidence?

You talked about your January series events - did those test well?

Is that why you're more confident that maybe you might see some better effectiveness?

And then I'll just finish up with the fact that it looked like inventory was up significantly, maybe terms might have slowed, and if you could talk about what's going on with the inventory there.

I think both of those are probably Red Lobster questions.

The ads that we'll be running in January have scored higher on basically measures than what we've had in the last - than anything we've had probably in the last six months.

So we do have some confidence that they'll be better.

And with respect to inventory, we've - of course, our inventories are always up this time of year as we buy in for Lobsterfest and buy in for the back half promotional calendar.

In addition, we've had some good opportunities to buy shrimp and we've availed ourselves of those, so our shrimp inventory is running a little bit higher than it normally would.

And we thank you for your attention and time, and if there are other questions, as there always are, Matthew will be on his phone all today, responding to your questions.

And you know he makes himself available in a heroic way whenever we have these calls.

So we hope that you'll get in touch with Matthew if you have any remaining questions.

We certainly appreciate your interest and the fact that you joined us today on the call.

Good day.

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