達登餐飲 (DRI) 0 Q0 法說會逐字稿

[OPERATOR INSTRUCTIONS] As a reminder, today's call is being recorded.

At this time I'd like to turn the conference over to Mr. Matthew Stroud.

Please go ahead, sir.

Thank you.

Good morning, everyone.

With me today are Clarence Otis, Darden's CEO;

Drew Madsen, Darden's President and COO; and Linda Dimopoulos, Darden's CFO.

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

During the course of this conference call, Darden Restaurants's officers and employees will 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 statements involve risks and certainties that could cause actual results 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, and changes in consumer tastes 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 statement made by or on behalf of the Company.

A copy of our press release announcing our earnings and the Form 8K 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 website at Darden.com.

We are holding an investor and analyst meeting on Thursday, June 23, in Orlando, this meeting will be Webcast starting at 8:00 a.m.

Eastern time.

We also plan to release the same-restaurant sales results for fiscal June, 2006 during the week beginning July 11.

We plan to release same-restaurant sales results for fiscal July, 2006 during the week beginning August 1.

And we plan to release fiscal 2006 first-quarter earnings and same-restaurant sales for fiscal August, 2006 on Thursday, September 22, after the market close.

We released fourth quarter and annual earnings yesterday afternoon.

Results were available on our first call PR Newswire and other wire services.

Let's begin by updating you on our fourth quarter and fiscal year earnings.

Fourth quarter net earnings were $84 million and diluted net EPS was $0.52.

This represents a 16% increase in diluted net earnings per share, excluding last year's asset impairment and restructuring charges.

On an annual basis, we reported net earnings of $290.6 million and diluted net EPS of $1.78.

This represents a 21% increase in diluted net earnings per share, excluding last year's asset impairment and restructuring charges.

Olive Garden had an outstanding quarter with strong operating profit growth.

Red Lobster had an outstanding quarter as well.

While its operating profit was slightly lower than last year's fourth quarter due to last year's extra operating week, excluding that week, Red Lobster had solid earnings growth.

Bahama Breeze's financial results this quarter were also solid, providing a positive contribution to Darden's earnings.

Smokey Bones is continuing to expand rapidly and while it generated significant incremental sales and incremental restaurant level earnings, on an overall basis it was slightly dilutive to earnings.

We had expected it to be slightly accretive to earnings this quarter.

Linda will now provide detail about our financial results for the fourth quarter as well as our outlook for next year.

Drew will discuss the operating company's business results and then Clarence will offer some final comments.

We will then respond to your questions.

Thanks, Matthew.

Darden's total sales increased 2.6% in the fourth quarter.

That's 13 weeks versus 14 weeks as a result of same-restaurant sales growth at Olive Garden and our operation of 56 more restaurants [AUDIO DIFFICULTIES].

Olive Garden reported positive same restaurant sales of 9.9% for the quarter on a 13 week versus 13 week basis, achieving its 43rd consecutive quarter of same-restaurant sales increases.

Its total sales increased 5.6% in the fourth quarter on a 13 week versus 14 week basis.

And 13.6%, including the extra week.

For the fiscal year, Olive Garden had a same-restaurant sales increase of 7.2% on a 52 week versus 52 weeks basis.

Red Lobster had a same-restaurant sales increase of 3.4% for the quarter on a 13 weeks versus 13 weeks basis and while total sales were down 2.7% on a 13 weeks versus 13 weeks basis, total sales grew 3.8%, excluding the extra week.

For the fiscal year, Red Lobster had a same-restaurant sales increase of 0.9% on a 52 week versus 52 week basis.

For the fiscal year, Bahama Breeze had average unit volumes of 5.1 million, which reflect the same-restaurant sales decrease of 1.6%.

Despite the decrease in same-restaurant sales, Bahama Breeze was accretive to earnings for the year with an operating profit improvement over the prior year that amounted to approximately $0.05 diluted net earnings per share.

We expect Bahama Breeze to be roughly break-even to earnings in fiscal 2006 as they continue to invest in positioning the business for successful, renewed growth.

Smokey Bones opened six restaurants during the fourth quarter and a total of 35 restaurants in fiscal 2005.

Smokey Bones achieved meaningfully higher restaurant earnings versus the prior year.

However, it had the same level of earnings dilution as the prior year due to the combination of more new restaurants openings, spending to test the effective advertising at nationally-competitive levels in a couple of markets, and the write-down of one restaurant.

At the restaurant level, that's excluding SG&A and D&A, earnings increased almost 72% to over 32 million.

In fiscal 2006 we anticipate approximately $0.04 to $0.06 improvement in Smokey Bones' affect on Darden's overall earnings.

In terms of margin analysis in the fourth quarter, food and beverage expenses were 5 basis points better than last year on a percent of sales basis.

Looking forward to fiscal 2006, we expect food and beverage as a percent of sales to be relatively flat to fiscal 2005 with more favorability in the second half of the year than in the first half.

Fourth quarter restaurant labor expenses were flat to last year on a percentage of sales basis with sales leverage at Olive Garden and Red Lobster offset by wage inflation, about 2%, and higher restaurant-level bonuses.

Restaurant expenses in the fourth quarter were 13 basis points lower than last year with on a percentage of sales basis.

Sales leverage and favorable public liability insurance costs were mostly offset by higher utilities expense and higher repairs and maintenance at Red Lobster.

Selling, general, and administrative expenses were lower as a percent of sales by 14 basis points due to sales leverage at Olive Garden and Red Lobster.

However, included in this line is the asset impairment at Smokey Bones I mentioned, costing about a penny and consulting fees associated with our Sarbanes-Oxley 404 compliance, which also cost us about a penny during the quarter.

The tax rate for the fourth quarter was lower versus last year on an adjusted earnings basis due to favorable resolution of prior-year tax matters and increased tax credits.

For fiscal 2006 we expect the tax rate to be more normalized at approximately 33%.

Finally, we repurchased 4.5 million shares of our common stock in the fourth quarter.

In the last four years, we repurchased nearly $1 billion of our stock, including the 312 million we spent in fiscal 2005.

This really demonstrates the significant cash flow that we generate.

We are delighted by the continued strong sales growth at Olive Garden, delivered in fiscal 2005 and by the terrific progress Red Lobster has made.

For fiscal 2006 we expect combined same-restaurant sales growth for the two companies of 2 to 4% of course there will be some month to month variability where specific factors such as differences in our promotional calendars and holiday shifts put us above or below that range during the year.

In fiscal 2006 we expect a net new restaurant increase of between 55 and 65 restaurants, slightly ahead of the number of net new restaurants we added in 2005.

On a net basis, we expect to open 5 Red Lobsters; 20 to 25 Olive Gardens; 25 to 30 Smokey Bones; and 3 Seasons 52 restaurants.

With these same restaurant and new restaurant expectations and the earnings improvement we anticipate at Smokey Bones, we currently expect low double digit diluted EPS growth for fiscal 2006.

From a quarterly perspective, low double-digit growth makes sense, although please keep in mind that in the second quarter, given the low base because of seasonality, modest dollar changes in earnings can result in meaningful percentage changes.

I should note though for the first quarter, we're off to a great start in June.

With that, I'll turn it over to Drew to comment on the operating companies.

Thank you, Linda.

The fourth quarter provided a strong ending to a very strong year at Darden.

Olive Garden led the way with another year of exceptional performance.

Virtually every key business fundamental improved versus last year and established a new record.

This performance was driven by a powerful combination of brand management excellence, restaurant operations excellence, and a superior business model.

In particular, Olive Garden's 43rd quarter of same-restaurant sales increases helped generate double-digit growth in total sales and operating profit and their total value creation, driven by operating returns and asset growth, placed them in the top-quartile of the S&P 500.

Dave Pickens and his team have effectively managed their leadership transition and are well positioned for continued success.

Their focus in fiscal 2006 will be maintaining their current level of operating excellence while laying a foundation for accelerated new restaurant growth, from 20 net new restaurants in fiscal 2005 to approximately 40 per year by fiscal 2008.

Red Lobster made substantial progress this year in a number of critical areas.

First, Kim Lopdrup has built a strong executive leadership team that is now fully staffed for the first time in two years.

And their simply great operating discipline has helped eliminate unnecessary cost and complexity from their business.

As a result, the Red Lobster team has improved their guest satisfaction to new record levels, strengthened their restaurant level returns, and delivered a double-digit increase in operating profit.

Importantly, they also delivered three consecutive quarters of guest count growth in fiscal 2005 and have good momentum entering fiscal 2006.

They will continue to strengthen their business foundation in fiscal 2006 while taking the necessary action to finalize their brand promise, align their guest touchpoints and position Red Lobster for faster growth.

Smokey Bones continued to deliver a great guest experience while opening 35 new restaurants.

In fact, their guest satisfaction in the fourth quarter was the best of any Darden business.

Although their fourth quarter financial performance was slightly below our expectation, as Linda mentioned, we continue to believe Smokey Bones will be a strong growth vehicle for Darden.

During fiscal 2006 J.J.

Betkin and the Smokey Bones team will balance the pace of new restaurant openings with the need to further strengthen same-restaurant sales and returns.

This will include menu enhancements to broaden appeal and increase frequency, targeted efforts to appropriately lower cost of sales, and continued optimization of their prototype investment.

Bahama Breeze achieved a substantial improvement in financial performance during fiscal 2005 and is now operating at a break-even level.

They also confirm that their brand promise to provide a Caribbean escape that puts guests in an island state of mind is a unique and broadly-appealing proposition.

Laurie Burns and her team will accelerate progress in delivering this brand promise next year with a particular focus on improving food taste and attentive service.

They will also achieve further operational simplification and improve their restaurant level of return on sales by eliminating cost that doesn't add value to their guests.

Clarence.

Thanks, Drew.

I sit here and I've heard the word a couple of times, "delighted," and that's absolutely the right word, we're delighted with where we are.

This was truly an outstanding color, it reflects exceptional performance at Olive Garden.

Olive Garden's clearly the leader in casual dining companies of size, it also reflects Red Lobster's excellent progress in rebuilding its business as well as good progress on a number of fronts at both Bahama Breeze and Smokey Bones, and the quarter caps a great year.

And that in turn caps a strong record achievement since we became a public company 10 years ago, and that record includes a compound annual total shareholder return of 16%.

Given this momentum, the outstanding start to the new year that we have here in June, and the comprehensive, strategic review we've completed this year as part of our leadership transition, we think we're firmly on a path to capturing the exciting, long-term opportunities in casual dining, and that said, we do know that to achieve our ultimate goal, which is to build a great company that continues to create superior top-quartile S&P 500 shareholder value and that lasts for generations, we've got work to do.

We need to continue the strong operating momentum that Olive Garden and Red Lobster currently enjoy, address near-term opportunities, as Drew said, to make Smokey Bones even stronger, we need to fully realize Bahama Breeze's potential and ultimately add new brands.

And we believe that in each case, the key is combining brand-building excellence in-restaurant operating excellence and outstanding operating support.

With two established and trusted brands, two emerging brands that have great potential, and exciting restaurant tests underway in Seasons 52, dominant market share in our industry, strong cash flows, strong financial position, and then most importantly, with the best people in the industry, we think we have everything it takes to be the best in casual dining, now and for generations.

Again, a great quarter, capping a great year, and now we'll take your questions.

Thank you very much. [OPERATOR INSTRUCTIONS] Our first question comes from Robert Derrington with Morgan Keegan.

Go ahead.

Yes, hi, good morning.

Clarence, question regarding Smokey Bones.

You mentioned in the press release your average unit sales had ticked down a little bit year-over-year for the concept, and it's got a lot of great growth potential, but I'm just wondering, given the fact that you increased the restaurant base by about 50% year-over-year, what is it that you see are opportunities for the brand that it may not be currently generating?

Thanks, Bob for the question.

I would say its average unit volumes ticked down a little bit and that's really -- reflects of market mix.

We've gone into some slightly smaller trade areas.

We did have, as we mentioned, same-restaurant sales growth for the year.

And I would say -- and we'll get into it in more detail on Thursday, but there are a number of opportunities.

Again, keep in mind the $3.1 million is unadvertised.

So certainly one of the big opportunities and one of the reasons why it's important to scale up is to advertise.

We did a national theoretical test, really taking a couple of markets, trying to go in at competitive, national levels to see what we could get, and we got over 15% sales lift.

So that's clearly in the long-term a very, very important driver.

I think in the near-term we look at restaurant-level earnings, and that's the key for us as we think about it, because everything below that has to do with decisions we're making about add test, for example, about how fast we want to grow, and the overhead associated with that, but at the restaurant level, I would say a couple of places: One is to increase sales even before we get to advertising.

We think there's an opportunity to broadening the appeal in terms of occasion mix by adding a little bit more non-barbecue, for example, to the menu.

That's one of the big areas.

There is cost of goods opportunity beyond sales leverage.

This has been a very high period in terms of cost for pork in general, ribs in particular.

We're seeing some of that abate and hope that it would come back down as we look out, so quite a few opportunities to improve.

Great, thank you.

Thanks.

We do have a question then from the line of Jeff Omohundro with Wachovia.

Please go ahead.

Yes, I wondered if you could update us a bit more about what your consumer research is saying.

You mentioned the high scores at Red Lobster, what does it say about price value and how has your, some of your mid-priced menu items performed at the concept?

This is Drew.

Red Lobster has improved every dimension of the guest experience that we measure in our in-restaurant guest satisfaction survey, and that includes value.

Value's gone up several points, and each point is statistically significant.

Part of that is related offering a broader variety of price points on the menu, as you just mentioned, and those new items that were introduced in February are doing well, but an equally important part of the value improvement is just the overall improvement in the guest experience and guest satisfaction.

So we're very encouraged by the fact that Red Lobster is establishing a stronger foundation for growth that starts with a significant improvement in guest experience across all attributes, including value.

And you mentioned a stronger foundation for growth.

When would you envision seeing that realized in terms of unit openings?

In terms of new unit growth, not in the next year or two.

We will continue to open a handful of Red Lobsters and relocate some existing Red Lobsters in the stronger trade areas as we have been over each of the last few years, but we think there's opportunity to further refine the brand and the way that's delivered, particularly in the menu that's going to result in stronger unit sales at their current margins, which are healthy, and that will put us in a better position to be more aggressive in new unit openings.

Thank you.

We have a question from the line of Mike Smith with Oppenheimer.

Please go ahead.

Couple of questions.

One on Smokey Bones.

Comps were up 1.1%, you did some advertising, and it's a young concept.

I'm wondering, how happy are you with Smokey Bones?

I notice that you're not opening as many in '06 as you did in '05.

Can you kind of expand on that a little bit?

Sure.

I think, Mike, there are a couple of things: One, is that we are making some tweaks to the menu, and so that justifies diverting some organizational capacity to doing that as opposed to as much of it as we've had on the expansion side; then the other piece is, we're in the construction environment that is pricey, I guess is the best word that comes to mind and it's every element.

It has to do with land costs and lease costs, it has to do with construction materials costs, and so we have had to walk away from some deals that were on the table because they just don't make sense from a return perspective.

Are you happy with the 1.1% comp increase, considering the satisfaction scores that you're turning in?

We'd like it to be higher.

We'd like it to be higher.

I mean, 1.1 growth is good, so we're always happy with growth, but we're always interested in having it be higher.

I think Drew mentioned some of the things that we're doing to drive more frequency, to make it more appropriate for more occasions, which is how you would do it given the guest satisfaction scores that we've got.

Thank you.

We do have a question now from the line of Bryan Elliott with Raymond James.

Please go ahead.

Good morning.

A couple items on Smokey Bones also.

If you, Linda, if you took away the write-off and the advertising test, would profit contribution have met your goals that you laid out last conference call?

Yes, directionally, they would have, yes, they would have been much closer to that.

I mean, there's a few other minor things.

There's rent averaging, now that we've allocated that back through the concept, has been a bit more punitive for an emerging business because there is this rent holiday impact and a few more leases in this business as well, so that has had more of a negative impact also.

Okay, you gave us, I think, a restaurant operating profit dollar number.

Could you give that in percentage terms or give us what the sales base that that number compares to?

Yes.

We're going to go into this a fair amount at our analyst conference coming up, but generally, at a restaurant-level earnings basis, and we look at it a bit different than you do because we would include both a piece for marketing as well as depreciation.

We're roughly at about a 10% return on sales at that level, and that's in the mid-teens is what we would generally target for a business that's certainly more mature, and so we would expect over time for this business and Clarence talked about a number of those factors that cost the sales and labor and certainly continued sales leverage when we get to advertisable scale would move us toward that higher level of performance.

And I would just add, as Linda said, for an established business, mid-teens is very healthy.

Red Lobster -- and we'll get into this in more detail as Linda said as well on Thursday -- Red Lobster's solidly there.

Olive Garden's actually well above that.

And for an emerging business, we really are trying to trend toward it, and we expect to get there sort of in years 7 to 10 is generally the pattern that we map out.

Thank you.

We have a question then from the line of Andy Barish with Banc of America Securities.

Please go ahead.

Good morning.

On food costs, kind of a flattish outlook.

Can you give us an update on where you stand on shrimp?

And then I think Linda, you implied better in the back half, is that starting to work in in the new calendar year maybe some easing of some of the other proteins like pork costs that have impacted Smokey Bones?

Yes, that is correct, and a little bit of beef as well, so shrimp remains pretty competitive and pretty solid.

We'll continue to have the head wind we've had for some time around crab and lobster, and so really some plusing and minusing, but as I said, on the whole we think relatively flat for the year.

And can you quantify the cost of goods impact at Smokey Bones?

I mean, was it north of 100 basis points if you just look at that food cost line from pork commodities?

At least that, yes.

Well north of 100 basis points.

Thanks.

We have a question from the line of John Ivankoe with J.P. Morgan.

Thanks.

Could you talk about the Smokey Bones prototype, what it costs you on a fully-loaded basis in 2005 and what kind of progress you're expecting in reducing that cost in '06, '07 and I guess what that actually means in terms of the consumer experience?

Thanks.

We're going to get into that more on Thursday, the prototype pieces, so we're not going to discuss that today.

We can just tell you that, again, it's complicated.

We need to walk you through all the line items to show you what fully-loaded looks like, because to some degree as we talk about that and we look at competitors and competitive benchmarks, sometimes we talk in apples and oranges, and so we want to take some time to walk you through that detail.

Could I ask a question maybe you'd like to answer today?

Any throughput initiatives at Olive Garden, especially as those average volumes are obviously getting very high?

Average volumes have increased steadily at Olive Garden for several years and we would expect them to continue to increase based on how solidly-positioned they are in the market and the great experience they deliver and the great loyalty they've got.

Having said that, we have started some efforts not solely geared at efficiency, but things that are geared to improve the guest experience, improve the employee experience for people that work in our restaurants and then ultimately will aid efficiency.

We started with wait time quotes, a program to increase wait time quotes last year and eliminate all other gaps in the experience through an increased emphasis on team service.

This year Dave and his team are looking at a meal pacing system that's already in all Smokey Bones as it opens, they're testing that at Olive Garden and would look to -- pending the successful test, expand that throughout the year as well.

Thanks, we have a question then from the line of Joe Buckley with Bear Stearns, please go ahead.

Let me ask a question on the Red Lobster core structure.

You're team -- going back over the last 18 months, you made a lot of progress, taken a lot of costs out of Red Lobster.

Then with this quarter with pretty good same store sales performance, really at the higher end of what you're talking for '06, it sounds like margins flattened out or were down on a percentage basis.

Can you talk about what we should expect going forward and particularly with seafood costs lower year-over-year, I gather, why we didn't see more progress on the Red Lobster margins?

Well, as you know, much of last year and early part of this year we saw a lot of margin improvement before we saw some of the sales momentum, and so we have -- we continue to see some opportunity with that, but certainly not as much as we've seen over the last couple of years.

We also -- and I would think we mentioned this both the last two quarters -- have had some accelerated repairs in maintenance as we're really working very hard to get those facilities looking in top-notch shape, and so that has been an effort that will moderate some on a more normalized basis into next year.

We would -- there continues always to be opportunities to take costs out of the business.

We have very active programs in all of our businesses to do that, but on a go-forward basis, more of the expectations that we have for margin expansion at Red Lobster would be related to sales leverage.

And just one build on that.

From what Linda said, as you look at the year, the restaurant level return on sales for our Red Lobster has increased substantially, and we think in a very sustainable way.

So again, that is a good foundation heading into '06.

Great, sounds like you're basically done, you're kind of at a normalized run rate where comps are going to drive the margin performance from this point?

No, I would say that first and foremost, Red Lobster's made substantial progress at the restaurant level in margin and we would expect that that could continue going into the future.

The headline we're trying to say is they've reached a very solid level in their restaurant unit performance and just like Olive Garden, has over the last six or seven years, as sales per restaurant increases and as they continue to get more efficient, we would see there that is some opportunity to continue to improve that year-to-year.

Thanks.

We do have a question then from the line of Jeffrey Bernstein with Lehman brothers.

Please go ahead.

Thanks very much.

Question on Olive Garden in regards to the more aggressive unit expansion, I believe you mentioned it will be up to 40 by fiscal '08.

Can you talk about efforts to trim down the investment costs to better fit perhaps smaller market opportunities, what's been done to lower the costs to facilitate this expansion?

Yes, this is Drew.

That's another thing that we'll get into in more detail next week, but I would tell you that the way Dave and the development team is approaching it is by developing a portfolio of prototypes that they can use to both more fully penetrate existing markets as well as enter smaller markets, so that could be smaller prototypes with lower season capacity and lower investment, could be in-line options, and we'll talk about all that next week, but it's no one single thing.

The other thing is they will all be in a Tuscan farmhouse look and feel, which has worked so well for Olive Garden over the last several years, but at a lower cost to build.

Thank you.

We do have a question then from the line of Peter Oakes with Piper Jaffrey.

Please go ahead.

Hi, good morning.

Drew, I'd be kind of curious if you could share with us, what was the level of coupon activity in the quarter at Olive Garden year-to-year?

It was the same.

They had one coupon in the fourth quarter a year ago and one coupon in the fourth quarter this year.

I'm not sure if it was the exact same week, but overall it was substantially the same.

And Red Lobster was there anything of material nature on the coupon front?

No.

Okay.

I apologize, sir.

If you could actually requeue, we'll open your line but we're going to move onto a question from Janice Meyer CSFB.

Please go ahead.

Thanks.

Two questions, if I can.

One on Smokey Bones.

Can you talk a little about the menu ideas and how you intend to broaden it?

Are you going to be adding non-course items to help sort of diversify your food cost basket, maybe bring the COGS down alternatively?

What impact might that have on checks and I think some of the barbecue items are probably some of the more expensive items.

And on the marketing front, how many markets do you think you can advertise at Smokey Bones for 2006 and 2007?

Well, first on the menu side, any time we look to optimize or evolve a menu, our starting point is to make sure we're staying very consistent what the brand is and the brand is all about, so this is really an evolution, not a fundamental change in their menu.

Barbecue is going to continue to be the foundation for the menu going forward, although we would expect preference on barbecue to drop a little bit as we add more meaningful variety around it.

Sorts of things that would be added are some lighter grilled items, some salads, probably a signature burger category.

J.J.'s going to talk about all this in more detail next week, but it is meant to build on a barbecue foundation and make the brand relevant for a broader variety of occasions without fundamentally changing what it stands for.

We think some of that will help on the cost of sales side, but there's also some innovative initiatives that the business has already taken to optimize the cost of sales side, a new menu was introduced at the end of May that adds a new create-your-own barbecue section on it that gives guests a chance to build combinations of two or three barbecue items to suit their taste, giving them flexibility, but all of our testing has shown that that does add some margin improvement.

It does lower cost of sales a little bit, while giving guests more flexibility.

On the marketing side, I wouldn't look to see any television advertising beyond testing in '06, although we are looking at local marketing ways that we can strengthen to let people know that Smokey Bones is there and it's a great guest experience and what it's all about.

I think as you also mentioned, ad tests, or ad markets in '07, and Janice, I don't have the information on that.

Please ask J.J. on Thursday, but clearly, one of the things we try to do as we build it out is get to some level of broadcast media efficiency in markets as quickly as we can.

I think I forgot your check question.

I think you asked about would there be a material impact on check?

And we're not anticipating a significant change in the check at this point, but as we get further into the menu evolution, certainly we'll talk about that more.

And check has not been a major consideration at Smokey Bones in terms of value.

Smokey Bones scores very well, is a value leader in casual dining.

Thanks.

We have a question from the line of Conrad Lyon with Key McDonald.

Please go ahead.

Hi, two questions, one on Olive Garden.

Is there any planned cannibalization with the need of coming on-line?

And then the second question is regarding Smokey Bones.

If you can talk a little bit about the closure since the quarter ended and the characteristics around that.

Thanks.

On Olive Garden, it depends on where we open new restaurants.

As we look to penetrate smaller markets, there wouldn't be, obviously, much cannibalization.

Building out existing markets and capitalizing on the strength of the brand and doing that in a way that makes it a little more convenient for our guests because they won't have to drive quite as far, they won't have to wait quite as long at the restaurants that we've already got.

There could be some cannibalization.

We've got some pretty sophisticated tools to help us analyze that, and that sort of impact is built into any of the investment decisions that we make going forward.

And the ultimate goals for Olive Garden is to accelerate total sales growth and total profit growth, total value creation, if you will, at margins that are well above the average in casual dining.

So if there is a little bit as long as we were building the top line in the value-creating way, we'd be happy with that.

In terms of the closure, we've talked I think for a while now about the fact that initially we were trying to see if we could make Smokey Bones work in markets that were sort of sea markets, sea locations, if you will, and we tried a handful of those on the front end.

Actually, probably 75% of the first 10, and what we found is they don't work as well as being at Main and Main.

So we look at those restaurants to make sure that they're moving in the right direction, even though their absolute sales levels are lower than the Company average by a fair amount.

And if they aren't, if we're not able to get what we need, we need to close them, and we closed one in Chicago that fits that description.

Prior to that, I think in '03 , we closed one before, and so we've closed two of that roughly 6, 7 group of restaurants.

Okay, thank you very much.

Thanks.

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

Please go ahead.

Thank you.

Two cost-related questions.

One is, could you talk about your expectations for labor cost pressures in the coming years, and maybe specifically on the Florida minimum wage and how it may impact you?

Secondly, could you talk about your experience in the up-front advertising market and if there's any benefit there due to lower rates?

Hi, this is Linda.

I'll take the labor question.

You're correct, we have a fairly high percentage of our restaurants in Florida, and that minimum wage did impact us the 1, of May.

All of our businesses feel they can price for that and most of that pricing is in effect at this point, and so we feel it's within our range and ability to price for the minimum wage at this point.

And in terms of advertising, our up-front buys are being finalized now, but you're correct in assuming that there's been less inflation in the media environment this year, at least so far, than last year in the up-front market.

And just to follow on the labor, are we expecting flat labor costs for '06 then?

Directionally, yes.

As a percent of sales.

Thank you.

We have a question from the line of Mark Wiltamuth with Morgan Stanley.

Please go ahead.

Hi.

If you could just please contrast the second half of the fiscal year versus the first half for Olive Garden.

There was clearly a very rich increase in the comps there.

I'm just curious what you think the primary drivers were.

I think it was the change in President. (Laughter) I think the second half at Olive Garden was, as you say, very strong, and they've benefited from several things, not the least of which was new news on the products side, new commercials, and a continuing improvement in their guest experience, and a solid economy.

To the degree that there are other things moving either this year or historically back in the second half of last year or the year before that, it's tough to isolate it.

We've asked ourself the question whether a couple years ago or maybe even last year, Olive Garden had some head wind because of consumer concern with lower carbohydrate diets.

We were never able to see that in the business results a couple years ago in terms of people shifting away from pasta dishes towards protein dishes at Olive Garden, and we haven't seen it shift this year the other way, so it's difficult to isolate those things.

Judgementally, there could have been a little bit of that, but fundamentally, we think we're seeing just the benefits over time of a broad and relevant brand, the great in-restaurant operations and continued news.

Do you think there was any value difference with the pasta offering versus the protein-focused offerings where there's been some cost pressure and therefore maybe pricing up a little bit?

Well, not in terms of what we advertised year-to-year.

I mean, most of the dishes that Olive Garden features, even though they're not discounted features, it's just news, really aren't that different year-to-year.

Thanks.

We have a question from Steve Anderson with MKM Partners.

I wanted to ask about this Bahama Breeze.

Going forward, are you looking to add any restaurant within the next fiscal year or are you still in that stage where you're still testing with those new smaller prototype as you mentioned before?

Well, Laurie and her team have done a tremendous job reducing costs while maintaining or improving the guest experience during fiscal 2005.

We want to continue building on that, but there's a few things we want to see first before we would go after opening new restaurants.

We want to see sustained improvement in the guest experience.

We want to see continued same-restaurant sales growth.

And we want to see more restaurant-level return improvement, and we've got tracking points basically by quarter and by half of the year in fiscal 2006 to monitor that, and pending improvement in all of those things consistently, then it's possible that towards the end of fiscal 2007 we could be looking at a of couple new restaurants, but not before that.

Okay, thank you very much.

Thanks.

We're showing another question from Mike Smith with Oppenheimer, please go ahead.

Has been answered sort of, but I had one other question.

Red Tide has I guess impacted the shellfish from the northeast part of the United States.

Is that having any impact on you at all?

No, it's not, Mike.

We have not had an effect at all from Red Tide, given where we saw seafood.

We have a question from Jason Whitmer with US CIBC.

Please go ahead.

That's FTN Midwest Research.

Drew, I think you'd recently mentioned something about the economy and I wanted to follow up also with just kind of a bigger picture by your brands and looking through the traffic pace, which has been quite strong at Olive Garden and getting maybe a little bit better at Red Lobster.

Have you seen any variances here within the brands, within the categories, even regionally?

And also, I think heard you say something earlier about consumer research.

I was wondering if there was any further thoughts on doing more or any more insights from consumer research.

I didn't hear the end of your question, but in terms of comp performance, the Midwest hasn't been as strong as other parts of the country.

Florida has been stronger year-to-year, year-over-year than other parts of the country, and in terms of day part, at least at Olive Garden they've seen significant strength at both lunch and dinner for a couple of years now.

Earlier on, lunch was a little stronger than dinner, but now both day parts are strong.

And again, I couldn't hear the very end of your question.

It was on consumer research.

Well, consumer research is showing us that confidence has improved some and the overall outlook is still solid.

Great, thanks.

And we're going to get, again, on Thursday into the growth drivers, and we've talked about them before for casual dining, real disposable income growth, employment levels, participation rate of women in the workforce, growth and their percentages of people in that 50-plus age cohort.

All of those have been strong over the long-term, in a couple of places they took a little bit of a dip in the first few years of the decade, but they've recovered, and been at the levels that they've been at historically for the last couple of years.

And we'll get into more detail on that Thursday.

Thanks, we do have a question then from the line of Bryan Elliott with Raymond James.

Please go ahead.

Good morning.

Just trying to understand some of the -- a lot of the -- can you reconcile a lot of the sort of guidance comments and all here.

If I sort of -- just making sure I'm interpreting things right.

I hear you saying I think that the food cost outlook, particularly into calendar '06 is better.

If I look at the brands, sounds like Olive Garden outlook on the margins side is fine if sales hold up, similar optimism I heard about Red Lobster.

And then with the slowing growth and costs to support that growth and some pork relief, I would take away expectations of improved margins -- well you actually clearly stated that on Smokey Bones.

Is that the right interpretation from a big-picture standpoint to take away from today?

Yes, Bryan.

I think that is directionally correct.

I mean, we have fairly flat costs on both food and labor and we certainly expect improved performance.

Margin improvement at Smokey Bones and continued leverage at Red Lobster.

Hello?

Yes, go ahead.

That would seem to be not reconcilable with the low double-digit guidance, which would imply minimal margin expansion in the aggregate.

Can you tie those two together?

Sure, Bryan.

You're stealing a little bit of our thunder from Thursday, but one of the things that we clearly want to do, we see an opportunity, is to strengthen our platform for accelerated growth, and what I mean by that is we think there's some opportunities to make restaurant support even more effective here so that as we scale up, we get some real economies of scale out of our restaurant support and there's some investments that we need to make in '06 to make that happen.

There's some technology investments, there's some leadership development investments, and so that is not in what we've given you so far, although we'll get into more detail on that at the meeting on Thursday.

Thanks.

We do have a question from Joe Buckley's line with Bear Stearns.

Please go ahead.

Hi.

I just wanted to get into this a little bit with Olive Garden.

As you think about opening new units, what kind of investment costs versus new unit volumes are you targeting for Olive Garden?

Well, our sales-to-investment ratio is above 1 now, and when you combine that with a very strong business model in terms of restaurant-level returns, as I said earlier, the combination is a very strong value creation, and we would expect to see that continue or get a little bit better on the sales-to-investment ratio and on the restaurant-level earnings side, there's really no reason to think it will change appreciably in either direction in the near-term.

Thank you.

Thanks.

We do have a question then from the line of David Palmer with UBS.

Please go ahead.

Good morning.

Congratulations, guys.

You've had I guess a little over a year now of resetting the promotion calendar for Red Lobster and you've probably reloaded the innovation pipeline somewhat at that concept, so it would seem that much of the promotion comparison growth volatility might be behind you and you might be a little bit more in control of your growth going forward and that's even considering your limited check growth opportunity that you may think you have.

My question is, do you think that in addition to your 2 to 4% same-store sales target we might -- you might also be targeting and it's fair to say you might be targeting positive same-store sales growth in any given month?

Well, in terms of the beginning part of your question, you're absolutely right that in fiscal 2005 Kim and the Red Lobster team have managed through some of the difficult comparisons in year-to-year promotions, particularly those that were deep discount a year ago and weren't this year.

And that's passed us, so we shouldn't see the same level of promotion-induced variability as we did in parts of fiscal 2005.

In terms of the innovation pipeline, Red Lobster is adopting some of the best practices that Olive Garden has used and they're introducing more fully-evaluated and fully-tested promotions than they have in the past, although there is still work to do in that area for sure, but progress has been made.

In terms of month-to-month, that's just too difficult to say, and we don't get into characterizing potential monthly variations, I guess.

And I would just say, I mean, you've touched upon a great point, which is we've made tremendous progress, as Drew said, but there is more work to do there, and we just brought in a marketing leader, and as you know, in our world, food and beverage, menu development is part of marketing.

Sally Sada (ph) joined Red Lobster from Olive Garden at the beginning of April, so she has had a great deal of -- she's a big part of the reason why Olive Garden has the kind of success that they have with menu evolution, promotional development at Olive Garden, and we expect her to bring that to Red Lobster, but that's work to do.

We show another question from the line of Janice Meyer with CSFB.

Please go ahead.

Ma'am, if your line is muted, we're unable to hear you.

Can you hear me.

We sure can.

To follow up on your forecast for 2006, in the fourth quarter here, you had essentially no margin leverage, or little leverage on, I guess, it was combined maybe 6 or 7% comp growth from Olive Garden and Red Lobster.

So does it make sense to expect flat margins in '06 on 2 to 4% on half the rate of same-store sales growth in '06, especially with the investment spending you're talking about, again understanding that Smokey Bones may be a little more profitable?

Was there something, costs in this fourth quarter that held back margins given the comps?

I think I'll start and let Linda answer it, but I think this quarter is pretty noisy because of the extra operating week last year, when you talk about margins.

And so we would have to walk you through in detail which of the line items were affected by the extra week and which weren't.

I don't think you can see that just looking at the line items as they're shown.

But Linda?

Yes, no, I agree.

It is pretty noisy and we've tried to call out to you the one-time sort of impact we've had this year, for instance the asset impairment, the 404 things, the higher utilities and maintenance, but any given quarter we have usually some variations and one-time sort of things, so it does make it a little bit noisy.

Yes, but on some of those semi-fixed costs, like SG&A and restaurant expenses, last year's margins looked better than they would look on a 52-week -- or 13-week, rather, basis.

I thought you spent most of that back last year, though?

I remember you saying that.

No, we said we spent half of it back, but the other half is still a fairly meaningful dollar amount.

That's correct.

Thanks.

We do have a question then from the line of Robert Derrington with Morgan Keegan.

Please go ahead.

Drew, can you give us an update on the remodel program up at Red Lobster?

The coastal home plan and kind of how that's going, the cost of that remodel, et cetera?

Well, we're not pursuing any more coastal home remodels at this point, and what I mentioned earlier, that Red Lobster is finalizing their brand promise and what that means in terms of all the guest touchpoints, the first thing that we're going to see ultimately, probably towards the end of next year and into '07, is menu enhancement and menu evolution like Clarence just talked about.

Later we'll start to see more of how the physical environment changes and a remodel for Red Lobster that really delivers the experience they're promising, but that won't come in the near-term.

Okay.

So essentially, the plan as you see it for Red Lobster is in pretty good shape and it doesn't require anything at this time, this fiscal year?

Well, continued and to some degree accelerated repairs and maintenance, like Linda said, catching up at the end of '05 and into '06, but no major remodels planned or needed in '06 until we have got a clear grasp of the future experience.

And we have a follow up question from Dave Palmer's line with UBS.

Please go ahead.

I'm sorry.

I was on mute.

Are you seeing any disparity in your performance of your restaurants regionally?

For instance, your restaurants, your growth may be better in Florida where you're getting a little bit of pickup on tourism and the economy's doing better and even population growth is higher than they would be in say the Midwest?

You're exactly right in terms of regionality year-over-year, the Midwest has been softer and Florida has been much stronger.

So you're right in terms of the trends that we've seen recently.

Okay, thank you.

Thanks.

We are showing a question then from the line of Mike Smith with Oppenheimer, please go ahead.

I might have missed this, but did you go in to your capital spending program for '06?

How big and how much you'll spend and break it down between maintenance and new stores?

No, we did not.

We just indicated the number of net new unit growth by concepts.

Could you?

Sure.

Yes, I mean, Mike, this is Matthew.

I think roughly we're looking at capital expenditures probably slightly higher than actual in FY '05.

We were shooting for around $350 million in FY '05, I think we came in around $25 million short of that.

I would expect somewhere between 325, 350 next year would be a good range for us to end up in in terms of capital expenditures.

Thanks.

We have time for one more question, operator.

Actually, at this to,e we are showing no further questions in queue.

Great.

Well, then we'll wrap it up here.

We appreciate you listening in to the call this morning.

If you have any questions, please give us a call here in Orlando.

We look forward to seeing many of you down here Thursday for our -- and Wednesday -- for our analyst day.

Those of you that can't make it, we're sorry you can't attend this year, but we will be Webcasting that event, again, it starts at 8:00 Thursday morning.

You can get the link via our website.

So, thank you very much for your participation.

Have a great day.

Thank you.

Ladies and gentlemen, this conference will be available for replay starting today, Tuesday, June 21, at noon Eastern time, and it will be available through Thursday, July 21, at midnight Eastern time.

And you may access the AT&T executive playback service by dialing 1-800-475-6701 from within the United States or Canada or 320-365-3844 from outside the U.S. or Canada, and then enter the access code of: 784982.

Those numbers once again are 1-800-475-6701 from within the U.S. or Canada or 320-365-3844 from outside the U.S. or Canada, and again, enter the access code of 784982.

That does conclude our conference for today.

Thank you for your participation and for using AT&T's executive teleconference.

You may now disconnect.