達登餐飲 (DRI) 2006 Q3 法說會逐字稿

Welcome to the Darden Restaurants third-quarter earnings release conference call. (OPERATOR INSTRUCTIONS). As a reminder, today's call is being recorded. At this time I'd like to turn the conference over to the Vice President of Investor Relations, Mr. Matthew Stroud. Please go ahead sir.

Thank you. Good morning, everyone. With me today are Clarence Otis, Darden's Chairman and 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 officers and employees may make forward-looking statements concerning 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 uncertainties that could cause actual results to materially differ from those anticipated in the statements. These risks and uncertainties include the impact of intense competition, changing economic or business conditions, the price and availability of food, ingredients and utilities, labor and insurance costs, increased advertising and marketing costs, higher-than-anticipated costs to open or close restaurants, litigation, unfavorable publicity, a lack of suitable locations, government regulations, a failure to achieve growth objectives, weather conditions, 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 statement made by or on behalf of the Company.

A copy of our press release announcing our earnings, the Form 8-K used to furnish the release to 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 plan to release same-restaurant sales results for fiscal March 2006 during the week beginning April 3rd, and we plan to release same-restaurant sales results for fiscal April 2006 during the week beginning May 1st. Finally, we plan to release fiscal 2006 fourth quarter and annual earnings and same-restaurant sales results for fiscal May 2006 during the week beginning June 19th.

We released third-quarter earnings yesterday afternoon. Results were available on First Call, PR Newswire, and other news sources. Let's begin with some highlights from the quarter.

Third-quarter net earnings were 105.3 million and diluted net EPS was $0.67. This represents a 20% increase in diluted net earnings per share compared to last year. Olive Garden and Red Lobster had an outstanding quarter, with strong operating profit growth at both companies, led by industry-leading same-restaurant sales growth at Olive Garden. Bahama Breeze made good progress as well, once again posting solid same-restaurant sales growth. Smokey Bones is strengthening its foundation for future growth.

Also yesterday, we revised upward our sales and earnings guidance for fiscal 2006. We now expect diluted net earnings per share growth for fiscal 2006 to be at the top of our previously announced 15 to 20% growth range, based on our expectation of combined U.S. same-restaurant sales growth of approximately 5% for Red Lobster and Olive Garden, and new unit growth of approximately 4%.

Linda will now provide detail about our financial results for the quarter, Drew will discuss the operating company's business performance, and then Clarence will offer some final comments. We will then respond to your questions.

Thanks, Matthew. Darden's total sales increased 7.1% in the third quarter as a result of same-restaurant sales growth at Olive Garden and Red Lobster and our operation of 48 more restaurants than the third quarter of the prior year. Olive Garden same-restaurant sales growth for the quarter was 5.7%, and this was its 46th consecutive quarter of increasing same-restaurant sales. This is well above the third-quarter net track estimate of plus 2.3%, excluding Darden concepts.

Olive Garden's total sales increased 9.8% in the third quarter, and as a result of strong sales leverage and cost management, Olive Garden had a record third-quarter operating profit, representing a double-digit percentage increase over last year.

Red Lobster had a same-restaurant sales increase of 1.6% for the quarter, and total sales increased 2.5%. Red Lobster also had strong sales leverage and cost management, which drove a solid increase in operating profits over last year and represents record third-quarter operating profit. The holiday shift of Lent from fiscal February last year to fiscal March this year, and the resulting shift of our Lobsterfest promotion, adversely affected February's same-restaurant sales by approximately 6 percentage points. March is off to a strong start at Red Lobster, and as the holiday and promotional shift benefit takes effect, and we are on track to at least tie single-digit same-restaurant sales for the month.

Bahama Breeze reported a same-restaurant sales increase of plus 1.7%, their second consecutive quarter of growth, and we continue to expect Bahama Breeze to roughly break even to earnings in fiscal '06 as they continue to strengthen the business for successful renewed growth.

Smokey Bones opened nine restaurants during the quarter and we expect to open 23 net new restaurants in fiscal '06. Smokey Bones had modestly higher restaurant level earnings compared to the prior year. Restaurant level earnings increased 34%, excluding the SG&A and depreciation and amortization. Its 5% decline in same-restaurant sales continues to reflect the issues we have discussed before.

In terms of margin analysis in the third quarter, food and beverage expenses were 77 basis points better than last year on a percentage-of-sales basis. Cost savings on various products and better waste management contributed to the savings. In fiscal 2006, food and beverage costs as a percentage of sales will be favorable to fiscal 2005.

Third-quarter restaurant labor expenses were 40 basis points higher than last year on a percentage-of-sales basis, with sales leverage at Olive Garden and Red Lobster offset by wage rate inflation. This reflects our pricing strategy, which was to maintain dollar margins for the various state minimum wage increases rather than percent margins. We could pursue this strategy because of our favorability in cost of sales -- cost of goods sold and our desire to drive more traffic in our restaurants. We also experienced additional FICA taxes on higher reported tips. This additional FICA expense is fully offset as a credit to income taxes.

Restaurant expenses in the third quarter were 29 basis points unfavorable to last year on a percentage-of-sales basis. Higher utility expenses and higher credit card fees were partially offset by sales leverage and a favorable workers' comp and general liability cost, and decreased preopening expenses at Olive Garden and Smokey Bones.

Selling, general and administrative expenses were higher as a percent of sales by 22 basis points, due primarily to costs incurred to resolve legal disputes in California related to the exempt classification of certain managerial employees. It was about 9 million pre-tax, and an impairment of assets at Smokey Bones which was about 8.4 million pre-tax. These expenses were partially offset by reduced marketing spending at Red Lobster as a shift in some expenditures into the fourth quarter to coincide with the launch of Lobsterfest.

The effective tax rate for the third quarter of 24.3% was below our previous annual guidance of approximately 32%. Primarily these are the favorable unfavorable resolution of prior year tax matters and increased FICA tax credits on reported tips that I previously mentioned. For fiscal 2006 we are now estimating an effective tax rate of approximately 30%.

During the quarter we repurchased over 3.7 million shares of our common stock, leaving approximately 7.2 million shares in our current repurchase authorizations. We recognize that this quarter's results contain more noise than usual with the litigation cost and impairment expenses that cost the Company approximately $0.07 in net earnings per share, and partially offset by the lower tax rate that benefited the Company approximately $0.06 in net earnings per share. The net of this is that Darden still generated 20% diluted net earnings per share growth year-over-year, and on top of a very strong prior year quarter, and despite the favorable net unfavorable expenses and Red Lobster's holiday and promotional shift.

As Matthew mentioned, for fiscal 2006 we now expect combined same-restaurant sales growth for Red Lobster and Olive Garden of approximately 5%, inclusive of the holiday and promotional shift at Red Lobster in March and April, and we are targeting a net new restaurant increase of approximately 4%. With these same-restaurant sales and new restaurant growth expectations, we expect our diluted net EPS growth to be at the top of our previously announced 15 to 20% growth range for fiscal 2006.

Now I will turn it over to Drew to comment on the operating company.

We are very pleased with our performance during the third quarter. Our financial results were strong. Key operating fundamentals improved across all of our businesses and we made progress strengthening our foundation for future growth.

Olive Garden in particular had another tremendous quarter, with very strong growth in sales and operating profit, as Linda has already described. More importantly, as we think about the business more broadly, we believe Olive Garden is also very well positioned to maintain solid growth into the future. Their key business fundamentals, especially brand relevance, guest satisfaction and economics remain very strong. They have a pipeline of successfully tested new advertising and promotions, and they're in the process of accelerating new unit growth.

During the fourth quarter, Olive Garden will open nine new Tuscan Farmhouse restaurants, including two new optimized prototypes. And these prototypes are brand-appropriate, and they deliver the same great guest experience while also reducing the required capital investment and improving operating efficiencies. One prototype reduces the investment by 250,000 versus what our current prototype would cost going forward, while the second prototype reduces the investment by $400,000. The second prototype has few receipts and will be utilized in smaller markets, or to further penetrate existing markets. Olive Garden has identified and approved a strong pipeline of quality sites, and expects to open 30 to 35 new restaurants next year, which is an increase of approximately 10 new restaurants versus the current year.

Red Lobster delivered another quarter of solid growth in same-restaurant sales and operating profit. Guest satisfaction set a new third-quarter record, and total sales, total profits and restaurant-level profit margins were new records for any quarter at Red Lobster.

Stepping back from the current quarter results, it's important to note that the Red Lobster team has achieved consistently strong guest satisfaction and restaurant-level returns this year. And this reflects accelerated progress (technical difficulty) strengthening restaurant operations and growing momentum (technical difficulty) their brand. They have done this through their simply great operating discipline and by focusing on guests -- what guests want most from a seafood restaurant. (technical difficulty). Operator? If we could get the AT&T operator. I think we're getting a little interference on this side at least.

I'm sorry, sir. We found it. We've got it taken care of. I apologize.

Let me step back from what I was stepping back on just a second ago. The current quarter results were strong. But stepping back from the current quarter, it is important to note, as I was saying, that the Red Lobster team has achieved consistently strong guest satisfaction and restaurant-level returns this year. And that reflects a couple of things -- accelerated progress, strengthening restaurant operations and growing momentum building their brand. And they've done this through their simply great operating discipline and by focusing on what guests want most from a seafood restaurant, which is fresh, delicious seafood, exceptionally clean restaurants and friendly, welcoming service. Their restaurant teams are performing at a high level, and we're confident that their momentum will continue in the next fiscal year and beyond.

More importantly, Red Lobster has built an excellent foundation to support continued evolution of their brand. The goal of this evolution is to broaden the appeal of Red Lobster in order to drive further guest count growth. A sharper brand positioning that better balances the unique physical and emotional reasons to visit Red Lobster has been developed and tested. New advertising and the new menu that better delivers this brand positioning are being finalized and will be market tested in the coming months. As we've discussed in the past, this is a disciplined testing process that typically lasts six to 12 months. And given that their current menu and ad campaign are performing well, we're not going to rush this process. We'll provide greater insight regarding next steps as new learning becomes available.

Smokey Bones same-restaurant sales remained soft this quarter. As we discussed last quarter, Smokey Bones needs to build sales by becoming more relevant for a broader variety of occasions. As a result, their leadership team is evaluating fundamental changes to their brand positioning and related guest touch points, from [main] and menu, to what the role of televisions in the restaurants should be.

We are very focused on ensuring that the new brand positioning builds on their current business strengths and is also competitively differentiated. In particular, we have no interest in making Smokey Bones another varied menu bar and grill concept. To help strengthen their foundation for future growth, Smokey Bones impaired five restaurants this quarter, and three of those restaurants have been closed. We're confident that Smokey Bones is taking the appropriate action to capture their full potential.

Finally, Bahama Breeze delivered same-restaurant sales growth of 1.7% during the third quarter. Key business fundamentals, including guest satisfaction and same-restaurant guest count growth, have shown consistent improvement over the last several months, as Bahama Breeze focuses on delighting guests with their distinctive but more approachable Caribbean escape. Substantial menu improvements, combined with a focus on improving attentive service, have been the key drivers of this growth. Going forward, Bahama Breeze continues to focus on strengthening their business model by eliminating cost and complexity that does not add value to their guests. While more sustained progress is required before we're prepared to restart growth, we believe Bahama Breeze is on the right path. Clarence?

Thanks, Drew. Drew talked about stepping back, and as we step back and look at it, we think we've got a business that is really in great shape. We had a terrific quarter. We know there are a number of special items in it. But when you net all of those out, they really cost us $[0.01] on the quarter. And despite that, we had 20% earnings growth; that comes on top of 24% third quarter last year. And we did that even with a pretty significant change in our calendar, as Linda mentioned, regarding the kickoff of Lobsterfest.

And that is all driven by just terrific momentum at Red Lobster and Olive Garden. We expect that momentum to continue into the fourth quarter. In fact, we're seeing a great start to March from a same-restaurant perspective at Red Lobster that benefits from that calendar shift. And I think as we think about it, Red Lobster and Olive Garden are proven brands. They've got high levels of consumer trust and loyalty, and that has been earned over decades, and it's getting stronger. So, we feel good about it.

That said, we do recognize that Bahama Breeze and Smokey Bones both have more work to do to get where they need to be. Both of those concepts are strengthening operationally, and they're also strengthening their positioning and their business model. And the goal there is really for them to become brands that are just as compelling and just as doable as Olive Garden and Red Lobster.

And a final comment is we believe very strongly in our approach to the business. We've talked to you about that before. That approach is all about combining great people, great brands, great operations. It's an approach that served us well in the third quarter and really for the entire fiscal year. It's served us well in any environment, really, and we are committed to it. We think we're working on the right things with the right people. We expect to gain good momentum into the fourth quarter and into next fiscal year. And with that, we will take your questions. Thank you.

(OPERATOR INSTRUCTIONS). Larry Miller, Prudential.

I want to follow up on something you said about Smokey Bones, and broadening the concept or reevaluating some of the marketing and the TV, and the name even. I know that you had been working on broadening the menu. Can you kind of give us an update on how that's being received by the consumer?

The Smokey Bones team has introduced several new menu items over the last couple of months which have been well received by guests, but more fundamental change is going to be required going forward. And it's all centered around making Smokey Bones less barbecue-centric than it is today. And we need to think wholistically about how we present that brand and that experience to the market. So, we're thinking about the name, Smokey Bones. We're thinking about a menu today that is centered on barbecue. We're thinking about our style of service in the restaurants and the atmosphere we want to have. So, all of those things are being evaluated and will be adjusted, while building on the strength that Smokey Bones has today around friendly service, a distinctive large atmosphere, and barbecue that is tremendous that will continue to be a signature part of the menu; it just won't define the menu and the experience.

Is it fair to say, when you say that it's not going to be -- just paraphrasing what you're saying -- a varied menu concept, you're not going to go to the bar and grill category, you're just taking -- you're keeping that barbecue flavor to that brand? Is that where you think you're headed with that brand?

Yes. Becoming less barbecue-centric will not mean becoming a bar and grill concept.

John Glass, CIBC.

On Olive Garden, as you're looking to the fiscal '07 and ramping up the unit growth, what's a reasonable expectation for the overall brand's performance in terms of same-store sales and margins? So, are the unit openings enough to maybe pressure either one of those metrics in your mind?

Going forward, as I said, we're looking at 30 to 35 new restaurants next year and same-restaurant sales growth in the 2 to 4% range, as we've said before. And we don't think either of those things are going to unduly impact restaurant margins.

And then I will follow up. On the SG&A, if you exclude the onetime charges, it looks like that came in just over 8%, which would be extraordinarily low for a third quarter. How much of that was a shift in the advertising shift at Lobsterfest, or was there something else that may have impacted the line?

There was a pretty meaningful piece of that that was part of the shift. I would say about 34 basis points, about 5 million of that was media that -- from Red Lobster that is basically going to be shifting for the most part into the fourth quarter for the launch of Lobsterfest. So that's probably the biggest thing. There were some favorable items in the prior year, but that was probably the biggest piece, besides the sales leverage.

Jason Whitmer, FTN Midwest.

I wanted to go back to Red Lobster specifically. It sounds like there's some interesting things in development there. Could we revisit the grand plan as we try to push this into the next phase to get that brand established again, as you try to grow it again? Particularly as it relates to maybe exterior remodels, and maybe even the overall pricing position, are two kind of big themes I'd like to address.

I think it's important to start with reemphasizing the notion that the fundamental business is strong. We made substantial improvement. And the things that have driven that improvement are going to continue into the future. The operating fundamentals are better, the restaurants are cleaner, the guest experience is better. The advertising is resonating with current guests in particular. It's more effectively tested. It more typically features compelling news than it has in the past. And we're going to continue to do all those things.

I think we can add on that foundation to broaden the appeal of the brand by going beyond an emphasis on today what is really more focused on the physical nature of the brand -- delicious, craveable seafood -- and broaden that to talk about the total experience. So, if you will, Red Lobster is on a journey from being a good casual dining restaurant that serves a lot of delicious seafood, to being a terrific seafood restaurant that delights guests with an idealized seafood experience. And so we're just broadening -- as we go forward, we're broadening the way we talk about the brand, and then paying that off in the restaurant, particularly with some new advertising and new menu in the future. Remodels will probably be part of that, but that's going to be farther down the road.

And I think as you think about how that manifests itself -- Drew touched upon it; he talked about consumer touch points. So, clearly, the menu itself is one of those most important touch points. What's on it, how it looks and feels, the tabletop, and the look and feel of that, plateware -- all of those things. And then ultimately the service style, and how people make guests in the restaurants feel. And so all of those things will come in parts and pieces, and continue to build on the momentum that Red Lobster has clearly established with stronger operations. Ultimately, the big payoff will come with all of that coming together. And remodels may be part of the picture, but they need to come in probably toward the back end of everything else.

How about on the food quality itself? It certainly seems like that might actually need some investment to bring up the food quality, or to push more towards fresh. Is that something that would take some reinvestment back onto the menu?

I don't think it's going to take investment in food, I think it's going to take some innovation to broaden the appeal. Current guests love Red Lobster food, and it gets very high food satisfaction marks. So, I think the opportunity, as Clarence mentioned, is more in the innovation area around fresh seafood, and more in the innovation area around flavors that complement what's already on the menu, but done in a way that doesn't add complexity. So, we are going to have to better balance the menu, how we present it and how we feature it. But it's not going to require investing more in the physical product.

I would just reemphasize or reiterate that point. The food that Red Lobster has is very high quality. We've got an extraordinarily strong supply chain. And so, it's less about we need to pay more for higher quality seafood -- it's more about innovation, as Drew said, and flavor profiles, and all of those sorts of things. And [Kim] and the team are working very hard on those elements of the brand.

Mark Wiltamuth, Morgan Stanley.

I'd like to ask Drew some questions on the new smaller prototypes at Olive Garden. Obviously, with the smaller prototype and the lower capital costs, you have a little lower hurdle that you have to clear for revenues per store. If you could just talk to us about how the cash-on-cash returns look on these new smaller restaurants, relative to the previous models you were using.

We just opened the first one last week, so a little early to talk about actual results. But we're expecting -- the first one that I said would be about $250,000 lower investment versus our current prototype, that unit actually has more seats than the current prototype. And we've been averaging in the low $4 million range on new unit openings with that current prototype, with capital investment that's a couple of hundred thousand dollars below that. So, we expect that equation to strengthen with this new prototype, to continue to capture the sales potential that's there with the lower investment, and just strengthen the return we're getting on new units.

The second prototype, which we haven't opened yet but will in a few months, is going to help us penetrate the brand further in existing markets and smaller markets where we aren't at. And we haven't opened one yet, but our belief is that it's got everything else that the Olive Garden brand and business model stands for. So, we expect it to be very strong.

The second prototype is more focused at broadening penetration more so than really driving up returns? Is that fair?

Broadening penetration, absolute sales growth, absolute profit growth, but at a return that further justifies the investment. Yes.

Joe Buckley, Bear Stearns.

I'd like to go back to the SG&A line again. If we back out the 17 million plus for the onetime items, and even add back 5 million for the advertising shift at Red Lobster, you basically ran flat in dollars, and the second quarter in a row that SG&A has come in for less than we would have expected. Is there anything else going on there that will help us understand it, any shifts in expense allocation between SG&A and the labor line, for example, or things of that sort?

No. We've been, obviously, working with all of our businesses to be more efficient with G&A and leverage more of our marketing as we see. Particularly our larger businesses, Red Lobster and Olive Garden, when they really deliver strong sales performance, that really does leverage those marketing dollars. So, I think that's probably the biggest thing. We will see, as I said, some movement into the fourth quarter with Red Lobster moving their Lobsterfest and also some of their testing and that sort of thing into the fourth quarter. So, some of it does move around depending on our promotional strategy. But for the most part it's really just ongoing leverage that we would expect to continue to see into the future around both marketing and G&A.

And I think just if you go back to our analyst conference at the beginning of the fiscal year, one of the things we talked about is a clear strategic goal of getting more leverage out of our support platform. And that's one of the things that we were looking to do with the new leadership structure and our Chief Operating Officer, and Drew is making that happen. So, that's something that we clearly are counting on as we think about fully capturing the return and profit growth opportunity for the enterprise.

A follow-up just related to the marketing shift at Red Lobster. You mentioned March being very strong. How would you expect March and April to play out? We would have expected April to be stronger than March because Easter is later this year. Or do you just get a big bump when you begin advertising Lobsterfest, and that's why March would be -- might be up more significantly?

We expect to see that benefit in both months because of the extra week in April. But the weeks in March, the initial launch weeks are the most powerful for any promotion. And so certainly we get some benefit from having those weeks in March as opposed to February. And the Lobsterfest coupon was pushed back a month also into March, so that's going to benefit April as well.

Jeff Omohundro, Wachovia.

I wonder if you could comment on this FICA tax on the tip shift, and whether that's likely to continue into '07. And then also, with the ramp-up in Olive Garden's development, maybe you could just comment once again on where you stand in terms of infrastructure development to support that, particularly in terms of new store openings.

Let me take the FICA tax one. We would expect that to continue to drift up a bit. The nature of it is the reporting of tips, and we continue to work with our tipped employees to report all of their tips. And as they do, there is a FICA tax that is owed on that. And that shows up in the labor line. But then when we -- we actually get a tax credit in the tax line for that amount. So, that's why it does put pressure on that labor line, but we get it back in the after-tax or in the tax rate. And that will continue to drift up slightly over time, but we've been moving up in our tip reporting throughout the year.

And on the Olive Garden new opening side, we've been preparing -- Dave and his team have been preparing for accelerated rate of new openings for several months. The two prototypes we talked about are part of that. But in addition, they've been working very closely with our real estate and development team on identifying and creating a pipeline of sites that's ready to go for the entire year. They've been working with our training team on how to open restaurants as efficiently as possible, in a way that actually takes less time but delivers the same great employee experience and sets people up for success. The team is fully staffed and they're ready to go.

David Palmer, UBS.

I have a multi-part question here on the Red Lobster brand strategy. You mentioned that advertising and a new menu will be tested in the coming months, and you also mentioned the testing takes about six to 12 months. Does this suggest that the benefit of this, I guess this menu and advertising part of the brand strategy, will hit in the second half of fiscal '07? Kind of the second part to this -- do you think you might start phasing in different limited-time offers or promotions in the meantime? And lastly, are you considering the re-imaging of restaurants to coincide with this sharper brand positioning you mentioned?

The brand positioning work at Red Lobster is going to unfold over several quarters, as Clarence already talked about. The advertising and menu testing that I was talking about goes through several stages. There's a phase where we test the creative communication, clarity of communication. Then there's a phase where we test it in market. And then there's ultimately the phase where we expand it. Same thing with the menu. We test the new items conceptually. We test the new item recipes individually. Then we test them together in restaurant. And then ultimately we put the entire package together.

Between now and then, Red Lobster is going to continue doing the things that have driven profitable same-restaurant guest count growth and profitable same-restaurant sales growth for the last six quarters, which is improving the guest experience and delivering craveable news to the market in their advertising in the campaign they currently call Ignite the Crave. So all of that is going to continue, and we've got confidence that it will maintain the momentum that we've seen today at Red Lobster.

The things I'm talking about really go beyond that and more broadly talk about the entire experience, not just the food portion. There will be other changes to the experience that our guests will see. Clarence talked about some of the other touch points like plateware, same as Olive Garden did several years ago. And re-imaging our restaurants is probably part of something that we're going to look at, but not in the near-term. That's going to be down the road.

Do you think that some of these promotional items -- will you perhaps phase in changes in the schedule there, or even the frequency of those?

Yes. I think that promotional scheduling is going to move more and more to look like what Olive Garden does, compared to what they've done in the past.

But I don't know that the frequency is going to change. We're pretty comfortable with the number of promotions per year at both Red Lobster and Olive Garden. It's about how compelling, and we're working to make them increasingly compelling.

Andrew Barish, Banc of America.

Just a couple more on Red Lobster. Can you give us a sense on sort of the value scores as a part of your guest satisfaction? Have those numbers improved pretty significantly in terms of what you've done with those mid price point items on the menu? And then on the cost side for Red Lobster, can you give us an update as to where you stand looking out on shrimp and your costs there?

Value scores are also at a record high, and it's partly because of more affordable price points on the menu. But, I think, more importantly, it's because the entire experience has improved. So, the what you get for what you pay part of the equation has really strengthened. So, value is part of what's driving this.

And on the cost side, we continue to have very good stability in shrimp and in some of the other seafood items. Still a bit of pressure in lobster, but the other ones have really continued to be very, very approachable, and do not really challenge that business at the current time or what we see in the really foreseeable year or so.

We've been -- as we've talked to you in the past, we've been very attentive to price points at Red Lobster. And we've worked very hard to contain those, and think we've been pretty successful there, and that's part of the equation. And we'll continue to do that. We'll continue to do that. We've done it at Olive Garden -- different reason. We think that it's a competitive advantage that we've been able to leverage, in terms of guest counts.

Just one final on the food costs, the shift of Lobsterfest will sequentially make that food cost number look higher, I would imagine, in the fourth quarter versus the very favorable third quarter?

Marginally, not significantly.

Steven Kron, Goldman Sachs.

I have a question and a follow-up. The first question is on your full-year guidance. And as I think about the growth algorithm, you indicated 5% same-store sales and 4% unit growth for fiscal '06. You've been doing that actually for the first three quarters, and you've been able to drive phenomenal bottom-line growth, north of 20%, from just great leverage and great cost controls.

I guess my question is, for the full-year, and just looking at the fourth quarter, with no expected change in the top-line -- and you've answered some questions essentially saying you expect the same type of leverage on a go-forward basis. The implied guidance would suggest a deceleration in growth, and I'm just wondering if there's anything in the cost structure on the margin side that may be there that we're not anticipating that would cause that growth to kind of trend down a little bit.

No, there isn't. Of course, there is the movement, as we said, the marketing into the fourth quarter. We do -- we are, I also mentioned, doing some additional testing in the fourth quarter in Red Lobster, as they work on some of these opportunities. They are going to fully test them, so there is some of those dollars that do move in and suppress margins a little bit. We also had some onetime favorability in workers' comp and public liability in the prior year that benefited some of that, and that has been more ratably experienced throughout this year, and a few other items that we're seeing that were more favorable last year. But for the most part, we expect our continued strong margins and some of these onetime things and investments moving around a bit.

I would say the other thing is it is the fourth quarter. We've got a lot of items throughout the P&L that we're estimating throughout the year accruing throughout the year. The fourth quarter is a year where we true-up to actuals, and so we always need to make sure that we account for that possibility.

Fair enough. My follow-up is on Smokey Bones. On the last call and, I think, in prior calls, you talked about the improvement or the recovery in Smokey Bones largely coming from top-line and guest experience-driven, and less about kind of cost structure changes. I guess I was surprised that despite a negative comp in the quarter, your restaurant expenses as a percentage of sales declined. I would have thought you would have seen de-leverage on that line. Can you maybe put a little bit of color around that? Are you doing anything different on the cost side with that brand?

I don't think so. I think what you may be seeing is that we've talked about the growth overhead at Smokey Bones, and the fact that you get to a critical mass where that starts to flatten out. And I think some of that is going on, for sure.

The real pressure we see in restaurant expenses is, clearly, as I mentioned, around -- continued around utilities, where that's probably pretty much masked -- that and credit card fees pretty much mask much of the sales leverage and some of the other favorability that is going on in that category.

I think the gist of your comment is appropriate to say our focus is on building sales, not re-engineering the business model at Smokey Bones. Because in the existing nearly 125 restaurants we have today, when we get the sales, we see that we get the appropriate restaurant-level profitability. So it's really more about broadening appeal for more occasions to increase the top-line and a business model that will then work.

Bryan Elliott, Raymond James.

Actually, most of them have been asked, but I wanted to circle back to the G&A question that Joe had. Given sort of a flat nominal spending over the last few quarters, with a fair amount of activity and gearing up for Olive Garden expansion, etcetera, it would appear that some resources in some areas have had to be cut back and transferred to those activities. Is that the right read? And if so, what have you found that you could dial back?

Nothing really comes to mind on that. We really have tried to be very focused on the work that we do. Some of what may not be as apparent is, as we -- the Smokey Bones piece, that overhead does get more leveraged. So, we are really, obviously, not adding the kind of growth investment there for the infrastructure as we've had in the past. So, that kind of normalizing does not put as much pressure on that line, so that's maybe part of what we're not -- that's part of what we're seeing here.

Fair enough. On the Olive Garden preopening teams, etcetera, you mentioned that -- Drew, I think, that you think you can open these increased number of units, but sort of have fewer preopening dollars and man hours, etcetera, per opening. Is that right?

Directionally, yes. What Dave has been looking at is how do we make sure that as we have new prototypes and a stronger pipeline, that we can open the restaurants as effectively and as efficiently as possible. So, without divulging exactly how we do it, they found a way to allocate less management time to open them and shorten the training period a little bit. But I wouldn't take that to say there's going to be a material savings in preopening expenses, nor to say that the people we've got today are going to be fully up to the challenge of opening more restaurants at a high level.

Tom Thomson, TSW.

On new openings, could you give us your current thinking on fourth-quarter and '07 openings for Red Lobster, Smokey Bones, Bahama Breeze and Seasons 52, please?

We're opening nine new Olive Gardens in the fourth quarter. Smokey Bones, I believe, is a little over 10. And Red Lobster is just a couple. And Seasons 52 are not (indiscernible) test.

How about '07 for Smokey Bones and Red Lobster?

For Olive Garden, 30 or 35, as I said. For Smokey Bones, it's probably going to be in the -- around 10. And we're really focusing on the areas that we have the most confidence in, and that being Florida and New England, and those are getting to be tougher locations to find. So, in that range of around 10. Red Lobster is only going to have a handful of net new openings next year, around five. And Bahama Breeze doesn't have any new openings scheduled.

We're just working to finalize up our plans for next fiscal year, and we'll be certainly more specific in our next June conference call about those figures.

Mike Smith, Oppenheimer.

My question was just asked and answered. But I guess what I would like to ask is -- Bahama Breeze -- you've had the latest prototype open for over a year now. And I wonder what kind of hoops that they might have to jump through to get you to open more of those units.

First of all, we're very encouraged with the improving guest satisfaction and increasing sales per unit at Bahama Breeze, and we want to see that continue into the future. In terms of cost to prototype, the Robinson Township prototype that you're referring to would be more expensive, obviously, to build now than it was a couple years ago. So, there are some refinements that Laurie and her team are working on to make sure we deliver the same experience, but at a cost that's -- in current dollars that's more in line with the average unit volumes they would expect to get opening in the future.

And I would tell you that the Bahama Breeze team appreciates your support. I think they recall your comment about the penalty box, and the jumping through hoops will probably be well-received there.

Peter Oakes, Piper Jaffray.

I was just hoping we'd get a little clarification on a couple of expense lines, specifically food and beverage. For all three reporting brands, all three quarters thus far this year you've seen lower food and beverage costs. And I was hoping you could, Linda, maybe delve in a little bit. How much of that is commodity cost and how much is price mix? I know you mentioned here this quarter you benefited from waste. I'm just trying to get a pulse as to what your mindset is as to how that possibly looks for '07 also.

Well, I'm just looking to get some of the dissection here. There is -- roughly half of it is coming from cost savings. And half of the favorability -- and I'm talking specifically on the third quarter here, it is directional for what we're seeing for the year. And so what we consider cost savings or cost avoidance, I think we've talked in the past with how -- what a strong supply chain team we have that really helps us manage this, and has been doing a great job over the last several years. And we see this continuing into '07. So, we'll certainly give more guidance at our next meeting, I mean at our next conference call in June. But there really is nothing really concerning in the near-term on food costs. We, obviously, in these businesses continue to work on their menu mix and their promotional strategies to continue to make sure we stay in a good range here, and that contributes as well. But the -- as I said, well over half of it -- the other piece is, obviously, pricing and sales leverage. But the biggest important factor that's helped us keep it down is really the cost avoidance work.

The one other line item, restaurant expense -- and I wanted to do a little compare and contrast, I guess, Olive Garden and Smokey Bones here, where Olive Garden has had actually quite healthy comps the last couple of quarters. You've seen that number go up. Obviously, utility is part of the pressure, but I guess it implies that you weren't able to get leverage elsewhere in that line item yet. Smokey Bones, with comps going the other direction, you've seen some significant belt tightening show up in that line item. So, I was wondering if you could add a little more color there.

What we'd say, really, the impact at the reported level is about 12 basis points with the sales leverage at Smokey Bones. So, it is having some impact and contributing to that lack of leverage that we see there, but the utilities and the credit card fees are pretty significant items as well. We also did have some favorability in there related to fewer openings this quarter than last year. So, some of that comes through that line as well. About 20 basis points favorable there.

Jeffrey Bernstein, Lehman Brothers.

I had two quick questions, first on brand advertising. A couple of your competitors have spoken about their advertising spend going forward, and a steady shift to more targeted consumer marketing. I was just wondering if you could talk about your outlook for your core brands as it relates to TV advertising versus other forms of media, and what measures you use to assess the success and return of these new marketing initiatives? Then I had a follow-up.

Both Olive Garden and Red Lobster continue to evaluate targeted marketing in many forms, whether it's on the Internet or whether it's against different diverse guest groups, like Olive Garden's Hispanic advertising effort. But in general, both brands, given their scale and scope, are very driven by network TV, and will continue to be driven primarily by network TV into the near future. And we look at a number of things there. We look at -- in the near-term, we look at incremental guest count traffic that our promotions get us. And every couple of years we do a return analysis, media mix analysis that gives us a feel for what the return is on different elements in our marketing mix -- radio, network TV, coupons and so forth. And that all continues to point to network TV, while relatively more expensive each year, is still the best game in town.

Just one follow-up. I guess a broader question on the casual dining industry. It seems as if a couple of your peers are noting ongoing consumer trade down on the menu, whether it's ordering lower priced entrees or fewer appetizers. Yet that doesn't seem to be having a major negative impact on your results. Just wondering if you have any color on that. And separately, if you can comment on your overall outlook for the consumer in the coming quarters. Thanks.

We haven't seen material changes in our menu mix as it relates to appetizers and desserts or entrees, beyond what you would expect to see based on your promotional strategy. So, the things that we advertise on TV and the things that we feature, the picture in our menus in restaurant, obviously, have elevated preference versus what their normal sales would be. And in any particular period it's going to depend on what the mix of those things is. So, Red Lobster sees a check increase during Lobsterfest right now because it's featuring four new Lobsterfest dishes that all have lobster and tend to be higher priced. But there hasn't been a structural change in any of those areas.

Secondly, I'd say we're very careful to make sure that we offer a range of price points, so that there's something for everyone when they go into a Red Lobster or into an Olive Garden. And there is a group of customers that's looking for more approachable, affordable items. And we want to make sure we have those available.

And I think as we look at the consumer, we feel like the consumer is in pretty good shape, that we've looked at the consumer weather some pretty high, historically record-high utility costs, home heating as well as gasoline, and yet consumer spending is quite strong. And that's because the underlying fundamentals of the economy are quite strong. Employment levels are high. And so we certainly see that.

When it comes to trade down, I don't know that that's being motivated by stress on consumers. Certainly, the quick service industry is stronger, I think, because they've been innovative and their product offerings are quite strong. I think competitively, we hold our own there. The biggest threat is certainly the lunch. Olive Garden has a very compelling lunch, and they have had strength in their lunch business. And Red Lobster has a very differentiated lunch. So that's not very substitutable for a QSR lunch.

David Palmer, UBS.

Did same-store sales at Smokey Bones improve through the quarter, and maybe now in March, in a way that gives you a sense of improving momentum, perhaps as a result of the new menu? And separately, was there -- what was the year-over-year increase in wage rates during the quarter? I think you were saying it was about plus two earlier in the fiscal year.

On the Smokey Bones side, second quarter to third quarter their same restaurant sales trend was less negative, as you said, but that's not indicative to us of an underlying improvement in the fundamentals of the business. We still think the things that we need to do for Smokey Bones in terms of broadening relevance for a wider variety of occasions is what we need to do.

And on the wage rate, we do see that ticking up slightly. Our estimate was about 2.3% of wage inflation.

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If there's no further questions, we will end the call right here then.

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Thanks for joining us today. We appreciate your interest in Darden Restaurants, and we look forward to speaking with you on our fourth-quarter conference call in June. If you have any questions in the interim, please give us a call here. Have a great day.

Ladies and gentlemen, this conference will be available for replay starting today, Wednesday, March 22, at 12 noon Eastern time, and it will be available through Saturday, April 22 at midnight Eastern Time. You may access the AT&T executive playback service by dialing 1-800-475-6701 from within the United States or Canada. Or from outside the United States or Canada, please dial 320-365-3844, and then enter the access code of 822626. That does conclude our conference for today.