達登餐飲 (DRI) 2008 Q3 法說會逐字稿

Welcome to the third quarter earnings conference call.

At this time, all par is the pants are in a listen-only mode.

Later, we will conduct a question-and-answer session with instructions given at that time.

[OPERATOR INSTRUCTIONS].

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

I would now like to turn the conference over to Mr.

Matthew Stroud.

Please go ahead.

Thank you, Julie.

Good morning everybody.

With me today are Clarence Otis, Darden's Chairman and CEO, Drew Madsen, Darden's President and Chief Operating Officer, Brad Richmond, Chief Financial Officer, and Gene Lee, President of Darden Specialty Restaurant Group.

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.

The most significant of these uncertainties are described in Darden's Form 10-K, Form 10-Q and Form 8-K reports, including all amendments of these reports.

These risks and uncertainties include the impact of intense competition, changing economic or business conditions, the price and availability of food, ingredients and utilities, supply interruptions, 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 through the opening of new restaurants, or the development or acquisition of new dining concepts, weather conditions, risks associated with Darden's plans to expand Darden's newer concepts, Bahama Breeze and Seasons 52, our ability to combine and integrate the business of RARE Hospitality Internation, Incorporated, Achieve synergies and develop new Longhorn Steakhouse and the Capital Grille restaurants, risks associated with incurring substantial additional debt and other factors and uncertainties discussed from time to time in reports filed by Darden with the Securities and Exchange Commission.

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 web site at Darden.com.

We plan to release fiscal 2008 fourth quarter earnings and same restaurant sales for fiscal March, April and May 2008 on Tuesday, June 24th after the market closed.

Yesterday we released third quarter earnings results.

These results were available on PR Newswire, FirstCall and other wire services.

Let's begin by updating you on our third quarter earnings.

Third quarter net earnings from continuing operations were $115.6 million, and diluted net EPS from continuing operations was $0.80.

This includes the integration costs and purchase accounting adjustments related to the RARE Hospitality International Incorporated acquisition, that reduced diluted net earnings per share by approximately $0.05 in the third quarter.

We reported diluted net earnings per share from continuing operations of $0.79 in the prior year's third quarter.

Third quarter diluted net earnings per share, including discontinued operation was $0.88, compared to $0.72 in the prior year.

The third quarter diluted net earnings per share from Discontinued Operations of $0.08 was primarily the result of a gain on the sale of Smokey Bones to an affiliate of Sun Capital Partners in fiscal December 2008.

As you recall on May 5th, 2007, we closed 54 Smokey Bones and two Rocky River Grillhouse Restaurants and announced our intent to sell the remaining 73 Smokey Bones restaurants.

Additionally, we closed nine Bahama Breeze restaurants on April 28th, 2007, to position the brand for future growth.

The Smokey Bones results and the related impairment costs are classified as Discontinued Operations, as other results and the related impairments and costs for the nine closed Bahama Breeze Restaurants.

Brad will now provide additional detail about our financial results for the third quarter and our fiscal year outlook.

Drew will discuss the business results of Olive Garden, Red Lobster and Longhorn Steakhouse.

Gene will discuss the Specialty Restaurant Group, followed by Clarence with some final remarks.

We will then respond to your questions.

Brad?

Thank you, Matthew.

And good morning.

Darden's total sales from continuing operations increased 25% in the third quarter, to $1.81 billion, driven by the addition of Longhorn Steakhouse and the Capital Grille and meaningful new and same restaurant sales growth at Olive Garden.

The incremental sales from Longhorn Steakhouse and the Capital Grille totaled $292 million for the third quarter.

Excluding the acquisition, sales growth for the quarter would have been 4.7%.

Let's review the same restaurant component of our total sales growth.

For context, industry same restaurant sales as measured by Knapp-Track and excluding Darden, were down approximately 3% for the quarter.

Olive Garden's same restaurant sales were up 5.7% for the quarter, its 54th consecutive quarter of same restaurant sales growth and that was nearly 9 percentage points above the industry benchmark.

Olive Garden's total sales increased 11.1%.

Red Lobster reported a same restaurant sales decrease of 2.0% for the quarter.

That was a point better than the industry and its total sales decreased 1.8%.

Longhorn's same restaurant sales decreased 3.3% for the quarter.

Although slightly below the national industry benchmark, this compares favorably to same restaurant sales results in the Knapp-Track regions where Longhorn Steakhouse operates, which collectively were down about 4%.

The Capital Grille had a same restaurant sales decrease of 2.2% for the quarter.

Bahama Breeze had a same restaurant sales decrease of 2.0% for the quarter.

We believe that winter weather reduced same restaurant sales results for the quarter at Olive Garden, Red Lobster and Longhorn Steakhouse by approximately one percentage point.

December's results were heavily impacted by weather.

January was somewhat impacted by the weather, while February saw no meaningful adverse weather impact.

The net result, though, is that in a difficult environment, relative to the industry as measured by Knapp-Track, each of our brands performed solidly.

Let's discuss the margin analysis for the third quarter, which is complicated by the acquisition of RARE Hospitality.

We are comparing our year-over-year results on a reported basis and we are also comparing results from continuing operations this year and last year.

Thus, results from Smokey Bones and closed Bahama Breeze Restaurants are not included in either fiscal 2007 or fiscal 2008, but results for the acquisition of RARE Hospitality are only included for the third quarter of fiscal 2008.

So let's begin.

Food and beverage expenses were 146 basis points higher than last year on a percentage of sales basis.

This is primarily because of mix changes due to the addition of RARE Hospitality, which accounts for approximately 140 basis points of this increase, with the remainder coming from commodity cost increases that were partially offset by pricing.

Third quarter restaurant expenses were 83 basis points lower than last year on a percentage of sales basis, due primarily to mix changes associated with the addition of RARE Hospitality, which lowered labor expenses by approximately 140 basis points.

This change in mix more than offset wage rate inflation of 3 to 4%, and some increases in manager compensation cost.

As a reminder, our pricing approach is focused on maintaining our dollar margins and not our percentage margins.

Restaurant expenses in the quarter were 83 basis points higher than last year on a percentage of sales basis because of the impact of RARE Hospitality's acquisition, which accounts for approximately 36 basis points of the increase, as well as higher preopening costs related to the increased openings at Olive Garden.

Selling, general and administrative expenses were 28 basis points lower as a percentage of sales for the third quarter, primarily due to sales leveraging and reduced media expense.

These factors more than offset approximately 33 basis points of integration costs and approximately 30 basis points of expense on this line that is primarily due to a meaningful discretionary foundation contribution and other costs.

In aggregate, the foundation contribution and other expenses reduced diluted EPS from continuing operations by $0.04.

The third quarter diluted EPS benefited $0.04 from favorable resolution of tax matters that were expensed in the prior years.

As a result, the effective tax rate for the third quarter as 26.3% was below our previous annual guidance of approximately 29%.

For fiscal 2008, we are now estimating an effective tax rate of approximately 28.5%.

Now I'd like to update you on our outlook for fiscal 2008, which is essentially in line with our previous guidance we disclosed in our press release dated February 11th, 2008, the day before investor meeting in New York City.

For the full year, we continue to expect combined same restaurant sales growth for Red Lobster, Olive Garden and Longhorn Steakhouse to be between 2 and 3%.

We see it being more towards the middle to lower part of that range, given the current consumer environment.

We expect a net new restaurant increase of approximately 60 restaurants, which is a few units lower than our previous estimate due to weather impacts which has delayed some openings.

This amount, though, includes the growth of Longhorn Steakhouse and the Capital Grille for October through May, putting total sales growth for the year in the range of 19% to 20%, compared to reported sales of $5.57 billion in fiscal 2007.

With these expectations, we now anticipate that diluted net EPS growth from continuing operations will be 2% to 4%, including transaction and integration related costs and the impact of purchase accounting adjustments related to the RARE Hospitality acquisition.

We estimate that these costs and adjustments will impact diluted net earnings per share by approximately 5 to 6 percentage points.

So excluding the transaction and integration related costs and purchase accounting adjustments, we estimate that diluted net earnings per share growth from Continuing Operations will be 7% to 9% in fiscal 2008.

We believe this is solid EPS growth in a challenging environment, especially given our reduced share repurchase expectations this year, which we expect to be between 150 and $175 million.

With our focus on reducing debt accumulated to fund the acquisition, this is less than half of what we spent on share repurchase last year.

As we indicated last month, in fiscal 2009 and beyond we expect to return an increasing amount of our strong cash flows to shareholders through share repurchases, lowering our share base and supporting EPS growth.

And now, I'll turn it over to Drew to comment on Olive Garden, Red Lobster and Longhorn.

As Brad already mentioned, Olive Garden continued to deliver competitively superior sales performance during the third quarter.

And importantly, their key business priority remains unchanged, and that is to accelerate new restaurant growth while maintaining same restaurant excellence.

More specifically, Olive Garden opened 16 new restaurants during the third quarter this year, compared to nine new restaurants in the third quarter last year.

In fiscal 2008, they expect to open 40 net new restaurants, and ultimately we believe Olive Garden has the potential to operate 800 to 900 restaurants in North America.

In addition, Olive Garden delivered their 54th consecutive quarter of same restaurant sales growth during the third quarter, achieving a 5.7% increase that exceeded the Knapp-Track competitive benchmark by almost nine percentage points.

Now, this performance we believe is explained by two important factors.

First, Olive Garden is a trusted brand with broad appeal that has earned strong guest loyalty and a reputation for both affordability and exceptional value over many years.

Second, advertising during the third quarter featured exciting food news and strong value that reminded guests why they love Olive Garden and gave them a compelling new reason to visit.

Their Twist On Classics promotion ran in November and December.

It featured two new entrees, stuffed chicken florentine and stuffed chicken prosciutto that introduced guests to classic Italian ingredients in approachable new dishes.

Now, this was followed by their Warm You Up Promotion that featured two versions of a new dish, lasagna rollatini with chicken, and lasagna rollatini with sausage, plus a starting at $9.95 price point.

Both of these third quarter promotions were supported with new commercials as well as their unlimited soup, salad and bread sticks for $5.95, equity building advertising.

Operating fundamentals at Olive Garden also remained strong, especially guest satisfaction, controllable cost management, and front line turnover.

We're certainly pleased with Olive Garden's strength in this challenging consumer environment, and believe they will continue to deliver industry-leading performance this fiscal year.

Red Lobster delivered competitively strong same restaurant sales performance in the third quarter, also exceeding the Knapp-Track benchmark for the 12th time in the last 14 quarters.

Red Lobster also continued to strengthen its business foundation and delivered record guest satisfaction.

As we've discussed before, Red Lobster's plan to achieve sustainable growth has three phases.

The first phase was to strengthen the brand's fundamentals.

The second is to refresh the brand, broaden its appeal and build guest counts.

The third phase, which we expect to start in the second half of next year, fiscal 2009 will be to accelerate new unit growth.

During the current fiscal year, their primary focus will be to refresh the brand and accelerate guest count growth by improving perceptions among lapsed users that Red Lobster offers a variety of fresh seafood prepared with culinary expertise.

Our Red Lobster ran three promotions during the third quarter.

In November and December they ran the Big Seafood Festival Promotion featuring new dishes that were not available at any other major restaurant chain.

These featured plates set a new record for guest satisfaction but did not sell as well as expected.

We had prophesied that guests may have become more cautious about trying somewhat unfamiliar items with a premium price, like colossal scallops, in the current environment.

In January and early February, Red Lobster introduced a new promotion called Shrimp Flavors From Around the World.

This promotion featured three new shrimp dishes, asian garlic, southwest tequila lime, and caribbean citrus, all at affordable price points and sales trends began to improve behind this promotion.

In late February, Red Lobster launched their signature Lobster Fest promotion.

Now, this year's Lobster Fest features three new items and two popular classics, providing a range of craveable dishes and affordable price points that make it accessible for all guests.

During the fourth quarter, Red Lobster plans to expand their remodel test and complete installation of our meal pacing system.

Similar to Olive Garden's experience, the introduction of this system is improving guest satisfaction, service times, and guest through-put.

Red Lobster is making good progress on strengthening their fundamentals and refreshing the brand and we're confident that Red Lobster is on the right course and that it will be ready to resume meaningful unit growth in the second half of fiscal 2009.

Total sales at Longhorn increased nearly 8% versus last year during the third quarter, driven by new restaurant growth.

Same restaurant sales declined versus a year ago and were below the Knapp-Track national benchmark.

As Brad said, a key driver of this unfavorable comparison to the national Knapp-Track benchmark is Longhorn's geographic concentration in Florida and the south Atlantic, two of the weakest regions in the Knapp-Track set.

Longhorn outperformed Knapp-Track cumulatively in the seven regions in which it competes.

During the third quarter, Longhorn opened four new restaurants.

They expect to open 24 net new restaurants during fiscal 2008 and continue to build a pipeline of quality sites to support future new restaurant growth and ultimately we believe Longhorn has the potential to operate 600 to 800 restaurants in North America.

Operating fundamentals at Longhorn remain strong.

Guest satisfaction as measured by their mystery shop program improved versus prior year and set a new record.

Restaurant level returns are solid and improving as more integration synergies are captured and employee turnover remains at industry leading levels.

Similar to last year, Longhorn ran only one promotion during the third quarter.

Starting in late January, they advertised two existing dishes from their current menu,renegade sirloin and longhorn salmon.

This promotion underdelivered versus expectations, and we believe primarily due to a lack of compelling news.

Our primary focus at Longhorn over the next several months is to further integrate the brand into Darden and complement their existing operational strengths with increased brand management excellence.

In particular, we're going to be focusing on strengthening the effectiveness of their advertising and promotion efforts as well as broadening the appeal of their menu.

We mentioned last quarter that Terry Stanley, who was previously the Senior Vice President of Culinary and Beverage at Olive Garden has been promoted to Executive Vice President of Marketing at Longhorn.

In addition, we have further strengthened the Longhorn marketing team with the addition recently of Kurt Hankins as Senior Vice President of Culinary and Beverage.

Kurt had been the Senior Vice President of menu development at Applebee's for many years where he introduced significant business building innovation.

Before that, Kurt had been Vice President of Culinary at Red Lobster, and now Gene will discuss our new Specialty Restaurant Group.

Thanks, Drew.

Let me start by saying how pleased we are with the progress we're making integrating these three brands into the Specialty Restaurant Group.

We are building an organization that will enable us to share best practices, leverage our synergies, while reducing G&A expenses and providing appropriate governance and administrative support.

The Capital Grille sales for the third quarter was $67.6 million, an 11.9% increase over prior year.

Same restaurant sales declined 2.2%, however, average weekly sales for the third quarter continued to be strong and average unit volumes are approximately $8.5 million.

We are experiencing some traffic softness, primarily during the weekend.

Some of which was impacted by weather during the quarter.

We are focused on increasing our private dining business as well as continuing to elevate our differentiated service experience and overall restaurant level execution through enhanced training.

During the quarter, we successfully opened one new restaurant in Seattle and opened another restaurant early this month in Stamford, Connecticut at the beginning of the fourth quarter.

There are no additional openings planned for fiscal 2008 but we anticipate opening five or six restaurants in fiscal 2009.

Bahama Breeze's third quarter sales of $31 million were 2.2% below prior year sales from continuing operations.

Although down from the prior year, this performance continues to outpace the industry as measured by Knapp-Track, even though a significant portion of its restaurants are located in one of Knapp-Track's weakest regions, Florida.

Bahama Breeze has made tremendous progress over the last two years on improving the guest experience, increasing restaurant-level returns and broadening the brand's appeal.

Given this performance, the brand will continue focusing on providing a compelling, differentiated dining experience while also preparing the business for disciplined new restaurant growth starting with two new restaurants in fiscal 2009.

Seasons 52 continues to perform very well.

This uniquely positioned brand with strong guest acceptance is delivering average unit volumes in excess of $6 million, and we're extremely pleased with their overall sales performance and profitability.

We are now focused on building a strong operational foundation and talent pool to support growth and ensure we continue executing this exciting concept at a high level.

We continue to identify and secure new locations to support disciplined growth beginning in fiscal 2010.

And now I'll turn it over to Clarence for final comments.

Thanks, Gene.

We are pleased that we're continuing to deliver industry-leading sales and earnings results in what clearly remains a consumer and commodity cost environment that's difficult.

And we're also pleased with the progress that we've made integrating Longhorn and Capital Grille.

As we indicated at our investor meeting last month, we're seeing greater integration cost savings than we had estimated and we're seeing those savings come in faster than our initial expectations.

We think as we look at the environment we're in, the key to really successfully navigating through it is to remain focused on the things that we control.

And we think we're doing that.

And so we remain focused on our proven approach to the business.

It's an approach that involves combining strong brand management and great operations with restaurant support excellence, and we're working hard to strengthen ourselves in each of those strategic pillar areas.

Drew mentioned some of the steps that we're taking within each of the brands when it comes to brand management and restaurant operations excellence, but we're also making a lot of progress strengthening our support functions, functions like supply chain and information technology, human resources, a number of other key business disciplines.

We think that we were already competitively superior in those areas because of our scale, because of the ongoing investment that we made.

We think that that strength really is reflected in the synergies that we're realizing from the RARE acquisition.

And we think that the combination of those synergies, and the even stronger operating platform that we've got as a result of the progress we're making across the enterprise does a couple things.

First, this combination enables us to better withstand the cost pressures that we're seeing in today's environment compared to our competitors and then second, we think this combination allows us to take advantage of the current slowdown to profitably build market share.

Ultimately, we think all that we've accomplished and all that we expect to achieve comes down to one simple thing and that's having great people.

And so I'm proud of our outstanding people in our restaurants, in our support center and they are working very hard and very effectively, we think, to create a company that's a leader in the full-service restaurant industry, now and for generations.

And with that, we'd be delighted to take your questions.

Thank you.

(OPERATOR INSTRUCTIONS).

We'll go to the line of Steven Kron with Goldman Sachs.

Please go ahead.

Thanks.

Good morning, guys.

Couple of questions on margins, if I could.

I guess, Brad, if I look at the operating margins tore the quarter on a reported basis, it was around a little bit over 10.

If we back out the contribution to the Darden foundation and the integration costs I think you're up at around 11.

Can you maybe give some perspective of what that number would have looked like last year, had you been operating the RARE brands and that's the first question.

I have a follow-up to that.

That's going to take me a few minutes to work through that, Steve.

Let me work on that and come back to you just in a second, okay?

Okay.

That's fine.

Just I guess as a layer to that, it looks like SG&A backing out some of these items for comparability is significantly lower I think than what you're reporting in the second quarter as a percentage of revenues.

You have a full year guidance of just under 10% as a percentage of revenues.

Can you maybe comment on that.

Are these faster than expected synergies coming out of that line, in which case we should expect a lower number for the year?

In terms of the guidance for the year, no, that wouldn't change, but you are pointing out this is an area where we're seeing some of the synergies in our planning process, estimating process, that we would achieve those quicker than some of the others.

They're easier, quicker, more timely to act upon.

So no, that's pretty much on track with the expectations and guidance we gave out in mid-February.

So that's pretty much on track.

To your first question, though, trying to look back at last year on a continuing operations basis, in terms of I think the gross margin, if I look at that, after food and beverage, labor, restaurant expenses, that number last year would have been around the 24% range.

If you take that down to the operating profit or EBIT line, that would be just above 11% for the best apples to apples comparison.

We'll go to the line of Jeffrey Bernstein with Lehman Brothers, please go ahead.

Thank you very much.

Also had two questions.

First, I know you don't specifically provide specific color in the out year in your third quarter release.

Just wondering, based on having the analyst day a month or so ago, could you comment perhaps on EPS thoughts relative to the most recent I guess you said 9 to 12% was more of a near term annual guidance, just wondering specifically in terms of units for next year expenses, specifically labor and COGS, just wondering directionally whether you have any insights what it's looking like a couple months out from now.

I would say, again, we will provide guidance on the year in June.

I don't know that very much in our thinking has changed though since the analyst day when we shared with you the long-term business model and as you said, some of the near term pressures that would take that on an annualized basis down to that 9 to 12% range.

In terms of actual outlook for next year, we really are going to wait until June and certainly the business momentum in the fourth quarter will be a big factor in what that looks like.

Okay.

And then as a follow-up question on Olive Garden, looks like close to a 6% quarterly comp and I know you noted in the actual release some sales leverage.

Yet there was pressure on all restaurant level lines.

Just wondering if you could talk about perhaps the ability to reduce costs as a percentage of sales, perhaps the comp necessary of or perhaps what might have been unusual here with such a strong comp that you couldn't see greater profitability.

I'm not sure if we understand your question.

If you could rephrase that for us.

Sure.

I mean, the Olive Garden comp like you said outperformed Knapp-Track by close to 9 percentage points, putting up close to a 6% comp and in your text of the release, talks about each of the specific line items that you saw higher food and beverage, restaurant labor and restaurant expenses as a percentage of sales, just wondering with such a strong comp I would have expected to see perhaps leverage, perhaps down year-over-year in terms of those specific components, just wondering if there is anything unique in any of those line items or what comp would be needed to drive some leverage, seems like it was such an impressive top line, I would have looked to more profitability.

At Olive Garden, they did have strong operating profit growth.

We don't break out that specific number.

At the Darden level, the blended comp was roughly 1.3% and so you pretty solid blended comp, especially compared to an industry that was down 3%, and we think the operating profit leverage that we got out of that is what you would expect out of 1.3% on the total enterprise basis.

Little bit more, actually, in this environment than you might otherwise expect because of some of the acquisition synergies.

We'll go to the line of Joe Buckley with Bear Stearns.

Please go ahead.

Hi, thank you.

Just to follow up on Jeff's question for a moment, I'm sure he's referring to the Olive Garden paragraph under operating highlights and I guess I would have sort of the same question, maybe not so much food and beverage costs but with almost a 6% comp, why of would labor and restaurant operating expenses be up as a percent of sales?

Yeah, this is Brad, Joe.

And when we look at that, I would say first off, in the environment we're in, the pressures that we're facing, we're really pleased with Olive Garden's performance there.

To add a little bit more color to that, when we look at restaurant labor, particularly your question, lapping on a year ago, some of those significant statement of wage increases, but as we're moving further away from those, we are seeing a year-over-year comparison on that line that continues to get better.

I would also mention that the higher number of restaurant openings and the initial inefficiencies and preopening costs that you incur with those, also influence those lines rather significantly.

That makes sense.

Thank you.

Then a question on -- just on food costs, one of the more interesting things I learned at the analyst meeting in February was your expectations for food costs for next year to run up about 2%.

And I guess I'm curious if that's still your thought and how much of that is locked under contract, how firm an estimate is that, is that plus two?

Our opinion of that really hasn't changed.

I think we detailed it fairly well at the conference there, that particularly through the calendar year, the first half of our fiscal year, we have good visibility over that and feel that our projections on that are pretty good.

I do think you get beyond that, we'll have to see how the marketplace develops.

But particularly for the first half of the year, you know, I think we know pretty close to where we're going to be.

Thank you.

We'll go to the line of David Palmer with UBS.

Please go ahead.

Hey, guys, this is actually Michael.

Good quarter.

Congratulations.

Your profit guidance that you gave us in February for the second half was about 360 to $385 million, which if my math is right it implies $170 million to $195 million in the fourth quarter which is about 17 to 34% growth.

That seems pretty big.

Could you give us some insight as to what might be driving that guidance and what gives you confidence now that we're into 4Q?

We would imagine that most of the 10 to $11 million in synergies you talked about would fall in that quarter.

But perhaps there is something else we should consider as well?

Had a little bit of trouble hearing your question.

I think you were talking about the earnings growth that we're looking at for the fourth quarter.

Is that correct?

Yeah, the profit growth for the quarter.

Seems to imply, based on the second half guidance you gave at the analyst day, seems to imply 17 to 34% profit growth in the fourth quarter?

Okay.

I think the drivers of that is, we continue -- we have the visibility on the cost lines.

We continue to expect our food costs with the pricing and things that we put in place earlier in the year to have some improvement there.

Labor as I mentioned earlier, we continue to get further along from the minimum wage increases there.

The opening schedule on the year-over-year comparison becomes a little bit more normalized and to a point, the synergies are significant drivers.

Those ramp up each quarter through that and as I mentioned earlier, we see the synergies being on track with our last discussion.

Thank you.

Thank you.

We'll go to the line of John Ivankoe with JPMorgan.

Please go ahead.

In your prepared remarks you talked about Red Lobster broadening appeal, improving the perception, in an effort to increase comps.

It's nice to talk about and we've been hearing about that for years.

So as we kind of lay out the plan for fiscal 2009, and perhaps even for the fourth quarter of 2008, could you give us timing of specific deliverables that you've asked your team that are going to be put into place at the store level or the brand level to where we can see the change actually happening in the minds of the consumer?

And I have a follow up on that.

Probably the three biggest things that we're working on sequentially that are going to change how people think and behave as it relates to Red Lobster is more consistently strong advertising and promotion, number one.

A menu that's updated with broader appeal, number two.

And then beginning the process of a remodel effort that's going to change the look and feel of the buildings, number three.

The advertising and promotion effectiveness continues to get better, we believe and more consistent at Red Lobster, although there is still opportunity to improve that and they're working hard on that.

The new menu that I was referring to and we mentioned briefly at the analyst conference is something that's in test now and we would look to have introduced later in the second quarter of next fiscal year, so toward the end of the first half of next fiscal year.

And the remodel, which is going to be obviously a major change to atmosphere, which is one of their bigger opportunities, is also in test in a number of restaurants.

That test is going to be expanded and refined in the fourth quarter this year and we would expect to have picked a design and begun implementation of that towards the end of the second half, the next fiscal year, obviously that's going to be a multi-year effort to ultimately have introduced.

Those would be the biggest things.

Just before the second part, I would just add that as we look back over the last couple of years, that Red Lobster's done a number of things already that are starting to make changes and so when we look at the promotional calendar for this year, much stronger than it was last year, even though there's still significant work to be done.

The introduction of fresh fish has made a meaningful difference in you how some consumers perceive it.

So a lot of those things are already having an effect and what Drew is talking about is real manically building on that and we see the effect when we look at their relative performance when you compare them to Knapp-Track.

That Red Lobster is outperforming Knapp-Track even though the average check for Red Lobster is appreciably higher than the average check for the Knapp-Track benchmark.

So we're seeing some progress in the marketplace, masked a little bit by the consumer environment we're in now.

That's a very good answer.

Some follow-ups on that.

In terms of advertising, I mean, the look and the feel of advertising, I can recall that there was some discussion of a real change in 2009.

Is that something that you're still thinking about or would it be an evolution from the current message that you're sending to consumers?

I'd say it's going to be more an evolution that involves a change in the type of food that's advertised.

Obviously, we moved well away from deep discounting.

But we want to advertise food in a way that demonstrates culinary expertise more than we have in the past which tended to focus more on quantity.

So that's going to be the biggest change, as well as emphasizing freshness more than we have in the past.

We'll go to the line of Jeff Omohundro with Wachovia.

Please go ahead.

Thanks .Just wanted to ask a little bit more regarding the current promotional initiatives and efforts to drive traffic in this environment.

For example, in my market here we're seeing Lobster Fest coupon drops with prices, discount prices off on lunch and dinner.

Just curious about the couponing strategy.

How does this compare with prior years and what your thoughts are about this type of discounting in general?

Well, the coupon timing specifically or the coupon you're referring to isn't a change year-over-year.

I think the timing is different by a week or two but the notion of having a coupon out to promote trial, to have people go in to Red Lobster and see some of the new lobster fest dishes is the same as it was a year ago.

So that's not an increase.

As it relates to discounting, we tend to think more about giving people a reason to visit that is either around compelling news, new dishes, or around value.

And we thing about value differently than we do deep discounting.

So the starting at $9.95 price point at Olive Garden had, for instance, or during the world of shrimp flavors promotion that Red Lobster had where they were featuring a range of items at pretty moderate price points, those are more the sorts things we need to do, news and value, as opposed to deep discounting in the current environment.

Thanks.

We'll go to the line of Glen Petraglia with Citi Investment Research.

Please go ahead.

Thanks, good morning.

I guess I had two questions.

First, the Darden Foundation, Brad, I'm guessing that that's an annual contribution.

Maybe I'm wrong.

I was hoping maybe you could tell us what last year's contribution was and does it typically fall in the third quarter?

No, this was a unique contribution that we made.

We typically, support the foundation each year with an amount.

But this was an opportunity for us to support some of the causes of that foundation, particularly around sustainability and other causes that we took this opportunity to make an additional contribution.

On timing, the normalized contributions is expensed evenly across the year.

So it's not driven by quarter.

Okay.

And then in terms of Red Lobster specifically, I think, if I'm correct, Easter is falling a little bit earlier this year.

So you would have gotten a couple of weeks of extra benefit from lobster fest in this quarter and would have lost it in the fourth quarter.

Maybe if you could help me quantify that, that would be helpful.

You're correct, there was a shift forward but the impact of that's been relatively -- excuse me, one week forward is all.

And the one week over the course of the quarter really wasn't that meaningful to the quarterly performance for them.

We'll go to the line of Bryan Elliott with Raymond James.

Please go ahead.

Good morning.

Couple questions I had haven't been asked.

One, I guess somewhat analogous to the Olive Garden question.

Looking at your Longhorn commentary in the press release, comps down 3.3, but you noted a decline in labor costs and I wondered if you could deconstruct that as well because that seems a little counter-intuitive with a same store sales decline of that magnitude.

Can you hear me?

Yes.

Basically, in Longhorn we are trying some different approaches there in terms of wage management there and we are having initial strong success with that.

We're pleased with that, during the course of the quarter we rolled that out to pretty much concept-wide and so we are seeing the positive results there that we would like.

We're evaluating like and potentially could consider that for our other brands as well, but still too early to say anything more about that possibility.

Could you help flush out a little bit.

I mean, is it a -- you know, just a closer matching of hours with projected sales or are there consolidation of positions?

What's driving the decline?

?

Or what's the change with the new

The focus really is all about managing wage rate.

As you can see, it's had strong success for us in this quarter.

Thank you.

We'll go to the line of Larry Miller with RBC Capital Markets.

Please go ahead.

Just two quick questions.

Brad, you talked about blended same store sales guidance but you gave a little bit of more brand-oriented guidance at the analyst day.

Does that guidance still hold, relatively speaking?

Yes.

Pretty much the case.

I think when we go to the guidance that was in February, we were really talking about the quarter to date results there.

The guidance for the year remains unchanged.

Okay.

Perfect.

And then you know, you mentioned improving the effectiveness at Longhorn advertising.

Can you guys elaborate on that?

What are you doing and when will we see that process start?

Well, the biggest things we're working on now is how to have advertising that still reflects the brand character of Longhorn, comfortable Western steakhouse, but has harder hitting news and reasons to visit in the short term.

So the types of dishes that we put in the advertising, more new dishes versus items that are off the existing menu and don't have the same sort of special call to action in the near term and then just the way we present the dishes in the advertising to emphasize the news more aggressively.

Those are the sorts of things we're looking at.

That's ongoing as we speak; is that correct?

Yeah.

I mean, it's not going to happen major evolution isn't going to happen in the next month.

But it is the sort of thing that's being worked on and gradually will improve their advertising going forward.

Thank you very much.

The next question comes from John Criss with European investors, please go ahead.

Thanks.

In looking at Darden's history, it seems to me that the return on investment and the return on marginal investment has been much higher at Olive Garden than in other areas and that your efforts to start up new types of restaurants or maybe even to make acquisitions had not been as successful really for Darden and the shareholders as your efforts with Olive Garden.

It seems to me that you're a good operator but the competitive situation is such that Olive Garden is sort of a better niche than the other things you've looked at and that's the answer.

So why not spend more of your resources on Olive Garden and less on other things, or to ask the question differently, what makes you think that a dollar spin on trying to improve the operations on Red Lobster and the RARE brands is going to be more productive for investors than spending an additional dollar on expanding the Olive Garden brand where there seems to be as far as demand goes.

For sure, Olive Garden has the highest return on invested capital.

So from a new restaurant perspective, we've got significant expansion at Olive Garden.

When we look at some of the newer brands that we have tried, because of return on invested capital considerations, we've halted expansion.

We've gotten Bahama Breeze though to the point where the return on invested capital is at a point where it justifies expansion but it's relatively slow because we need to see those new units and see them prove themselves.

In the case of Smokey Bones, we didn't feel that we could get where we needed to get and so we sold that concept.

On the acquisitions, it's still early but as we look at the restaurant level returns at Capital Grille and Longhorn, they're very solid and as we look at what we can do to increase those returns by really reducing some of the restaurant support costs, by reducing some of the food cost, and labor cost, we felt like return on invested capital would be very strong.

At Capital Grille, stronger than Olive Garden.

So we feel pretty good about expanding both of those brands as well.

Thank you.

Thank you.

We'll go to Brad Ludington with KeyBanc Capital Markets .

Please go

Thank you.

Good morning.

I just had a clarification on the integration costs and purchase accounting adjustments in the third quarter.

I think I -- I'm not sure I got all of the impact on that.

I think you said 33 basis points on G&A.

Is that correct?

And was there any impact on restaurant expenses or depreciation?

33% of G&As would be correct.

There is some impact on restaurant expenses.

Let me find my notes here.

Yeah, I think Brad said it was 36 basis points on restaurant expenses and 140 basis points favorable on labor and 140 basis points unfavorable on food costs.

Correct.

Well, that was the change all together year-over-year.

Integration costs and purchase accounting.

You mean just the.

That's the mix change.

You're trying to isolate just the purchase accounting.

The one-time items in the quarter were about the $0.03.

Excuse me, $0.05.

$0.05.

And that 33 basis points in G&A comes out to about four.

There's a little bit more in restaurant expenses, probably?

Just a little bit, yes.

Okay.

All right.

Thank you very much.

We'll go to the line of John Ivankoe from JPMorgan.

Please go ahead.

We're in a very interesting industry environment where a lot of your peers are taking pricing actually in excess of your own and have traffic is that is more negative than your own.

Can you give us a view on the consumer and how the consumer is responding to actually menu price maybe in fiscal '09, and if that's still something that you think you can pass through without affecting your underlying traffic trend, whatever it is?

Yeah, it's a tricky environment.

We think basically consumer is very value and price sensitive and so the trade is pricing against traffic.

We do think that given our competitive advantages in terms of support costs, and those are amplified right now by the synergistic cost savings from the acquisition, that we're in a position where we can be a little bit more judicious on the pricing side and profitably build market share.

And so that's been driving our thinking to this point and clearly factors in as we think about next year.

Okay.

Thanks.

Go to the line of Joe Buckley with Bear Stearns.

Please go ahead.

Yes.

You gave the full year same store sales guidance on a blended basis.

Just for clarification, where are you at the end of the third quarter and does that include RARE only from the date of acquisition or kind of on your full fiscal year.

I guess where I'm going, what does it imply for the fourth quarter blended rate?

Well, on a year-to-date blended rate including Longhorn for the entire -- our entire fiscal year, we're about in that mid-2.5% range.

Okay.

So to be in that, kind of 2, 2.5% range for the full year, fourth quarter is about in that range as well?

Yes.

Give or take a little bit, yes.

Okay.

Thank you.

We have no further questions.

Okay.

Well, thank you everybody for joining us this morning on our third quarter call.

If you have any additional questions we're available here in Orlando to follow up with.

Thanks for joining us and we'll speak to you at the end of next quarter.

Thank you.

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