達登餐飲 (DRI) 2009 Q1 法說會逐字稿

Welcome to the Darden Restaurants first quarter earnings release.

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

Later there will be a question-and-answer session and instructions will be given at that time.

(OPERATOR INSTRUCTIONS).

As a reminder, today's call is being recorded.

At this time, I would like to turn the call over to Mr.

Matthew Stroud, please go ahead, sir.

Thank you, Ken.

Good morning everyone.

With me today are Clarence Otis, Darden's Chairman and CEO, Drew Madsen, Darden's President and COO, Brad Richmond, Darden's CFO, 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 Restaurant's 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 to those 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, the loss or difficulty in recruiting key personnel, information technology failures, 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 Season 52, our ability to combine and integrate the business of RARE Hospitality International Incorporated, achieve synergies and develop new Longhorn Steakhouse and The Capital Grille restaurants, risks with incurring substantial additional debt, a failure of internal controls over financial reporting 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 for 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 fiscal 2009 second quarter earnings and same-restaurant sales for fiscal September, October and November of 2009 on Thursday, December 18th after the market close.

We are planning to hold an analysts investor meeting in Orlando on January 22nd and 23rd, 2009.

Additional details will soon follow.

We released first quarter earnings results yesterday afternoon.

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

So let's begin by reviewing our first quarter results.

First quarter net earnings from continuing operations were $82.4 million, and diluted net EPS from continuing operations was $0.58.

Representing a 21% decrease in diluted net earnings per share from continuing operations.

This includes the integration cost and purchase accounting adjustments related to the October 2007 acquisition of RARE Hospitality International Incorporated which reduced diluted net earnings per share by approximately $0.03 in the first quarter.

Excluding estimated integration costs and purchase accounting adjustments, net earnings from continuing operations were $0.61 per diluted share or a 16% decrease from prior year.

These results were in line with the preliminary first quarter earnings guidance we announced on August 26, 2008.

Brad will now provide additional detail about our financial results for the first quarter.

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

Gene will discuss the specialty restaurant group, followed by Clarence, who will have some final remarks.

We will then respond to your questions.

Thank you, Matthew.

Good morning.

Darden's total sales from continuing operations increased 20.9% in the first quarter to $1.77 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 $270 million for the first quarter.

Excluding the acquisition, sales growth for the quarter would have been 2.5%.

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

For context, industry, same restaurant sales as measured by Knapp-Track and excluding Darden are down an estimated 3.7% for the quarter.

Olive Garden's same restaurant sales were up 2.4% for the quarter, its 56th consecutive quarter of same restaurant sales growth, and that was 6.1 percentage points above the Knapp-Track industry benchmark.

Olive Garden's total sales increased 8.1% for the quarter.

Red Lobster had a same restaurant sales decrease of 3.7% for the quarter which was in line with the Knapp-Track industry benchmark and its total sales decreased 3.5%.

As a reminder, Red Lobster reported a 7.0% same restaurant sales increase in last year's first quarter while the industry was flat.

Longhorn same restaurant sales decreased 4.9% for the quarter while its total sales increased 4.2% because of the addition of 25 net new restaurants.

This compares to a same restaurant sales decrease of 3.9% for Knapp-Track in the regions where Longhorn Steakhouse operates.

On a branded basis, same restaurant sales were down 1.0% at our three large brands, which out performed Knapp-Track industry average by 2.7 percentage points.

The Capital Grille had a same restaurant sales decrease of 8.6% for the quarter, while total sales grew 6.7% due to the addition of five new restaurants.

Bahama Breeze had a same restaurant sales decrease of 3.7% for the quarter.

The quarter was also adversely affected by the Fourth of July Holiday impact.

This holiday shifted from Wednesday in fiscal 2008 to a Friday in fiscal 2009, the move to what is normally a much busier day of the week and caused a negative 0.7 percentage point impact to same restaurant sales for the quarter.

Now let's discuss the margin analysis of the first quarter which is complicated by the acquisition of RARE Hospitality.

We are comparing year-over-year results on reported basis, and we are also comparing results from continuing operations this year and last year, thus results from Smokey Bones which was sold in December 2007 are not included in the first quarter of fiscal 2008 and the acquisition of RARE Hospitality is included for the first quarter of fiscal 2009.

Our first quarter results fell short of our target and last year's results.

Diluted EPS from continuing operations of $0.61, which excludes integration costs and purchase accounting adjustments of $0.03 was $0.12 below last year's comparable first quarter diluted net EPS of $0.73.

Of this amount, approximately $0.09 of the EPS short fall was attributable to sales deleverage and approximately $0.03 was attributable to cost pressures that exceeded last year.

I will explain each P&L line item in detail.

Food and beverage expenses were 194 basis points higher than last year on a percentage of sales basis.

This is primarily the result of mix changes due to the addition of RARE Hospitality, which accounts for approximately 152 basis points of the increase.

Excluding the mix change, food and beverage expenses were approximately 40 basis points unfavorably, due equally to changes in promotional mix at Olive Garden, protein cost increases across all of our brands, and higher costs for dairy, bread and pasta.

Our outlook for the fiscal year is that food and beverage expenses as a percent of sales will be approximately 70 basis points unfavorable to last year on an as reported basis.

This would include the full-year impact of the RARE acquisition in fiscal 2009, but only eight months impact in fiscal 2008.

Excluding the acquisition impact, food and beverage expense as a percent of sales would be approximately 20 basis points unfavorable to last year, consistent with our previous guidance.

First quarter restaurant labor expenses were 67 basis points lower than last year on a percentage of sales basis due primarily to the mix changes associated with the addition of RARE Hospitality, which lowered labor expenses by approximately 99 basis points.

The change in mix more than offset wage rate inflation of 2 to 3% and the impact of sales deleveraging.

Our outlook for the year is that labor expense as a percentage of sales will be approximately 20 basis points favorable to last year.

Excluding the acquisition impact, restaurant labor as a percentage of sales would be 10 to 20 basis points unfavorable to last year.

Restaurant expenses in the quarter were 145 basis points higher than last year on a percentage of sales basis.

The mix changes associated with the impact of RARE Hospitality acquisition and purchase accounting adjustments accounts for approximately 50 basis points of the increase.

Excluding the mix changes, restaurant expenses were approximately 95 basis points unfavorable, due primarily to higher utility costs and sales deleverage.

We were also ramping on a favorable workers compensation public liability credit in the prior year.

Our outlook for the fiscal year is that restaurant expenses as a percentage of sales will be approximately 40 basis points unfavorable to last year.

Selling, general and administrative expenses were 17 basis points lower as a percentage of sales for the first quarter.

This favorability is primarily related to reduced performance-based incentives.

There was also some unfavorability related to marketing expense at Olive Garden as the Never Ending Pasta Bowl promotion began one week earlier than in the prior year, adding an extra week of media expense, as well as the entire production cost of the commercial.

The production cost is expensed when the first commercial is broadcast.

These costs added an additional $4 million to the first quarter marketing expense.

Our outlook for the fiscal year is that selling, general and administrative expenses as a percentage of sales will be approximately 50 basis points favorable to last year.

To summarize, operating profit or EBIT was 300 basis points lower as a percentage of sales for the first quarter.

Of this variance, 130 basis points was due to the RARE Hospitality acquisition and associated mix changes while the remainder is due to sales deleveraging and increased costs.

Our outlook for the fiscal year is that operating profit as a percentage of sales will be approximately 70 basis points unfavorable to last year on an as reported basis.

The effective tax rate for the first quarter of 28% was in line with our previous guidance and lower than last year's rate due to an increase in federal tax credits.

We now anticipate an annual effective rate of approximately 27%.

For the quarter, we repurchased 2.1 million shares, or approximately $68 million, which speaks to the significant cash flows we generate on a consistent basis.

We have 13.3 million shares remaining in our current authorization.

And yesterday, we announced a dividend of $0.20 per share payable on November 3rd, 2008 to shareholders of record October 10th, 2008.

Based on the $0.20 quarterly dividend declaration our indicated annual dividend rate is $0.80 per share.

As we indicated in our press release yesterday and our preannouncement in late August, our revised outlook for the fiscal year anticipates combined US same restaurant sales growth in fiscal 2009 of approximately 0 to 1% for Red Lobster, Olive Garden and Longhorn Steakhouse, and we expect to open approximately 75 to 80 net new restaurants in fiscal 2009.

As a result, we anticipate total sales growth of between 12 and 13% in fiscal 2009 compared to reported sales from continuing operations of $6.63 billion in fiscal 2008.

This total sales growth includes the 2 percentage point impact of a 53rd week in our fiscal 2009.

Excluding the 53rd week, we expected total sales growth would be approximately 10 to 11%.

We anticipate reported diluted net earnings per share growth from continuing operations of 5 to 10% in fiscal 2009, which includes the impact of the 53rd week.

This compares to reported diluted net earnings per share from continuing operations of $2.55 in fiscal 2008.

The additional week is expected to contribute approximately 2 percentage points or $0.05 per diluted share of growth in fiscal 2009.

Exclude estimated integration costs and purchase accounting adjustments of approximately $0.19 in fiscal 2008, net earnings from continuing operations were $2.74 per diluted share.

In fiscal 2009, these costs and adjustments are estimated to be approximately $0.07 per diluted share.

Excluding the impact of these costs and adjustments in both fiscal 2008 and fiscal 2009, the company expects diluted net earnings per share growth of 0 to 5% on a 53 week basis.

And finally, let me take a moment to update you on our integration efforts.

We are pleased with the progress we made integrating Longhorn Steakhouse and The Capital Grille brands we acquired with the purchase of RARE Hospitality.

As we previously said, our integration plans and synergies are exceeding our original expectations We are seeing greater cost savings than we estimated, and we are seeing an acceleration of those savings.

For fiscal 2008, we realized cost savings of approximately $10 million.

In fiscal 2009, we are estimating incremental cost savings of approximately $30 million.

And we anticipate additional incremental cost savings of approximately $10 million more in fiscal 2010, or approximately $50 million in annual savings.

These savings are of course especially welcome in today's increasing cost environment and are slightly higher than our original expectations.

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

Thanks, Brad.

As we mentioned in our press release, economic and consumer dynamics during the first quarter were much weaker than we anticipated.

As a result, we have adjusted our fiscal 2009 business plan programs and investments in a way that responds to these near-term financial pressures without materially impacting our longer term strategic priorities and growth potentials.

More specifically, each brand is reviewing their key sales building initiatives including advertised promotions, coupons and menu initiatives and made adjustments where appropriate that we believe supports same restaurant sales growth in the 0 to 1% range this fiscal year.

In addition, we have been more aggressive in the pursuit of additional cost management opportunities, including better adherence to existing operational standards, and optimizing our G&A spending.

As a result, we expect net cost inflation across the business, including food and beverage, labor, energy, and all other areas of cost to be approximately 2.5% after including the savings from our proactive cost management efforts.

This is an amount that can be covered with price tag is slightly above recent years while still maintaining the breadth of appeal and value of our brands.

In addition, we remain confident that we will capture an additional $30 million in incremental RARE acquisition synergies this year to help offset the impact of guest count declines and investments in future growth.

Importantly, we are not taking any action that would erode our guest experience, reduce employee pride and engagement or interfere with the successful integration of RARE.

Now let's talk about the specific priorities for each brand.

Olive Garden's strategic priority this fiscal year is to accelerate new restaurant growth while maintaining same restaurant excellence.

During the first quarter, Olive Garden delivered on that priority.

As Brad already mentioned, Olive Garden reported competitively strong results during the first quarter.

More specifically, Olive Garden delivered their 56th consecutive quarter of same restaurant sales growth, achieving a 2.4% increase that exceeded the Knapp-Track competitive benchmark by over 6 percentage points.

In addition, Olive Garden opened nine net new restaurants during the first quarter.

This exceptional sales performance 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 exceptional value over many years.

Second, advertising during the first 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.

The Culinary Institute of Tuscany promotion ran in June and July, and featured a compelling new entree, Chicken Veronese, and new advertising featuring Olive Garden's cooking school in Tuscany.

This was followed by their vibrant Italy promotion in July and August that featured two new dishes, grilled balsamic chicken, and grilled garlic shrimp.

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

Olive Garden also began national advertising on Telemundo and Univision with Spanish language commercials during July, becoming the first brand in casual dining to reach this growing market nationally.

Going forward, every promotion will include advertising support on these two networks.

Operating fundamentals at Olive Garden also remain strong.

Overall guest satisfaction in the first quarter set an all-time high and may have seen reduced turnover levels for both restaurant team members and managers.

To maintain competitively superior same restaurant sales performance in a value sensitive environment, Olive Garden decided to start their Never Ending Pasta Bowl promotion one week earlier than last year, during the last week of August, and end the promotion one week later than during fiscal 2008.

Olive Garden also experience more food cost pressure than our other brands during the first quarter, primarily in pasta, dairy and bread.

To help offset this cost pressure going forward, they have implemented plans to take moderately more pricing this year than they did in fiscal 2008, and to further strengthen their management of wage rate and labor hours.

Olive Garden still expects to open approximately 40 net new restaurants during fiscal 2009 and ultimately we believe the brand has the potential to operate 800 to 900 restaurants in North America.

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

Turning to Red Lobster, this is a challenging quarter for Red Lobster in large part because they wrapped on same restaurant sales growth of plus 0.7% last year which was the strongest performance in the Knapp-Track database.

Despite this challenge, the first quarter same restaurant sales performance this year was in line with the Knapp-Track benchmark.

Red Lobster utilized two promotions that were successful during the same quarter last year.

In June and July, they ran summer grilling, which featured fire grilled lobster and shrimp, and the new dish, honey citrus seafood grill.

In July and August, Red Lobster promoted the American Seafood Adventure, which featured New England lobster and crab bake, plus two new dishes.

Hawaiian Isle Shrimp and Salmon and Georgia Peach Bourbon Shrimp and Scallops.

Guest traffic and sales of lobster entrees fell short of expectations and prior year results.

We believe this was due to the economic environment and pressures facing many of our consumers, which were exacerbated by the higher absolute check at Red Lobster and higher price points for lobster dishes during the first quarter compared to last year.

Fortunately, lobster costs are now declining, and we will be able to reduce the price of several promotional dishes going forward.

In light of the current economic environment, Red Lobster has added a coupon during the second quarter and has significantly strengthened their Endless Shrimp media weight and advertising to better communicate choice, variety and value.

Endless shrimp started three weeks ago.

Looking further ahead, Red Lobster's plan to achieve sustainable growth has three phases.

The first phase was to strengthen the brand's fundamentals, the second phase was to refresh the brand, broaden its appeal and build guest counts.

The third phase will be to accelerate new unit growth.

Importantly, the operating fundamentals at Red Lobster have never been stronger.

Guest satisfaction, labor productivity and food waste in particular all showed meaningful improvement again during the first quarter.

During this fiscal year, Red Lobster will continue to focus on broadening the appeal of their brand and recapturing lapsed users.

Specifically they will introduce a significantly improved new core menu supported by compelling advertising late in the second quarter, and they plan to finalize preparations for a remodel program of their existing restaurants by the end of the year.

We are confident Red Lobster is on the right course and that it will resume meaningful unit growth in the second half of fiscal 2009 with plans for approximately 10 net new restaurants this fiscal year.

Now at Longhorn Steakhouse, as Brad already mentioned, total sales increased 4.2% versus last year during the first quarter driven by new restaurant growth.

However, same restaurant sales declined 4.9%, and were below the Knapp-Track benchmark for the regions in which Longhorn competes.

We believe there are two key issues are driving Longhorn's disappointing same restaurant sales versus the industry benchmark this quarter.

First, their check average is at the higher end of casual dining, making them somewhat less affordable in an economically challenging environment, especially given the increase in competitive discounting, and they do not yet have the ability to provide advertising support for all of their restaurants that give their guests a compelling new reason to visit.

To help offset this, Longhorn has increased their coupon pressure approximately 25% over the remainder of the fiscal year.

Longhorn has three key areas of focus during fiscal 2009.

First they will successfully complete the integration process.

Second, they will further elevate the guest experience by improving results at underperforming restaurants and on weekend occasions.

And they will continue their efforts to strengthen brand relevance.

In particular, Longhorn will sharpen their brand promise, strengthen their advertising and promotion effectiveness and expand their ranch house remodel program.

Operating fundamentals at Longhorn also remain strong.

Guest satisfaction, as measured by their mystery shop program, improved versus the prior year and set a new record for the first quarter.

An employee as well as management turnover remains at industry leading levels.

During the first quarter, Longhorn opened three new restaurants.

They are on target to open 20 in fiscal 2009 and we believe that ultimately, Longhorn has the potential to operate 600 to 800 restaurants in North America.

Now, Gene will discuss the three brands in our specialty restaurant group.

Thanks, Drew.

The specialty restaurant group organizational structure we established a year ago is functioning effectively, and providing an appropriate level of governance and support for our three brands.

In this difficult economic environment, each of our concepts is focused on executing the strategies and tactics to deliver differentiated guest experiences.

And our operations teams continue to operate at a high level, as indicated by our guest satisfaction measures.

Our teams will also continue implementing sales building initiatives that we believe will increase market share and result in competitively superior performance.

Now I will go into a little more detail on each of the Specialty Restaurant Group brands.

The Capital Grille's first quarter sales were $54.4 million, a 6.7% increase over prior year, driven by an additional five restaurants.

Same restaurant sales declined 8.6%, reflecting continued weakness in luxury consumer spending and a significant increase in promotional activity in the premium steak category.

The team continued providing guests with an exceptional personalized dining experience.

Overall guest satisfaction as measured by our mystery shopper program was at an all-time high.

Everyone in the Capital Grille team is committed to rapidly regaining competitively superior same restaurant sales.

The company is focusing on numerous sales building actions, including additional efforts to grow the private dining business, compelling new culinary news through chef suggestions and limited promotional activity.

The team is also focused on delivering an extraordinary dining experience by increasing training efforts, refreshing brand touch points, and enhancing reservations management to maximize efficiency.

Capital Grille successfully opened one restaurant in the first quarter and will open another one next Monday which will bring the total number of restaurants to 34.

The company will open a five to six restaurants in this fiscal year.

The Capital Grille team continues to make progress on their integration efforts.

The company remains focused on balancing the demand of the integration with managing new restaurant growth and building sales momentum.

Bahama Breeze had first quarter sales of $35.8 million, 3.7% below last year.

Same restaurant sales also declined 3.7%; however this performance outpaced the Knapp-Track comparative set on a regional basis, despite a higher check average.

The company's overall guest satisfaction continued to improve.

We believe implementing fewer operational changes this fiscal year is allowing our restaurant teams to focus on being brilliant with the basics, which is helping improve the overall dining experience.

At the same time, the company's taking a number of actions to improve same restaurant sales, including cable television advertising in select markets, targeted direct mail and testing online advertising.

Bahama breeze is preparing to open one restaurant in the second half of the fiscal year.

Seasons 52 remains focused on building an effective operational foundation and continuing to hire and develop more talented team members who can help support the brand's growth and ensure we continue executing at a high level.

The company also continues to actively identify and secure new locations to support disciplined growth, starting with one new restaurant later this fiscal year.

Now I'll hand it over to Clarence for some final comments.

Thanks, Gene.

There's no question that it has been a difficult quarter, and given the difficult economic environment, it looks like it is going to be a challenging year.

Our current sales and earnings outlook reflects that.

But as we step back and look at where we are competitively, we feel good and we feel good because of the actions we have taken over the last four years to transform Darden and those actions have put us in a position where we can weather the current storm better than most of our competitors, and we think we can emerge with an even wider positive competitive gap.

With the actions we have taken, we have a portfolio of proven brands that together give us a much stronger long-term sales and earnings growth profile than we had just 18 months ago.

We have greater scale than we did, and all of the advantages that scale brings and those advantages are reflected in the cost synergies that we are realizing for the RARE acquisition, and we have made changes in how we work, so that we can be even more effective and efficient and that enables us to let our scale work even harder for us.

The progress we made and the competitive position that we built as a result of that progress really hinges on one thing and that one thing is having great people.

We are proud of the outstanding teams we have in our restaurants, in our restaurant support center.

They're working to successfully navigate the current environment, and beyond that, they're working to create a great company.

We have said it before, we believe it, and we have what we think at every level of the organization is the strongest leadership team in full service dining.

Together we are focused on creating a company that in good times and bad is a leader in the full service restaurant industry, now and for generations.

And we recognize that we went a little long this morning, but we did want to give you some detail on the cost dynamics that we're seeing, and on the cost management and sales building initiatives that we've put in place, but with that, we'll take your questions, so thank you.

Great.

Thank you.

(OPERATOR INSTRUCTIONS).

Also due to time considerations, we do ask that you please limit yourself to one question and one follow-up per turn.

If you do have additional questions, you may requeue at that time.

Our first question today comes from the line of Steven Kron with Goldman Sachs.

Please go ahead.

Thank, good morning, guys.

A question on Olive Garden profitability, I guess given 8% increase in sales, a little surprised to see operating profit decline and if I did my math correctly that implies rushing the margins down a couple hundred basis points, I guess in your prepared remarks that commodity cost pressures were the disproportionate hit there.

If wheat was the big pressure there, and maybe you can confirm that, if I look out and considering comments you made last quarter, that you were floating quite a bit does that become a year-over-year benefit for you guys in the current quarter?

Well, Steve, you are correct in that the commodity costs, nonprotein commodity costs are disproportionately weighted to the Olive Garden.

That is the big driver of their profit mix on that.

To your point with what's happening in the commodity market and particularly as we move past the October time frame, that comparison for them gets much easier.

And as a follow up on the commodity discussion, you guys last quarter talked quite a bit about suppliers not really being receptive to longer term contracts.

Given what we have seen in the moves in some of the commodities, can you update us on the current ability to contract and I guess to that point how active were you guys in this quarter in the futures market?

The environment still exists where no one's too excited about contracting on any long term basis but as you have seen in the case of wheat, its price has moved down.

We through our supply management chain had anticipated getting the harvest in and see how that was materialized.

We believed that would be the likely course.

We had not taken a lot of positions that existed at the end of our first quarter.

So we have been waiting for the market to move down and it is moving in that direction.

So, we will continue to evaluate that.

We are getting to the point we will be taking more positions if it continues the current path in this quarter.

Great.

Thank you.

Our next question comes from the line of Matt DiFrisco with Oppenheimer.

Please go ahead.

Can you update us on where you see the regional strength where Olive Garden and Longhorn can grow even in this environment?

And how set in stone are you on especially Longhorn in this given the current trends and their regional weakness seeming somewhat temporary, but still out there?

Is it time to still grow there?

And I do have a follow up.

In the near term, Longhorn is really focused on filling in existing markets so they can get spot market media efficiency faster.

And they're not now in say Texas which is the most, which is the best performing Knapp-Track region now.

Olive Garden is also, they're entering new markets but largely filling in existing markets as well.

So, while Longhorn is down a bit in same restaurant sales compared to Knapp-Track benchmark currently, we still see significant potential for them to continue expanding.

Just to add Drew is absolutely right.

As we think about Longhorn near term expansion, clearly filling in markets, getting to media efficiency is important because that gives them one more, one more tool that they can use to help build sales, and so, clearly focused on that.

Probably a little bit more cautious about entering new markets until we get the kind of clarity around brand positioning that Drew talked about.

So that's the balance and that explains the unit growth number that we have this year roughly 20, which is down from where they have been over the last couple of years.

Okay.

And then, the ranch house remodel, what are you seeing in early test or can you give us some sort of characteristics on the list that you are getting on sales or greater profitability potentially?

Well, they've been working on a ranch house model for maybe not quite two years and have continued to refine the investment level as well as the changes that they're investing in.

Qualitatively, the consumer reaction has been very strong.

The ranch house remodel is moving closer to what their new prototype looks like, and quantitatively guest count increases and operating profit increases early on are encouraging but we really haven't had a big enough group of restaurants for a long enough period of time to be conclusive about that.

They have it in maybe 20 or 25 restaurants, it just hasn't been for a long enough period of time.

We would think by the end of this year, at least another couple of quarters, that we would have a better sense of it but very encouraged.

We think that that atmosphere change and what it does for the experience and brand is going to be a major lever in terms of strengthening their brand relevance going forward.

Great.

Thank you.

Our next question comes from John Glass with Morgan Stanley.

Please go ahead.

Thanks, good morning.

I wanted to go back to your comments on the promotional stance and maybe how far are you willing to go to recapture some sales?

It sounds like for the two main brands you are just extending existing promotions but I am wondering if you have thought about going beyond that in term of increased couponing or absolute sort of price discounting and how you factor that into your plan.

Do you think of that as a lower margin but higher sales volume or do you think that's just going to be an absolute negative to margin this year?

Maybe how much of your plan is factoring in the benefits of that discounting?

I would characterize everything I went through on the sales building adjustments as refinements versus radical change.

We are trying to respond appropriately to the near term financial pressures we see.

Do it in a way that passes all three filters we run these decisions through.

Number one, we have to believe we get sufficient incremental guest count to offset whatever the discount is that we may be offering, not everything I described is a discount but if there is, that's our first filter.

Second we want to be confident there's no other menu mix changes or labor changes that would adversely impact margins and third we want to make sure we are not doing anything to the brand, the way guests perceive it, the way guests would use it going forward, so we don't want to diminish that.

So we believe everything I went through is going to help us get to the 0 to 1% same restaurant sales growth in our guidance.

It is going to go be profitable and it is going to be consistent with what our brands stand for.

We would be hesitant to go significantly beyond that in a way that was either very aggressive in discounting the diluted margins or diluted brand equity going forward.

Okay.

And then just, is there anything in the sequential trends you saw as you exited the quarter or maybe entered this quarter that gave you a hope or despair?

In other words, were August trends relatively level?

Do they get worse?

How should we look at the current environment?

I don't think we want to talk about September, John but the summer clearly, the most stressed month was July.

We certainly had a difficult June, got more difficult in July.

Some of that was the holiday.

Brad mentioned Fourth of July, which was a slow day falling on a Friday, a very strong day this year versus a Wednesday, a more average day last year -- hurt the entire industry.

But beyond that, we saw weakness and so the effect I think of gas prices at the levels that they were, a lot of other things going on.

We certainly saw a better consumer in August.

Still not anywhere near where we would like to see them but better.

Great.

Thank you our next question comes from the line of Joe Buckley with Banc of America.

Please go ahead.

Thank you.

A follow up to John's question, as gasoline prices have come down, are you seeing any benefit from that, in the last eight or ten weeks?

Well, I think we certainly saw August better than July and the gas piece was certainly part of that.

But August was still a tough month when you look at the absolute industry number ex Darden 3.7% negative.

As we built our outlook we assumed things will stay difficult and we are not looking at a whole lot of improvement because there are so many pressures beyond gas prices.

And those continue to e emerge.

And so, while we did expect gas prices to come down, they have, that's not dramatically changed our outlook for the year.

Okay.

And then, I wanted to ask about the RARE acquisition what EPS effect on the quarter was, and I know with the preannouncement a large part of it seemed to be related at the feet of Red Lobster, looking at some of these RARE numbers I'm concerned maybe that's d raining on earnings per share.

Can you comment on that or give us some comfort.

I would let Brad answer and I will follow up.

Joe, in the particular quarter obviously the RARE brands we acquired mp pressured by some of the cost pressure and more importantly, the sales impact.

But their total part of Darden is not that significant that their impact on EPS say was very slightly dilutive but not meaningful in any sense, the real opportunity there is an opportunity to grow those brands and add meaningful growth to Darden.

I would say, I mean the cost pressures that we saw at Olive Garden the operating profit decline was significant.

So this is not just, it is not just about Red Lobster for sure or RARE.

So I think that's why Drew went through the discussion of Olive Garden on the cost side.

Drew and Brad.

Great.

Thank you.

Our next question comes from the line of Jeff Omohundro with Wachovia.

Please go ahead.

Thanks.

I wonder if you could share a bit more details on the direction of the new menu initiative at Red Lobster.

I am concerned about the apparent affordability issue in this environment at the brand and how you plan to meet that challenge.

You know, certainly I understand the value offering position of endless shrimp.

Do you need to do more of that or is there another solution that you are leaning toward in the new menu?

Thanks.

Well, there's a couple of different things to broaden appeal, strengthen menu and even further strengthen the brand.

On the core menu, what we have talked about in the past is that to regain lapsed users, those people that used to come to Red Lobster and have stopped.

We need to address two fundamental things, one is change their perception that the menu at Red Lobster is primarily comprised of frozen seafood prepared in a fried manner and not having a lot of interesting innovation, flavor profiles, culinary expertise.

The menu that's coming out late in the second quarter is really designed to maintain or increase appeal of current users, which is important but also address those concerns about this is frozen, fried seafood without any interesting flavor profiles.

Importantly, we are not addressing that in a way that introduces lot of new higher priced items that is going to take the check up.

It is really more about freshness and flavor profile and culinary innovation as opposed to more higher priced items.

Beyond that, we are looking at ways to strengthen value in a more targeted fashion to a group of Red Lobster customers in particular that are more value sensitive and that will be coming in the second half.

I don't want to get into that in more detail but we are looking at a couple of different levers to address both the issues that you brought up.

Is it when you look at those two issues, the perception of frozen versus value and affordability, how much weight do you put on each of those?

Well, I don't think it is value versus or frozen versus value.

I think it is frozen versus fresh interesting something for me, and that if you offer that, then second, I am going to view that as an experience that offers more value and a brand I am going be more loyal to.

So it isn't directly an either/or and I think we have to address the first, be more relevant with the type of food items that people want today to ultimately address the second around value.

We are not going to win on value just by lowering menu sizes or portion sizes at Red Lobster.

Great.

Thank you.

Our next question comes from the line of Brad Ludington with KeyBanc.

Please go ahead.

Morning.

Thank you.

I want to start off asking if we should expect any other variability on the G&A line with timing of changes in timing of marketing expenses and maybe the production costs falling in.

I'm not aware of anything now that would be moving around a meaningful nature although we will continue to assess the competitive and business environment out there.

If there's opportunities that we think can strengthen our position we will take those, but nothing I'm aware of at this moment that causes any big quarterly shifts beyond the holidays.

Thank you.

Okay.

And then, just on the integration charges impact, trying to do a pro forma model is it fair to assume that you had maybe around $1.5 million pretax on the restaurant expense line and about 5.5 on the G&A line?

One moment.

Say that again, I'm sorry.

Just thinking about $7 million total pretax, 1.5 on restaurant expenses and 5.5 on G&A?

At the restaurant line you are talking for the full year that would be pretty close and on the G&A side, that really works out to the $0.06 to $0.07.

I would have to do the math on that one.

So it would be about for the year about $13 million.

Okay.

Thank you.

We do have a question from the line of John Ivankoe with JPMorgan.

Please go ahead.

Yes, thanks.

A question on Red Lobster, I guess for the better part of a year, the concept has been performing I think beyond your expectations or below I should say your expectations or my expectations from a traffic point of view.

So, I would like you to frame your continued commitment to development of new restaurant in the second half of 2009, in other words why this is the right time to commit capital for new restaurant development and if the decision on '09 is because you have them in plan if there's any sense and direction for what new development will be for the out year, 2010.

Yeah, John this is Clarence.

I will take that.

I would say as we look at traffic over the last couple of years, from a traffic perspective, Red Lobster has out performed the industry as measured by Knapp-Track.

For Red Lobster with its materially higher check than Knapp-Track average, that's competitive strength because of n the past we underperformed Knapp-Track on traffic.

So I would say we performed strong competitively.

We wish it was even higher but we also wished the industry environment was higher and the industry's numbers were higher.

So that's how we think about it.

On a new restaurant basis, Red Lobster is a restaurant by restaurant decision.

I don't know that we have a pace of expansion that we think makes sense versus we scour the country and look at the markets and decide market by market does this restaurant make sense from a return perspective.

And so it is very much a bottom up driven expansion.

Here's a market that's expanded, that is strong a trade area we think we can get X guests out of.

It makes sense to open this restaurant.

Some years it might make sense that all that adds up to five, other years to ten.

It is more about that, and to the extent that the guest count level that we start to make that restaurant by restaurant assumption from is lower and we scale out over 30 years, fewer trade areas will make sense.

So that's a little bit of how we think about Red Lobster.

I don't know that there's a master plan as opposed to a unit by unit investment decision.

It does seem like maybe that the sales part of the equation is lower today than we would have liked it to have been a year ago.

Is there anything that's changing and if you can answer this question very immediate term on the investment side of the equation whether in land or building costs.

Yeah, I would say the biggest change on that side is the attractiveness of the units that are available in terms of where they're located and therefore what we can forecast for guest counts is the biggest change.

So units that would have been unavailable to Red Lobster because developers felt other concepts were more attractive are now available.

So as we forecast those traffic numbers into the future they may be 0.5 point higher than they would have been if we didn't have that softness in the development community.

That's the biggest piece compared to land values.

Construction costs certainly have flattened out and they were scaling up.

The other thing as we look at these unit level investment decision at Red Lobster that helps them, is that there are secular declines in a lot of products they use.

So the food cost product on the shrimp side, on a lot of the [fin fish] side -- has helped and Tim and his team have done a great job in their direct efforts of really reducing the cost of their restaurant support platform that dovetails a lot of work we have done at the dining level to reduce the cost of our strong support program on a per operating week basis and certainly acquisition helps and it improves Red Lobster restaurant level earnings model with the cost synergies because a lot of those it benefits from.

So all of those things I think you know help each of those restaurant by restaurant investment decisions.

That's how it is looked at not some global goal we are trying to go meet.

Thank you.

Our next question comes from the line of Jeffrey Bernstein with Lehman Brothers.

Please go ahead.

Great.

Thank you.

A couple of questions.

First, obviously, being 100% company operated system, you are very sensitive to the swing in comps, just wonder if you can talk about your flexibility or perhaps your ability to adjust costs realtime based on comp trends you are seeing whether you have the ability to pull back on certain labor lines or make adjustments as you move through the quarter and then I had a follow up.

Certainly we think our operating fundamentals on wage rate, labor hour management are good but we think they can be even better.

We think we can do a better job of forecasting what the guest counts are going to be in this environment and reacting faster on the labor hours side.

Same thing on something like managers per restaurant where historically we have been very good at that.

We have seen reduced turnover recently and we can respond to that a little quicker as well.

So, we think we have strong tools for our front line restaurant operators to do all of those things and we just need to continue doing it at an even higher level.

Okay.

Then just, in terms of the specific quarter just ended, you talk about the Red Lobster comparison being so difficult which we definitely recognize and it seems to get a lot easier.

I'm just wondering, the down 3.7% comp plus 7.

That doesn't seem so horrible when you consider the comparison, yet it seems like internally you guys are expecting Red Lobster to actually be posting a modest positive comp in this past quarter.

Just wondering why perhaps that assumption, if you are considering the year ago comparisons, perhaps the expectations of promotions this quarter you thought would lead to the positive comp, if that was one of the big drivers of the earnings short fall.

Thanks.

Well, part of the positive 7% last year was promotion that worked exceptionally well and we are repeating those promotions this year in had the first quarter.

We had a little more media weight behind them in the first quarter this year than we did last year.

We didn't have the investment in fresh fish advertising media weight that we had a year ago which is one of the big drivers of the 7% increase but we thought we had proven promotions slightly increased media weight behind those, some new products, you know, we thought we had some momentum behind those and obviously we didn't get that.

Thank you.

Our next question comes from the line of Robert Derrington with Morgan Keegan.

Clarence, can you revisit for us for a minute the company's philosophy about the plan for your operating cash flow this year?

I know there's a number of pieces there between new store development, share repurchase dividend et cetera.

Can you kind of update us on that plan and if it has changed any?

Operating cash flows are somewhat lower.

That has changed things a little bit.

Probably means that I guess our debt levels will stay a little bit where they were a year ago.

That's probably the biggest piece.

We may have been looking to pay down a little bit more debt than we are likely to.

So we feel comfortable with those levels because the dividend really has not changed.

Share repurchase is about the same place we talked about and the capital piece has come down slightly but not a whole lot.

I don't know, Brad if you have anything else to add to that.

No, that pretty well sums it up but the net of that is we are continuing our share repurchase plan as we previously stated.

Of course the dividend as we have talked about and a fair amount of support for capital expansion still continues slightly moderated some but not meaningful.

So it does put a little more pressure on our debt metrics but we still believe that preserves you know investment grade debt profile.

Okay.

That's fair enough.

And then follow up question, as it relates to you know, the Longhorn brand, the market seems to be pretty competitive for that concept, for the whole industry, I guess.

And we are seeing a national competitor use a price point promotion to try and drive sales within its steakhouse concept.

Any kind of thought there about getting you know, different repositioning or more aggressive on a price point as opposed to just couponing?

This is Drew.

The Outback $9.99 promotion is probably having an impact on Longhorn and others in the category.

It's the first time we can remember that Outback has advertised a price point.

We have chosen not to do a price point on Longhorn at this point for a couple of reasons.

One we don't have enough experience with the brand to know if it is going to meet those filters that I just talked about a minute ago that it's going to drive incremental traffic at a margin that maintains our profitability and second, what does a price point discount like that pretty aggressive price point do for the image of a steakhouse restaurant.

So, we want to get a little more comfortable with both of those things.

I wouldn't rule out a value oriented promotion in the future not unlike an endless shrimp promotion that Red Lobster does which doesn't happen to be price pointed.

But we are going to continue working on ideas for that versus just a straight discount.

Thank you.

Our next question comes from the line of Chris O'Cull with SunTrust.

Please go ahead.

Thank you.

A quick question on the contribution from RARE.

Brad, will the extra period in the second quarter this year with RARE ownership have a material benefit to earnings?

You are talking about in the second quarter will it have an impact?

Right.

I this I the biggest impact you are going to see is a quarter of transition.

So the P&L will still be a little bit confusing and we will have to work through that to be honest.

But in term of its contribution on as reported basis, yes it would be.

We will be lapping past some of those initial expenses in those items that are there.

But you know, in term of its EPS impact I would presume at this point that it is going to be slightly positive once you X out all of the acquisition and integration cost related items.

Okay.

Then as a follow up, and I may have missed this, but is your guidance for SG&A expense to be flat as a percentage of sales from last year?

SG&A to last year is to be 50 basis points favorable for the entire year.

Okay.

Thank you.

And our next question comes from the line of Steve Anderson.

Please go ahead.

Good morning.

Just wanted to ask about at the end of the second quarter this year you had the Thanksgiving Holiday.

I wanted to ask, last year that fell pretty much in the second quarter.

How is that going to affect this quarter if at all?

We are moving out a week in our fiscal quarter which is typically a low week we are not open on Thursday, and Friday is not your typically strong Friday sales period for us.

We haven't gone into quantifying that but I would say you know it is a meaningful impact for us in the quarter.

Okay.

Can you give us an update on your restaurant closures from recent storms, hurricanes Gustav, Hanna and Ike.

Yes, it is an unfortunate situation for the areas affected.

We went in beforehand and prepared our restaurants.

We have gotten most of those reopened but through Monday anyway we had lost about 115 operating days.

So on our scale it is not a meaningful impact to our business.

There are a few restaurants, I think it is around a dozen that still remain closed today, but those are slowly coming back online for us.

No reports at this time of any meaningful property damage.

Thank you.

Our next question comes from the line of Mitch Speiser with Buckingham Research.

Please go ahead.

Thanks very much.

First on the overall I guess pricing average check strategies at the three core brands, it looks like you are going to take some pricing at Olive Garden incremental to the 2 to 3%.

Can you give us a sense of how much more incremental pricing you might take?

And then on the other brands, Red Lobster, Longhorn you may lower lobster prices at Red Lobster and I guess more generally, is the plan maybe to lower the average check at Red Lobster and Longhorn while maybe taking up the average check at Olive Garden?

No, we are not planning on lowering the check at Red Lobster.

Our pricing for Olive Garden, Red Lobster and Longhorn, but Olive Garden and Red Lobster in particular, has typically been in the 2 to 3% range, historically more in the middle of that.

This year we are probably going to be toward the upper end of that range.

It is not a dramatic increase but a little more pricing than we have taken in the past, and directionally true for Longhorn as well.

Red Lobster what I meant to say -- maybe I wasn't clear -- is that there are a few lobster specific promotional dishes that we won't have to take the price up as much now that lobster cost has come down on those couple of items.

So we can actually reduce the price on those a little bit but in terms of total pricing and total menu and total check it is not going to have a material impact.

We still would expect to be at the upper end of that 2% to #5 range in pricing.

Okay.

Just on labor, wage rates you mentioned we are up 2 to 3%.

With the labor market softening is there any sense that perhaps wage rates can do in fiscal '09 or is it just with all of the statement and wage increases, federal minimal wage increases that is just, not going to happen that way that rates could can actually come down over the next, you know, nine to 12 months.

We don't see them coming down but we can be a little more proactive in how we manage them in this environment.

Ken, that's all the time we have for questions today.

We appreciate those of you who joined us.

If you have further questions, contact us here if Orlando.

We look forward to speaking with you in about three months.

Great.

Thank you.

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