達登餐飲 (DRI) 2009 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Darden Restaurants third quarter earnings release conference call.

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

Later there will be an opportunity for your questions and instructions will be given at that time.

As a reminder, today's conference call is being record.

I would now like to turn the conference over to the Vice President of Investor Relations, Matthew Stroud.

Please go ahead.

Thank you.

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.

We wish to caution investors not to place undue reliance on any such forward-looking statements.

Any forward-looking statements speak only as of on the date which such statements are made and we undertake no obligation to update their statements to reflect events or circumstances arising after such date.

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 difficulties 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 plans to expand Darden's newer concepts, Bahama Breeze and Seasons 52.

Our ability to combine and integrate business of RARE Hospitality International Inc., achieve synergies and develop new Longhorn Steakhouse and the Capital Grille restaurants.

Risks associated with incurring substantial additional debt, a failure of our internal controls or our financial reporting, disruptions in the financial markets, possible impairment of goodwill or other assets, volatility in the market vale of our derivatives 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 information required by Regulation G is available under the heading investor relations on our website at Darden.com.

We plan to release fiscal 2009 fourth quarter earnings and same restaurant sales for fiscal March, April and May 2009 on Tuesday, June 23, after the market close.

We released third quarter earnings results yesterday afternoon, these results were available on PR Newswire, First Call, and other wire services.

Let's begin by reviewing our third quarter earnings result.

Third quarter net earnings from continuing operations were $108.1 million and diluted net EPS from continuing operations was $0.78 representing a 2.5% decrease in diluted net earnings per share from continuing operations.

This includes the integration costs and purchase accounting adjustments related to the October 2007 acquisition of RARE Hospitality International Inc.

which reduced diluted net earnings per share by approximately $0.02 in the third quarter.

Excluding estimated integration costs and purchase accounting adjustments for this year and last year, net earnings from continuing operations were $0.80 per diluted share in third quarter this year, compared to $0.85 per diluted share last year, or a 6% decrease.

We are pleased to announce that as a result of earnings for the quarter they're significantly better than we assumed in the prior guidance and our continued success managing costs.

We are providing updated guidance that projects stronger full-year earnings results.

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

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.

Brad?

Thank you, Matthew, and good morning.

Darden's total sales from continuing operations decreased 0.7% in the third quarter to $1.8 billion reflecting a decline in same-restaurant sales that was partially offset by meaningful new restaurant sales growth at Olive Garden and Longhorn Steakhouse.

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

For context industry same restaurant sales as registered by Knapp-Track and excluding Darden were down an estimated 6.5% for the quarter.

On a blended basis, same restaurant sales were down 3.2% at our three largest brands which is better than the Knapp-Track industry average by 3.3 percentage points.

Olive Garden's same restaurant sales were down 1.4% for the quarter.

And while that marks the end of 57 consecutive quarters of growth it is 5.1 percentage points above the Knapp-Track industry benchmark.

Olive Garden's total sales increased 3% with the addition of 36 net new restaurants.

Red Lobster had a same restaurant sales decrease of 4.6% for the quarter which was 1.9 percentage points above the Knapp-Track industry benchmark.

Although, the same restaurant sales decline led to a total sales decline of 4.3%.

Longhorn Steakhouse same restaurant sales decreased 5.4% for the quarter which was 1.1 percentage points above the Knapp-Track industry benchmark while total sales increased 1.4% with the addition of 19 net new restaurants.

The quarter was adversely affected by the Thanksgiving Holiday week shift.

This Holiday week shifted from the second quarter in fiscal 2008 to the third quarter in fiscal 2009.

As a result, same restaurant sales were negatively impacted by approximately 70 basis points in the current quarter.

The quarter was also adversely affected by more severe winter weather than last year.

And by a shift in the Linton Holiday.

Weather had a negative 30 basis points impact on same restaurant sales at Olive Garden and Longhorn Steakhouse.

However, because of its geographical footprint, less severe winterer weather favorably affected Red Lobster same restaurant sales by approximately 60 basis points, although this benefit was fully offset by the later start to the Linton season this year.

Diluted net EPS from continuing operations of $0.80 which excludes integration costs and purchase accounting of $0.02 was $0.05 short of last year's comparatively adjusted third quarter diluted EPS of $0.85.

The aggressive cost reductions we spoke about in the past saved us approximately $10 million in expenses this quarter contributing meaningfully to the strong earnings performance.

We achieved these savings much sooner than we originally anticipated and the level of the savings is higher than we expected.

As a result of this and somewhat better than initially anticipated sales results for the second half of the year we have increased our full-year earnings guidance which I will comment on shortly.

Now let's discuss the margin analysis for the third quarter.

As a reminder we are comparing results from continuing operations this year and last year.

Thus results from Smokey Bones which was sold in December of 2007 are not included for the third quarter of fiscal 2008.

Food and beverage expenses were 7 basis points lower than last year on a percentage of sales basis primarily due to reduced waste.

Our outlook for the fiscal year is that food and beverage expenses as a percentage of sales will be approximately 40 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 of the impact in fiscal 2008.

Excluding the mix changes associated with the acquisition, food and beverage expenses as a percentage of sales should be approximately 10 basis points favorable to last year.

Which primarily reflects both the cost saving initiatives we have undertaken and the improving cost environment we see today.

Third quarter, restaurant labor expenses were 47 basis points higher than last year, on a percentage of sales basis, due primarily to wage rate inflation of 2 to 3%, increased major compensation, and the impact of sales deleverage.

Our outlook for the year is that labor expense as a percentage of sales will be approximately 10 to 20 basis points favorable to last year on an as-reported basis.

Excluding the mix changes associated with the acquisition, we expect restaurant labor as a percentage of sales to be approximately flat to unfavorable 10 basis points for the year.

Restaurant expenses in the quarter were 10 basis points lower than last year on a percentage of sales basis.

This reflects savings and credit card fees, preopening expenses, and a number of other areas.

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 on an as reported basis.

Excluding the mix changes associated with the acquisition we expect restaurant expenses as a percentage of sales to be approximately 30 basis points unfavorable to last year as a result of the effects of sales deleveraging and higher utility costs earlier in the fiscal year.

Selling, general and administrative expenses were 11 basis points lower as a percentage of sales for the third quarter due to acquisition synergies and cost savings initiatives through the organization and a favorable comparison to the foundation expense incurred last year.

This is despite additional media at Red Lobster, for Woodfire Grills and the launch of the new lunch menu.

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 on an as reported basis.

Excluding mix changes and integration costs associated with the acquisition, we expect selling, general and administrative expenses as a percentage of sales to be approximately 25 basis points favorable to last year.

To summarize, operating profit or EBIT was 47 basis points lower as a percentage of sales for the third quarter.

Our outlook for the fiscal year is that operating profit as a percentage of sales will be approximately 40 to 50 basis points unfavorable to last year on an as reported basis.

Again, excluding the mix changes and integration costs associated with the acquisition, we expect operating profit as a percentage of sales to be approximately 10 to 20 basis points unfavorable to last year.

The effective tax rate for the third quarter of 27.2% was in line with our previous guidance and higher than last year's rate.

Last year's rate benefited from the resolution of prior year's tax matters.

And we anticipate an annual effective rate of 28 to 29% for fiscal 2009.

While we experienced some sales deleveraging this quarter, the adverse effect on -- the adverse effect on operating profit was mitigated this quarter by the cost synergies we realized as a result of the RARE acquisition and by aggressive cost savings efforts.

As we discussed in January, we expect annual net acquisition synergies to level out at approximately $55 million.

And we are nearing that amount on a current run rate basis.

There are structural benefits from these synergies not only in the P&L of Longhorn Steakhouse and the Capital Grill, but also in those Red Lobster, Olive Garden, Bahama Breeze, and Seasons 52, as well as Darden's income tax line.

In addition as I mentioned our aggressive cost management initiatives saved us over $10 million in the third quarter and much of these savings are ongoing.

Also in the quarter, we repurchased approximately 200,000 shares for $6 million.

We have 11 million shares remaining in our current authorization and depending on market and business conditions we may repurchase up to an aggregate of $200 million of shares in fiscal 2009.

And yesterday, we announced a dividend of $0.20 per share payable on May 1, 2009, to shareholders of record on April 10, 2009.

Based ton $0.20 quarterly dividend declaration, our indicated annual dividend is $0.80 per share.

Our revised outlook for the fiscal year anticipates blended US same restaurant sales for Red Lobster, Olive Garden, and Longhorn Steakhouse of flat to down 2.5% for the last quarter of the year which implies a fiscal 2009 same restaurant sales decline of approximately 1.25 to 1.75%.

As we stated in our press release yesterday.

We continue to expect to open approximately 70 net new restaurants in fiscal 2009.

As a result, we anticipate total sales growth of between 9 and 9.5% in fiscal 2009 compared to reported sales from continuing operations of $6.63 billion in fiscal 2008.

This total sales growth includes the approximate [2] percentage points impact of a 53rd week in fiscal 2009, excluding the 53rd week, expected total sales growth would be approximately 7 to 7.5%.

We now anticipate reported diluted net earnings per share growth from continuing operations of 1 to 4% 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 $0.06 per diluted share of growth in fiscal 2009.

Excluding 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 expected to be approximately $0.10 per share.

Excluding the impact of these costs and adjustments for both fiscal 2008 and fiscal 2009, the Company now expects diluted net earnings per share to be flat to down 3% on a 53 week basis.

Let me finish by spending a minute to discuss our goodwill and intangible assets.

We review goodwill and other indefinite lived intangible assets, primarily trademarks for impairment annually.

As of the first day of our fourth fiscal quarter.

We do so more frequently if indicators of potential impairment exists.

Judgment involved in determining if an impairment has occurred.

After a thorough analysis with the support of third party evaluation experts, we have determined that there was no goodwill or indefinite lived intangible asset impairment as of the first day of our fiscal fourth quarter.

If we had determined that an impairment charge was required, this would have resulted in an increase in our leverage ratio as defined in our revolving credit agreement.

Under our credit agreement, our leverage ratio is limited to 0.75 to 1.

As of fiscal February -- as of February 22, 2009, it would have taken a write down of goodwill and trademarks or any other assets in excess of $560 million on an after tax basis to cause our leverage ratio to reach the permitted maximum.

By the way that translates into approximately three-quarters of the total goodwill and trademark value.

Going forward we would continue to review our intangible assets for possible impairment at least annually but more, but potentially more frequently if indicators of a potential impairment exists.

However as we go forward we expect that the amount of impairment it would take to push our leverage ratio to the maximum permitted in a revolving credit facility will grow even larger because our overall leverage continues to decline into fiscal 2010.

In summary we have no impairment of goodwill or trademarks assets in the third quarter and no individual restaurant level impairments as well.

And going forward, should there be an impairment in future quarters it would have to be more than approximately 75% of the total value of our intangible assets to push our leverage ratio to the maximum permitted.

That amount will continue to increase as we reduce our leverage over time.

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

Thank you, Brad.

Our three large brands responded aggressively to near-term challenges we face with selective value oriented promotions and a disciplined cost management effort.

Both in our restaurants and at the restaurant support center.

But just as importantly we have maintained our long term strategic direction, continued to invest in the highest priority building opportunities and continued our transformational efforts at the enterprise level to strengthen our organization capability and make our support platform even more cost effective.

Olive Gardens key strategic priority this fiscal year is to sustain strong new restaurant growth while also maintaining same restaurant excellence and continue to deliver against that priority during the third quarter.

As Brad mentioned, while same restaurant sales were down 1.4%, they exceeded the Knapp-Track competitive benchmark by more than 5 percentage points.

And total sales grew 3%.

Third quarter advertising at Olive Garden featured four exciting new dishes and strong value.

They started the quarter advertising shrimp carbonara and chicken carbonara, followed by a promotion that featured shrimp mezzaluna and sausage mezzaluna, with a starting at $9.95 price point.

Both of these promotions were supported with advertising for their unlimited soup, salad and bread stick lunch priced at $6.95.

In addition, a new chicken and milky soup was recently added to provide even greater choice and variety for this signature offering.

Guest satisfaction remained at best every levels while controllable cost management especially in the areas of food waste, direct labor scheduling and wage rate management remain strong.

Olive Garden opened nine net new restaurants during the quarter and still expects to open 35 to 40 net new restaurants during fiscal 2009.

Red Lobster also delivered competitively superior results during the third quarter while continuing to make meaningful progress, broadening the appeal of their brand.

Same restaurant sales declined 4.6% versus the prior year but exceeded the Knapp-Track industry benchmark by nearly 2 percentage points.

In November, Red Lobster introduced woodfire grilling and a new menu with eight new woodfire grill items.

Introductory advertising through December was designed to broaden appeal of the Red Lobster brand.

Primarily by focusing more on our new wood grill cooking platform and improved culinary expertise and as a result spending less time on specific new dishes.

Consequently, it did not have the same short term guest driving of a typical limited time only promotion.

In late December, Red Lobster responded to the growing need for affordability with advertising that featured the new quick catch lunch menu and the starting at $6.99 price point.

These eight new items, six of which are prepared on our wood grills were designed to be affordable and facilitate the quicker meal experience that many guests look for at lunch.

In early January, Red Lobster introduced a new promotion called Island Tour, that also leverages our wood grills, with several new grilled entrees inspired by the flavors of the Tropical Islands.

Citrus rum shrimp and scallops, Caribbean lobster and shrimp, and Hawaiian isles shrimp and salmon.

In mid February, Red Lobster began its signature Lobsterfest promotion that also features several new innovative wood grill lobster dishes.

The operating fundamentals at Red Lobster have never been stronger.

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

Red Lobster is on track to open approximately ten net new restaurants this fiscal year.

Longhorn Steakhouse's same restaurant sales exceeded the Knapp-Track benchmark by slightly more than 1 percentage point, finishing at minus 5.4% for the quarter while total sales increased 1.4%.

With much of the integration work now behind us we are beginning to more fully capture the power of combining Darden's brand management capabilities with Longhorn's strength and restaurant operations.

Longhorn started the third quarter advertising two new signature stuff fillet dishes, white cheddar and bacon, plus fontina and wild mushroom.

This is followed by a new Western Values promotion that featured Sierra chicken, Red Rock grilled shrimp and a new parmesan crusted sirloin with a starting at $9.95 price point.

The first price point promotion in Longhorn's history.

Longhorn also implemented a new media strategy during the had third quarter that increases the percentage of restaurants with advertising support from approximately 45% to 60%, increases media weight by 25% and increases the utilization of 30 second adds versus 15 second adds all for the same dollar investment in media.

Operating fundamentals have remained strong with guest satisfaction as well as manager and employee retention rates at record levels.

And controllable costs management continues to improve as the Longhorn team gains proficiency with some of the new tools implemented during integration.

Longhorn opened four net new restaurants in the quarter and is on target to open 15 to 17 net new restaurants for fiscal 2009.

And now Gene will discuss our specialty restaurant group.

Thanks, Drew.

The current environment remains challenging, particularly through the upscale luxury brands and the specialty restaurant group.

However we are confident that our strategic plans position our three brands to increasingly capture market share, both in the near term and as the environment starts to improve.

Each of our brand is focused on delivering exceptional dining experiences to our guests with a competitively superior service culture, developing creative brand appropriate sales building initiatives and continuing to strengthen their business models.

Now let's go into a little more detail on the third quarter performance for each of the specialty restaurant group brands.

The Capital Grille had total sales of $60.9 million in the third quarter, which is 10% below prior year.

This was driven by same restaurant sales decline of 19%, including a 3 percentage point negative impact from the Thanksgiving Holiday shift and was partially offset by an additional four restaurants.

The sales decline reflects the continuing weakness in demand in the fine dining steakhouse segment.

Nevertheless, Capital Grille's average unit volumes, restaurant level margins and return on invested capital remain at competitively superior and value creating levels.

And our team continues to execute our promise on a personalized, dining experience with excellence.

As part of the brands focus on increasing market share, Capital Grille continued to initiate sales building actions during the third quarter.

In particular they sought to further differentiate the brand by offering a premium food and service experience at a unique brand appropriate value.

An example of what we think is a brand appropriate way to offer value is a five course prefixed wine dinner being offer from February 23, through April 5, as part of a partnership with Italian winery.

Capital Grille successfully opened a 35th restaurant in the third quarter in Rosemont, Illinois and are on track to open a total of five restaurants this fiscal year.

In the third quarter, Bahama Breeze had total sales of $28.2 million, which is 9% below last year.

Same restaurant sales were also 9% below last year, including negative Thanksgiving shift impact of 2%.

The Bahama Breeze team continues to aggressively manage and control the costs and has made key improvements to their business model.

The brand remains focused on rebuilding sales momentum and has implemented a number of sales building initiatives.

Bahama Breeze successfully opened a new restaurant in Wayne, New Jersey last month and early sales and guest count results are encouraging.

The Seasons 52 team is also focused on growth as they prepare to open a new restaurant in Cherry Hill, New Jersey next Monday.

They continue to build a pipeline of sites to achieve their disciplined growth plan, at the same time, the team is continuing to strengthen organization capabilities to support growth while maintaining operational excellence.

Now I will hand it to Clarence for some final comments.

Thank you.

At the risk of stating the obvious, obviously this was a very challenging quarter not just for our industry but also for the economy.

And we think our financial performance in the face of that is really good evidence that we are well prepared to weather the current storm.

We also think it further demonstrates that we will emerge from this period an even stronger Company with wider positive gaps to industry benchmarks in both sales and earnings.

We have got a portfolio of brands that are proven and that collectively have strong long term sales and earnings growth ahead of them.

We also have the scale and all of the advantages that scale brings.

Those advantages are reflected in the cost synergies that we're realizing from the RARE acquisition.

And then we have made some changes as Drew mentioned in how we work and as a result of that our scale is working even harder for us.

That is helping us limit the earnings erosion that we are seeing as sales soften.

Finally, we have got some great team, some outstanding teams in our restaurant, in our restaurant support center, and these are teams that are working to successfully navigate the current environment.

Beyond that, working to create a great Company.

All of us are focused on creating in good times and bad a Company that is a leader in the full service restaurant industry now and for generations.

With that we are prepared to take your questions.

Thank you.

(Operator Instructions) We first go to the line of David Palmer with UBS.

Please go ahead.

Thanks.

Congratulations on a great quarter, guys.

I wanted to ask you about what you see going on in calendar 2009 to date.

Obviously the two-year deterioration and one year deterioration in same-store sales in January and February isn't quite what it was in the fourth quarter.

I know you guys are obviously very much students of the industry.

And I am wondering what you think is causing that slowing of same-store sales decline industry wide, and perhaps for you?

Obviously a lot of folks out there are doing a lot of value but there seems to be something else out there as well.

Even things like movie going is up.

And perhaps we are getting some sort of level where casual dining is a cheap entertainment.

Almost a trade down in that sort of way.

But again more like speculating because it seems not that bad.

So any sort of thoughts about that would be helpful.

This is Clarence.

I will start and it is -- it is difficult to say with certainly.

So a lot of what we are about to say is really theory as much as anything else.

We do think, as we look at the fourth quarter last year, we are looking at an environment that as a lot of people have said was unprecedented in a lot of ways.

So when you think about the financial crisis, you think about the wealth deterioration, how quickly it happened, our sense is that people hit the pause button and said I need to really hunker down and understand what is going on here.

Stability started to come back in a little bit as we got past what, at this point appears to be the worst of the concern about the basic financial institutions, deposits, those sorts of things.

And so we think some of that got past, even though the job loss continued and the headlines around job loss were there.

I think people felt it wasn't this crisis that they were unfamiliar with.

We were back to economic cycle sorts of things.

So we think people hunker down a lot.

It culminated in December where sales really fell off a cliff not just in casual dining but across every consumer category.

And we think as people got a little bit more confident that we started to see them return in January and February.

What we have seen also in prior recessions is that as people get their moneys around the fact that we are i a slow down and it is going to last for a while, they tend to make that decision about the big ticket item and putting those off, cars and appliances and those sorts of things.

And as a consequence of that, they started to treat themselves with the smaller ticket items.

In and the past that has included movies for sure but also dining out.

We think a lot of that was going on.

And that explains a little bit of the pattern.

I don't know if other people have other things to add.

I'd just amplify the last point that Clarence made.

This is Drew.

As consumers got used to the environment and their position in it, not only were they treating themselves to say casual dining or movie, it just reflects our belief that casual dining is and full service dining is part of how people live their lives and it's a fundamental part of how they live their lives today and going forward.

It is at a somewhat lower level now but it is still a meaningful part.

Thanks very much, guys.

Next we will go to the line of David Tarantino with Robert W.

Baird.

Please go ahead.

Hi, good morning.

Congratulations.

My question is really on the cost outlook as you look into Q4 and fiscal 2010, what are you expecting on the commodity side of the equation and where are you in terms of your contract if there's any updates since the analyst day, would you give a little more color on that.

This is Brad.

And since the meeting in January we had covered a very large portion of our food and beverage costs through the end of the fiscal year as well as utility costs.

And then regulating markets, about half of our business we covered those costs pretty much through the fiscal year.

So we have pretty clear visibility over those costs as we look out through the remainer of fiscal 2009.

We did provide some color though for fiscal 2010, some of the major items that we have covered.

But right now we are in the midst of working on our 2009 plan and so probably can't share much more at this time as we are still putting those pieces together.

Okay.

Just a follow-up to that.

I think the information you shared at the analysts day suggest that you might have favorable commodity costs.

Just, if you could talk a little bit about what you're pricing philosophy would be in an environment where you might see a favorable cost picture?

Thanks.

Well, in general our pricing strategy over time is to do two things, maintain our relative position in the market versus key competitors and to maintain broad price point accessibility on the one hand.

On the second hand, we want to make sure that we price to capture, to fully cover net cost pressures so that the strength of our underlying unit economics and business models is maintained over time.

This is an environment where value is increasingly important to consumers and as a result, we have really elevated our efforts to find lasting structural cost improvement opportunities that can reduce the need for us to take pricing and as a result maintain our price point accessibility and value even more.

So, those are the things I guess we are trying to balance and we are elevating the cost management side.

And I would say, I mean as you look back over time, pricing is 2 to 3 percentage points and so we sort of bounce between that range.

I don't know that our thinking has changed a lot.

But we will update in June on where we think we might be in that range.

Okay.

Thank you.

And next we move to the line of Matthew DiFrisco from Oppenheimer & Co.

Can you give us color on the regions and perhaps Florida looking at the Longhorn trends and their exposure, can we read into that that there might be, I'm not going to call it a floor but some stability in Florida maybe already?

Brad is looking for his notes.

Okay.

While he's looking for those notes can you give us some insight into what your philosophy is on pricing for the rest of calendar '09.

So maybe the first half of 2010 is that 3% at the big three something that is sort of the benchmark or is sustaining around 3 or 2.5 to 3?

We aren't prepared to get specific, but I would tell you that likely to be in the lower half of that 2 to 3 percentage range not in the higher half of it given the environment that we are in.

With the value consciousness on the consumer side and as was mentioned the softening on the cost side.

If you look at it sequentially over time, I mean Florida, has been a fairly weak area for some time and pretty much staying at that level.

So you can say stabilizing but stabilizing at a pretty low level.

If you go to the West Coast, the California, Washington/Oregon area also a weak area and continues to remain so.

But again you get stabilizing at these lower areas.

We have seen some strength though in the upper Midwest area on a relative basis.

And as part of the other emerging trend is Texas continues to be the strongest area but it is also starting to slow a little bit as we get into this most recent quarter.

That's very helpful.

And then I guess just to follow-up on your point that you made about the lower cost you are getting it sounds like per image for the media buy.

Could this be something that might make it more economical to get into national or cable advertising for the Longhorn brand earlier than say prior plans on gaining media efficiency only through expansion?

Well, the media efficiency that Longhorn has experienced in the third quarter and will experience going forward is more result of incorporating their buy into the media buying group that handles Olive Garden and Red Lobster.

So there's some scale there, it also was driven by some refinement in their media strategy, the day parts they use and the way they flight it.

So we think we were just able to strengthen what they had today by adjusting their plans and buying a little more effectively.

Going forward, media rates are softening just like everything else in the spot market and anything that makes it less expensive to buy media is going to help us get to national penetration faster but it isn't going to cut it from four years to next year.

It is still going to take a little while.

Thanks.

That's very help.

Just a reminder as we talked about in January, it is not a, it is not a thing where you cut it on immediately.

We sort of scale up.

So Drew talked about going from 45% of the restaurants covered to 60% and we would hope to continue to increase at that percentage.

Next we go to the line of Brad Ludington from KeyBanc Capital Markets.

Please go ahead.

Good morning.

I just had a couple of quick questions.

First, can you comment on what the CapEx was in the third quarter and what we expect for the full year now?

Hello.

Sorry.

CapEx expectations really have not changed for the particular year, and so being in the you know, 525 million, $575 million for the year is where we are.

The third quarter and again, you have to be a little bit careful because of the seasonality obviously.

And it is for building restaurants, the first quarter, second quarter are very big periods for us.

It does slow down in the third quarter because we haven't already got a restaurant closed.

There's not much work you can be doing on that so it does spike up in the third quarter but when we get the Q filed you will see around $135 million of CapEx in the third quarter.

Thank you.

And then just talking about, I know we talked about some of the commodities, lower lobster prices we have been hearing so much about does that translate to just a lower price on your lobster fest and lobster offerings or does that translate to a little higher margin on the product?

There's a little of both but in particular it has helped us to feature some signature lobster dishes, many of them new woodfire grill dishes at a lower more approachable price point than last year.

Okay.

Thank you very much.

Next we go to line of John Glass with Morgan Stanley.

Please go head.

Thanks.

First question is when do you think the gap, Darden's gap to the Knapp-Track index narrowed this quarter.

I think it was like 5% last quarter, 3% this year.

Is that evidence maybe of competitive discounting, eating away a little bit at your market share?

It is probably a reflection of a couple of things.

First the discounting that you mentioned is part of it.

But second Olive Garden in particular was wrapping on a quarter where they were up maybe 5.5% in same restaurant sales while the industry was wrapping on a quarter where they were down maybe 2.5% roughly in same restaurant sales.

So it was an exceptionally strong quarter for Olive Garden last year and obviously that's a very big piece of our portfolio.

So discounting and year ago comparisons are the two key things.

A lot of the outperformance this quarter really was driven by outstanding margin control, not really a sales win really and a lot of that was at the restaurant level.

So when did you first start this process of hunkering down at the restaurant level and two when do we expect to lap that or begin to lap that process in fiscal '10?

And then I think the number $10 million came up in cost savings, I wasn't sure if those were discreate in addition to what we saw at the restaurant level but that's really just 50 basis points.

That doesn't really explain the deleveraging you would really see on a 3% negative comp.

Where else are you getting cost savings besides those $10 million or maybe you could quantify where else you are getting?

This Clarence.

I will let Brad take the bulk of that question but we completed the acquisition of RARE in October 2007 and we have been talking about the cost synergies from the acquisition.

And those flow across the enterprise also at the restaurant level.

And so clearly we are benefiting from some of that as Brad as said.

We are getting them faster, it is a higher level.

I think when we talked about a run rate.

At the time of the acquisition, it was like $40 million annually.

Now we are talking about $55 million, and so much of that is in place now.

And so that is certainly helping.

The other piece of it is as we started this fiscal year, we really started pretty immediately in the first month of the year, June to see some serious spikes in a number of areas utilities in particular.

And so redoubled efforts beyond the acquisition to contain costs.

I think Clarence covered it pretty well though.

Let me just emphasize a couple of points there.

The acquisition synergy, those are very significant, very meaningful and occurred basically every line item on our P&L.

So those are there, they fundamentally changed our cost structure for the entire organization.

You are seeing some of the benefits of Red Lobster and Olive Garden and our existing Darden brands as part of that as well as if you look at the acquired brands it is pretty significant too.

One of the items I like to look at if you think about the cost synergies and just apply them to the RARE brand, that was 4% of their sales.

So that is a meaningful improvement if you associate to them like I said though in our P&L appears across all of our businesses.

So that's significant.

And then the first part of the year, there were some pretty challenging cost environments, we redirected some of our energies and efforts to tackle these costs.

We called our business strengthening initiatives, we talked about that at our January meeting and basically we are pursuing those very same items that we talked about then.

We are having quicker success in capturing those than we had originally thought and they're turning out to be a little bit higher than we thought as well.

And then I think partially when you look at year-over-year comparisons and looking at sequentially to the previous quarters, it was incorporated in our cost expectations but we are seeing meaningful improvements in many of the commodity costs.

The grains that affect the feed, the grains that cam to come to us in the form of pasta and all that as well as some of the other cost components that we've talked about.

Those add up to a pretty powerful impact to our business that we have been able to address and to capture.

I think the last point would be one that Drew made.

When we talk about the acquisition.

A lot of it was about introducing systems that we were using at legacy Darden into Capital Grille and Longhorn.

And the longer the restaurant teams live with those systems the more proficient they get with them.

So those are around forecasting volume, labor scheduling, managing labor expense, forecasting food usage and therefore managing food costs.

Thank you.

Next we go to the line of Joe Buckley with Banc of America.

Please go ahead.

Thank you.

Just a couple of clarifications on the costs.

You gave us at the analysts meeting in January some pretty good details on what you encountered through calendar year-end.

And I think a little more favorable since then .

Is that part of the message on the

Well, on the cost outlook when you are talking about the items that we have got forward coverage on is those really haven't changed much at all from our original expectations there.

There are some around the edges because we get 100% contract or forward hedge, all of those items.

So there are some there and you can see when we talked about the remainder of the calendar year past our fiscal year, a little less coverage.

So there's opportunity to still capture declining commodity prices there.

I think the bigger difference though is around our initiatives to reduce costs by how we run our business, particularly as we look at the importance of developing good labor schedules and how that is just so fundamental in our restaurants in terms of, you get the forecast right you can build a proper labor schedule so that you can take care of the guests when they're there and give a high level of service to them while keeping good control on costs.

It helps in your food production as well, so you are not only preparing food, investing in labor that you potentially won't use and have to fill it out.

So it is really just focusing our efforts and attention on many of those items.

It's also about some of the decisions we are making right now.

I think we are putting more of our attention than we typically would at cost reduction versus the opportunity of building sales for the longer term.

We view that as the best priority, the best opportunity for us to improve our earnings.

I think, though we are going to see a sales environment some time not too far out where it is more appropriate for us to look at opportunities to build our sales even greater than we have today.

So we will redirect that but that's probably a little ways out.

Brad makes a very good point.

Which is that it takes a lot of organizational capacity and focus to manage costs the way we are managing.

The opportunity costs of that is that the same organizational capacity and focus could go toward sales building.

But we are in an environment where, that we are in, and that opportunity is lower.

And so we lose a lot less by redirecting that time and attention.

On the margins this quarter, the restaurant expense line, everything but food and labor that was what was most surprising versus our expectations and I think you mentioned credit card fees, you mentioned preopening expenses.

I know there's lots of things in that line.

Is there anything else that would lead to that?

Is that where some of the synergies from the RARE deal surfaced in that line?

There's a fair number of synergies that do occur in that line, but I would say it is more broadly the focus and attention of just being very mindful of all of our costs because that's a category that collects a number of different expenses in there and so it is, it is truly a lot of little things that add up to big things when it is all said and done.

One example of that in our proactive cost management efforts has been most sustainable practices as it relates to energy usage, chemical usage at restaurants, and we are just starting that effort and just started it earlier a quarter or so ago.

But we have already seen meaningful improvements in those areas in restaurants and you would see some of that in the restaurant expense line.

Okay.

Let me ask, just switching to marketing just for a moment, are you getting more bang for your buck on the marketing, are media rates coming down?

Well, a lot of our media for Olive Garden and Red Lobster was already bought in the upfront market last April and it takes us through this coming August.

For Longhorn, where we are buying a little more on the spot market and have the ability to shift our schedule a little more easily, we have seen more of an efficiency improvement there.

Looking forward, as I mentioned though, earlier, there's reason to believe that the cost of media next year is going to be different than it was this year.

We will know more in a couple of months.

It is like everything else.

Okay.

One last question you gave detail on the sales numbers, did Valentine's Day shifting to Saturday matter much in the February numbers?

That was not mentioned.

Joe, it does.

I don't remember the exact impact but it does clearly make a difference when you pile on a special occasion day onto the weekend.

But when you look across the quarter you also had some shifts with New Year's day and some of those that over the course of the quarter they pretty much minimized or offset each other.

Just to be clear, the difference it makes is the negative difference.

We would rather have valentine's day on Monday than Saturday where we already have restaurants that are relatively full.

Next we go to the line of Jason Whitmer with Cleveland Research Company.

Please go ahead.

Thanks.

Good morning.

Curious to hear your thoughts on the dynamics of the increased discounting within the channel overall, particularly all these fixed price point bundles or buy one get one and not just change but also independents.

What are you thinking about either the competitive dynamics of that or overall it seems to be helping drive traction on traffic directionally.

I'm just not sure what you (inaudible) for the profitability.

Do you have any thoughts around that or consider that either within your portfolio or competitively speaking?

Well, consumers are clearly looking for value and it is a challenging sales environment.

So our approach to that environment has been to add some selective discounts, selective value offers that are designed to specifically be consistent with the brand and deliver acceptable margin.

And not to do them so often that consumers begin to expect it month after month or quarter after quarter.

So you essentially over time train them what your experience is worth if you continue to discount.

So, we are trying to respond aggressively internally, but balancing it with all of those things I just mentioned.

Competitively, we don't have a lot of visibility on whether they're profitable for our competitors or not.

But it is at levels we haven't seen before.

That's for sure.

And our guests based on our model is buy one get one free is not particularly profitable.

Doesn't do much for the margins, but to some degree you have got people that have to manage their business for cash given leverage levels.

I think that was sort of my thinking, is it getting to the point of desperation from other competitors out there either a chain or independent and lead to increased rationalization.

I don't know if you have seen any anecdotal or data to support that accelerating trend?

No.

I think it is not very sustainable.

But in terms of rationalization at the unit level, I think in this business, if you have got a unit that is producing cash, it is hard to close it.

If you have got a unit that even might be cash flow negative and it is a leased unit it is still hard to close it because that forces an up front payment that may be a lot bigger than the negative cash mill.

So, it takes a while for unit rationalization I think to play out would be how we would think about it.

The more restaurant impairments as opposed to, to other things, but individual restaurant impairments that you see, the closer we are getting to seeing people with units that are having challenges generate positive cash.

That will put us closer to some closings.

All right.

Thank you.

Next we go to the line of Robert Derrington with Morgan Keegan.

Please go ahead.

Thank you.

Brad, if you could help clarify a couple of housekeeping points for me.

One I thought you mentioned in your call you expected a fiscal year tax rate in the vicinity of 27, 28%.

I think you said 28 to 29 now.

Is that correct or?

Yes.

What we see right now is about 28 to 29%.

What's involved in that is there are a number of tax credits, some of those vary with the amount of activity in the restaurant, the greatest one in there being FICA tip credits on the wages paid o servers.

So those have tended to move around a little bit as well as various tax items out there, how they may subsequently be revolved.

So the rate has moved up a little bit.

28 to 29% is what we are looking at now.

Okay.

And then on the G&A front.

Last quarter you mentioned D&A you expected to be down roughly 70 to 80 basis points.

Yet the guidance now implies that it won't be down that much.

Can you give us a little bit of -- in the last couple of quarters the Company has done a very commendable job with D&A down on an absolute basis year-over-year.

How should we think about the fourth quarter and what is driving that either the percent and the absolute.

There's two things that are really driving that, is the cost savings and where those are actually appearing on the P&L from what we initially thought and how we are pursuing those and prioritizing those causes, some movement around on the P&L.

Some geography if you will.

The other thing that moves in there is that all of our individuals are on an incentive plan of some sort.

Those are highly variable pay.

As our performance as improved, that mitigates some of the improvement what we would expect there as well.

I think the other item as you see it is really SG&A is the marketing piece as well.

So we have made some adjustments particularly for Red Lobster as they made progress on new initiatives to launch those earlier than originally was intended.

The big one being their, most recently is their introduction of their lunch program which we feel is very appropriate in this time but very appropriate in that it has price points but equally is that how it positions the brand to be more appropriate at the lunchtime occasion for folks to come in because it is not by any means just a price point promotion.

It is a new offering, new steps of service.

A lot of things have gone to that that we think positions them to be in a better spot.

Got you.

Thanks for the color.

Next we go to the line of Jeffrey Bernstein with Barclays Capital.

Please go ahead.

Great.

Thank you.

A couple of brand specific questions.

First on Longhorn, you talked a lot about new adds and more recent price points.

The first ever.

I just wonder if you can give some feedback on that, perhaps was there more of a geographic geographic lift in the areas where all of a sudden there is now more ad spending.

You mentioned an increased reach, wondering what the future spend might be and whether you examine the disparity in maybe the strongest and weakest markets versus an Outback or a Texas Roadhouse?

Kind of how Longhorn is comparing depending on the market and the push that you're doing in terms of advertising and price points?

Well, if you look at Longhorn over say the last two or three quarters, they have gone from roughly 1 point below the Knapp-Track average on same restaurant sales to roughly 1 point above the Knapp-Track average on same restaurant sales.

So we are very pleased with that trend.

There's a number of things that are behind that as the integration, the work of integration begins to subside, obviously restaurant managers and restaurant teams have even more energy and more time to run the restaurants at a high level.

And we see that at Longhorn.

We see their guest experience which was good before continuing to improve.

We see control v cost management improving.

So that's part of it.

Second, the improved stronger media plan which really incorporates some of the principles that have helped Olive Garden and Red Lobster over time in terms of the number of points you need to be on a week to break through an effective reach ,or a frequency level but not waste money.

More 30s which we think pay off versus more 15s, the way they're using their day parts, all of that has begun to help and that was in the last quarter.

And then the price point add that you mentioned, while that's not something we intend to do on a continuous basis, we think occasionally a value oriented promotion for a brand like Longhorn is appropriate just like it is for Olive Garden and Red Lobster and we think it had a positive impact in the third quarter.

More broadly to your question, we be see restaurants with television support which increased from the mid 40% of all the restaurants to 60%.

We did see them outperform restaurants without television support.

So we think as we get closer to media efficiency we are going to see more of that benefit.

And that's a big part of our development strategy.

As the Longhorn team is looking for new sites that they find sites they have a high degree of confidence in.

If one site would get them to media efficiency in a local market sooner so they could turn on television that supports three or four other units and another site which also is a good site doesn't help get them the media efficiency, we are always going to open the site that will help us turn on television sooner.

So we are incrementally gradually going to get that benefit.

Okay.

Then just one question on Red Lobster.

There's been a lot of focus in the past quarter on the woodfire grill, the additional spend in marketing, just wondering whether we should expect further additional push perhaps where that woodfire grill is coming out in below targets in terms of sales mix, how perhaps that value push of the $6.99 level is doing in terms of drawing traffic at the lunch day part.

Well, those are two very different initiatives.

On woodfire grill, behind that is broaden the appeal at the Red Lobster brand both for current user who love Red Lobster today and for perspective users who haven't been for a while, they both are attracted by a fresh seafood restaurant that offers increased variety and increased culinary expertise.

That's really what today's fresh fish is all about, that's really what woodfire grill is all about.

We are going to continue to prominently feature woodfire grills on the menu, we're going to continue to develop items, develop for the woodfire grill.

Have at least one woodfire grill item in promotions.

We have seen the percent of our menu entrees go from -- increase about 60% basically in terms of woodfire grill preference or something that is resonating with guests.

That's a fundamental building block of the refreshed Red Lobster brand long term.

The quick catch lunches are very different.

That's designed to really address affordability, particularly at the lunch day part and $6.99 really isn't a short term discounted price.

That's the everyday price on the men.

And the dishes have been developed to make than an appropriate price and appropriate margin for us.

It has been very effective at driving profitable traffic in the short term.

It is something we will continue to use occasionally going forward.

We have time for one more question, please.

Very good.

That comes from the line of John Ivankoe with JPMorgan, please go ahead.

Thanks.

Actually it is somewhat of a follow-up on the previous question on Red Lobster.

Whether you brand a price point or you had the lunches or you didn't I mean mix looked like it was fairly unaffected in the past three months, which I think is an interesting phenomenon.

What kind of analysis should we do on that?

And what's really the attention for the Red Lobster customer base in 2009?

Is it still kind of a market move to try to move the customer up or is this the kind of environment where you want to broaden, in other words try to basically attract all customers to your store as opposed to the higher end customer?

I will let Brad answer the way to expect our menu mix, or follow-up on that in a second.

But we are not trying to move the customer up.

We are trying to make Red Lobster increasingly relevant for more guests on more occasions.

And essentially broadening appeal as you said.

We think in addition to what guests love about Red Lobster today, the addition of a woodfire grill and items from that grill that are a little more refined, a little more culinary forward, sometimes they're slightly higher priced, sometimes they're not, just gives guests more reasons to come to Red Lobster and in combination, those things are helping offset any increased preference from lower priced dishes at lunch and our menu mix as you said was pretty benign.

John, if you go back to the analyst conference that we had in January, and Kim talked about customer segmentation and their two biggest customers that we described as sophisticates and indulgents and the sophisticants, actually the biggest one would have higher income demo and the point there is simply to increase frequency among that base that's already their biggest base because they can afford increased frequency.

That's clearly what we want to do and we want to do that while also making sure that we continue to be relevant to that second group of indulgence and I think what they found is the changes they're making are appealing to both.

This is Brad, kind of repeating some but for us, it really builds a better platform for Red Lobster to operate off on, and in terms of the wood grill, the statement it makes about the brand, who it appeals to.

I believe approximately a third of their items recently are coming from a wood grill, through a combination or direct plate and through the fresh fish offering.

So it speaks a lot about the brand and how it can grow from there.

In terms of the nearer term expectations though, in terms of sales and all of that, I think we mentioned we didn't expect it to be a hard hitting, driving promotion.

It is more about getting the brand positioned for future growth.

But that being said, in the near term, it fully met our expectations in terms of how the mix would occur, impact of that mix would occur.

Which, I will tell you, the mix impact was very slight because it just how they were paired more so than what was sold if you would.

So when you look at that, in the short term but over the course of the quarter, we had, we put or met our expectations for the impact of the introduction of the woodfire grill.

Okay.

Great.

Thank you.

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