達登餐飲 (DRI) 2009 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, welcome to Darden Restaurants fourth quarter earnings release teleconference call.

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

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

At the time of the Q&A session, please limit yourself to one question and one follow up and then requeue if necessary.

As a reminder, today's conference call will be recorded.

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

Clarence Otis.

Please go ahead, sir.

Good morning, this is Matthew Stroud.

I'm going to kick off the call this morning.

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 Restaurants Group.

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

During the course of this conference call, Darden Restaurants officers and employees may make forward-looking statements concerning the Company's expectations, goals or objectives.

These forward-looking statements could address future economic performance, restaurant openings, various financial parameters or similar matters.

By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to materially differ from those anticipated in the statements.

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

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

The most significant of these uncertainties are described in Darden 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, change in economic or business conditions, the price and availability of food, ingredients and utilities, supply interruptions, labor and insurance costs, the loss of or difficulties in recruiting key personnel, information technology failures, increased advertising and marketing costs, higher than anticipated cost to open or close restaurants, litigation, unfavorable publicity, a lack of suitable locations, government regulations, a failure to achieve growth objectives to the opening of new restaurants or the development or acquisition of new dining concepts, weather conditions, risks associated with Darden's plans to expand Darden's newer concepts Bahama Breeze and Seasons 52.

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 over financial reporting, disruptions in the financial markets, possible impairment of goodwill or other assets, volatility in the market value over 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 covering the conference call, including any information required by Regulation G, is available under the heading investor relations on our website at Darden.com.

By way of information we plan to release fiscal 2010 first quarter earnings, and same restaurant sales for fiscal June, July and August 2010 on Tuesday September 29.

After the market close.

We released fourth quarter and fiscal year earnings yesterday afternoon.

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

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

Fourth quarter net earnings from continuing operations were $122.8 million, and diluted net EPS from continuing operations was $0.87.

Representing a 21% increase 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 Warehouse Fatality International Inc.

which reduced net earnings per share by approximately $0.03 in the fourth quarter of fiscal year 2009 and approximately $0.06 in the fourth quarter of fiscal 2008.

Excluding estimated integration costs and purchase accounting adjustments, net earnings from continuing operations for the fourth quarter of fiscal 2009 were $0.90 per diluted share or a 15% increase from prior year.

On a annual basis, we reported net earnings from continuing operations of $371.8 million, and diluted net EPS from continuing operations of $2.65 representing a 4% increase in diluted net earnings per share from continuing operations.

This includes the integration costs and purchase accounting adjustments related to the Rare acquisition which reduced diluted net earnings per share by approximately $0.10 in fiscal 2009 and approximately $0.19 in fiscal 2008.

Excluding estimated integration costs and purchase accounting adjustments, net earnings from continuing operations for fiscal 2009 were $2.75 per diluted share, which was up $0.01 to prior year.

Fourth quarter diluted net earnings per share including discontinued operations were $0.87 compared to diluted net earnings per share of $0.71 in the prior year.

And on an annual basis diluted net earnings per share including discontinued operations were $2.65 compared to $2.60 in the prior year.

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

Drew will discuss Olive Garden, Red Lobster and Longhorn Steakhouse.

Gene will discuss the Specialty Restaurant Group.

Brad will then review our fiscal 2010 plans and he will be followed by Clarence who will have some final comments and we will then respond to your questions.

Brad?

Thank you, Matthew, and good morning.

Darden's total sales from continuing operations increased 8% in the fourth quarter to $1.980 billion driven by new restaurant sales growth at Olive Garden, Longhorn Steakhouse, Red Lobster and additional operating week.

The additional operating week increased sales growth by almost seven percentage points in the fourth quarter.

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

As a reminder, our same restaurant sales results are calculated on a 13-week versus 13 basis, our total sales results are calculated on a reported basis or 14 weeks versus 13 weeks.

For context, industry same restaurant sales as measured by Knapp-Track and excluding Darden are estimated to be down 6.7% for the quarter.

Olive Garden same restaurant sales were down 0.6% for the quarter.

And total sales increased 11.5%.

Red Lobster also had a same restaurant sales decrease of 0.6%, for the quarter.

And its total sales increased 6.8%.

Longhorn Steakhouse, same restaurant sales decreased 6.5% for the quarter.

while its total sales increased 6.5%.

The Capital Grille had a same restaurant sales decrease of 22.1% for the quarter, and its total sales decreased 9.9%.

Bahama Breeze had a same restaurant sales decrease of 4.3% for the quarter.

and its total sales increased 7.6%.

What these numbers demonstrate is that in a difficult environment, relative to the industry as measured by Knapp-Track, our three large brands performed very well regarding same restaurant sales with Olive Garden and Red Lobster outperforming the Knapp-Track benchmark by an estimated 600 basis points and Longhorn exceeding the industry by an estimated 20 basis points.

When you combine these same restaurant sales with our total sales growth, excluding the 53rd week, we are taking significant market share.

As I explained in a moment we are doing so without sacrificing profitability.

But first let's discuss the margin analysis for the fourth quarter.

Here too we are comparing our year-over-year results on a reported basis or 14 weeks versus 13 weeks.

The additional week leverages restaurant expenses, selling, general and administrative expenses and depreciation expenses as some of these expenses are incurred or amortization on a monthly or 52-week basis.

Let's begin by reviewing our results for the fourth quarter.

Food and beverage expenses were 86 basis points lower than last year, on a percentage of sales basis as a result of reduced food cost.

As you may remember, commodity costs were peaking 12 months ago, we have benefited from declining prices in the second half of this fiscal year.

Fourth quarter restaurant expenses were 9 basis points higher than last year on a percentage of sales basis due primarily to wage rate inflation, which was almost entirely offset by reduced turnover levels and decreases in group insurance and other benefit costs.

Restaurant expenses in the quarter were 59 basis points lower than last year on a percentage of sales basis because of sales leveraging from the additional operating week, favorable workers compensation and public liability cost development and lower utility costs.

Selling, general and administrative expenses were 73 basis points higher as a percentage of sales for the fourth quarter because of increased media and marketing expense related to Red Lobster's lunch advertising, Olive Garden's national Spanish language television advertising and expenses associated with certain employee benefits that are hedged on an after tax basis.

Although the additional expense is offset by related reduction in income tax expenses for the quarter.

There were asset impairments in the fourth quarter for the closure of one restaurant.

And impairment of three others including the two specialty restaurants, Hemenway's and Old Grist Mill that were part of the Rare acquisition.

We are under contract to sell those two restaurants in the near future.

Now the annual impairment charge includes impairments in previous quarters of nonrestaurant operating assets that were in the G&A line which now appear in the fiscal year total impairment line.

The effective tax rate for the fourth quarter is 26.5%, which is below our previous guidance due to after tax benefit hedging I just mentioned.

Turning to the fiscal year, Darden's total sales increased 8.9% in fiscal 2009, to $7.220 billion, driven by 4.2% increase due to new restaurant openings and the additional operating week which added almost 2 percentage points of growth rate for the year.

On an individual operating Company basis, Olive Garden same restaurant sales increased 0.3%, and its average unit volumes were $4.8 million.

Well above those of any other nationally advertised full service restaurant brand.

Red Lobster had a 2.2% same restaurant sales decrease for the year, and its average unit volumes were $3.8 million.

Longhorn Steakhouse same restaurant sales decreased 5.6%.

And its average unit volumes were $2.8 million.

The Capital Grille same restaurant sales decreased 15.5%.

Its annual average unit volumes were $6.8 million.

In Bahama Breeze same restaurant sales fell 6.0%, and average unit volumes were $5.5 million.

For comparison, same restaurant sales as measured by Knap-Track casual dining benchmark excluding Garden were down an estimated 5.6%, for our fiscal year.

And as we know, erosion was more significant at the premium end of the industry.

We think both our outperformance on same restaurant sales and high average unit volumes demonstrates that Darden has a strong portfolio of brands that are capable of remaining healthy in the current period of economic weakness and positioned to be even stronger as the economy recovers.

In fiscal 2009, Olive Garden opened at 38 net new restaurants, Longhorn Steakhouse opened 16 net new restaurants, Red Lobster opened 10 net new restaurants.

And the Capital Grille opened five net new restaurants, while Bahama Breeze and Seasons 52 each opened one net new restaurant.

For the year, we repurchased $145 million of our shares.

In the last five years, we purchased over $1.420 billion of our stock.

Which speaks to the significant cash flow we generate on a consistent basis.

We have 10.3 million shares remaining on our current repurchase authorization.

In fiscal 2010 our focus will be on further strengthening our balance sheet and preserving the financial flexibility to respond to change, challenges and opportunities that may emerge as a result of the current economic weakness.

This fiscal year, we will be opportunistic when it comes to share repurchase basing our activity on the economic environment, Company sales trends and industry dynamics.

Our approach is that should we track to the higher end of our sales and earnings expectation, we are likely to be buying shares in the second half of the year.

Alternatively, share repurchases are likely to be relatively limited the entire year should we track to the low end of the sales and earnings range.

Finally, despite our bias towards capital preservation, our cash iteration remains very strong.

So yesterday we announced an increase in our dividend to $0.25 per share, payable on August 3, 2009, to shareholders of record July 10, 2009.

Previously we paid a dividend -- a quarterly dividend of $0.20 per share or $0.80 per share on a annual basis.

Based on the $0.25 quarterly dividend declaration, our indicated annual dividend is $1 per share, an increase of 25%.

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

Thanks very much, Brad.

As Brad just mentioned Olive Garden delivered competitively strong performance once again in the fourth quarter despite ramping on a very strong year ago period.

During fiscal 2010, the key strategic priority for Olive Garden remains unchanged, and that's to sustain accelerated new restaurant growth while also maintaining same restaurant excellence.

We plan to open approximately 30 or 32 net new a restaurants this fiscal year and ultimately we believe the brand has the potential to operate 800 to 900 restaurants in North America.

Importantly, the combination of their value leadership position in casual dining plus compelling promotions that feature exciting new culinary dishes and strong value offers will enable them to maintain strong industry outperformance in same restaurant sales throughout the year.

Red Lobster also delivered competitively strong same restaurant sales during the fourth quarter and now has either equaled or exceeded the Knapp-Track industry average for 17 of the last 19 quarters.

During fiscal 2010, Red Lobster will continue their brand refresh efforts designed to further broaden appeal, increase same restaurant sales, and strengthen unit economics.

Key initiatives include new dishes that leverage the wood fired grills installed last year, a new advertising campaign that more fully communicates the improved Red Lobster guest experience and expansion of those successful Bar Harbor remodel program.

More specifically Red Lobster plans to remodel approximately 50 restaurants this year, and accelerate the pace of remodels in subsequent years.

In addition, they will temporarily slow new unit growth and open three to five net new units during fiscal 2010.

Advertising will feature exciting new wood fire grill dishes as well as increased emphasis on value and affordability throughout the year.

Longhorn same restaurant sales were slightly ahead of the industry benchmark during the fourth quarter.

Importantly, they have meaningfully improved their performance relative to the Knapp-Track average from a GAAP of approximately minus 1 percentage point during the first half of fiscal 2009 to plus 1 percentage point during the second half.

During fiscal 2010, Longhorn will continue their increasingly focused transition, from a roadhouse to a steakhouse.

This will include better aligning all of their key guest touch points from the new advertising campaign introduced last March to a new menu design and elevated service levels that are more consistent with a steakhouse experience.

Longhorn also plans to remodel an additional 30 to 35 restaurants starting with the Atlanta market, which has some of the older restaurants and strongest roadhouse brand image in their system.

We've chosen to slow net unit growth at Longhorn from 16 net new units in fiscal 2009 to roughly 10 to 12 net new units in fiscal 2010.

These units will be focused on sites with the strongest value creation potential and better position the brand to expand the number of restaurants supported by television advertising in fiscal 2011.

During fiscal 2010 Longhorn will benefit from 213 restaurants receiving advertising support, compared to 179 restaurants in the first half of fiscal 2009, and 186 restaurants in the second half of the fiscal 2009.

Their advertising will feature compelling new culinary dishes and occasional value offerings, while also helping to build a more consistent brand image.

We're certainly pleased with the financial performance and the strategic progress these brands have made in a difficult economic environment.

We believe we are well positioned to once again deliver another year of competitively superior performance.

And now, Gene, will discuss three brands in our Specialty Restaurant Group.

Thanks, Drew.

The Specialty Restaurant Group's three brands remain focused on capturing market share by delivering exceptional dining experiences, developing effective sales building initiatives and continuing to strengthen the business models.

Let's take a quick look at the status of each brand.

The Capital Grille is a proven brand with a strong employee culture that delivers an exceptional personalized dining experience.

The current macroeconomic environment has been particularly difficult for premium steakhouses, steep declines in business travel and entertainment spending have led to significant demand destruction.

Capital Grille sales performance strongly correlates with the erosion and US hotel occupancy rates that start accelerating in calendar fourth quarter last year.

Throughout this period, the Capital Grille teams have remained focused on delivering best in class service and culinary execution both of which are a competitive advantage for the brand.

Capital Grille was recognized for the distinct service and culinary expertise as readers of Consumer Reports magazine gave them the highest score of any steakhouse chain in America.

Actually Capital Grille received the highest score across all full service restaurants.

The brand is focused on strengthening relationships with guests by building customer relationship management capabilities to help their teams further personalize the guest experience.

The team is also leveraging their culinary expertise to provide value to guests in unique ways while still delivering on the brand promise.

Capital Grille successfully opened two restaurants in the fourth quarter in Boca Raton, Florida and the Time Life building in New York City.

They plan to open three restaurants in fiscal 2010.

In the fourth quarter Bahama Breeze outperformed the casual dining same restaurant sales benchmark by 240 basis points; more importantly, the brand significantly elevated the guest experience as measured by their guest satisfaction surveys.

In February the Company successfully opened a smaller more efficient prototype in Wayne, New Jersey that is exceeding sales and return expectations.

In fiscal 2010, Bahama Breeze will focus on expanding their market share as they leverage the escape nature of the brand.

They will do this through beverage news, strengthening the brands value proposition, and continued operational focus.

The team will open one restaurant this fiscal year in Jacksonville, Florida.

Seasons 52 continues to deliver strong unit volumes in the fourth quarter despite the challenging environment.

In March, the team opened their first restaurant outside the brands footprint in the southeast in Cherry Hill, New Jersey and it is exceeding per requirements.

The restaurant design improves operating efficiency, and creates flexible private dining space while reducing the initial investment.

Seasons 52 team will open two to three restaurants in fiscal 2010.

Now, I'll hand it back to Brad for the fiscal 2010 financial outlook.

Thank you, Gene.

In fiscal 2010, we are basing our combined same restaurant sales growth for Red Lobster, Olive Garden, Longhorn Steakhouse of between minus 2% and flat.

This includes approximately 2% of pricing for fiscal 2010, and our assumption that together traffic and mixed changes will be negative.

Where the macroeconomic and industry trends that these assumptions are based on could be better than what we built in our plans, we believe our plans are appropriate, given the weakness and the uncertainty we've seen in the current consumer environment.

Of course, we will be both above and below this assumed range from month to month and quarter to quarter depending on promotional calendars, holiday shifts and changes in consumer sentiment, which, as you know has been volatile for much of the past 12 months.

In fact, there are two quarterly holiday shifts you should be aware of this fiscal year.

The Thanksgiving Holiday, when our restaurants are closed will fall in our fiscal second quarter in 2010.

While it fell in the fiscal third quarter in fiscal 2009.

And the start of Lent, which is when Red Lobster begins its signature and historically strong Lobsterfest promotion will shift to our fiscal third quarter in fiscal 2010 moving from fiscal fourth quarter in 2009.

These holiday shifts will have a meaningful impact on quarterly same restaurant sales results pressuring the second and fourth quarters and supporting the third quarter.

Looking ahead to unit growth, the new restaurant plans we outlined mean that we expect a net new restaurant increase of approximately 50 to 55 restaurants or about 3%.

Given our same restaurant assumptions and new restaurant plans, we anticipate that total sales change for the year will be minus 1%, to plus 1% comparing to the as reported fiscal 2009 sales of $7.220 billion, which includes the 53rd week.

That extra week was worth approximately 2 percentage points of sales in fiscal 2009.

With less unit development in fiscal 2010 we expect capital spending to be lower than fiscal 2009 levels.

We anticipate it to be approximately 450 million to $475 million, which compares to $535 million in fiscal 2009.

Fiscal 2010 includes approximately $25 million in additional remodel spending.

Approximately $25 million of capital spending remains on our new restaurant support center.

In fiscal 2009 approximately $95 million of our capital spending was attributable to our new restaurant support center.

You should know that the incremental expense of building our new restaurant support center is offset by various state and local tax credits and incentives and the previous sale of our current support center that made the net cost to build the offices relatively minor.

Looking at operating profit margins from continuing operations.

We expect restaurants to range from a margin contraction of approximately 10 basis points to margin expansion of 50 basis points on a full year basis compared to fiscal 2009.

We expect to see substantial benefit from food and beverage expenses in the first half of the fiscal year, as we experience lower year-over-year cost on many of the commodities we use, but we anticipate higher restaurant labor expenses because of same restaurant sales deleverage.

The remaining line items, restaurant expenses, selling, general and administrative expenses and depreciation expenses are expected to be relatively unchanged.

Incremental acquisition synergies and our other cost initiatives and favorable sales mix changes we experienced because of Olive Garden's expanding share of our overall business should contribute to lower food and beverage expense as a percentage of sales.

As we have discussed, we have many of our products contracted through the end of calendar 2009.

We have about 6 months of full visibility on our cost which I will detail shortly.

There is less visibility beyond calendar 2009, in part because some commodities will continue to experience cost erosion should economic weakness persist and we want to be in a position to benefit from that decline.

In terms of specific food items, total seafood prices for fiscal 2010 are expected to be lower than fiscal 2009 as global demand has softened.

Seafood accounts for approximately one-third of Darden's total cost of goods sold.

Category by category, shrimp is our highest value protein and we have coverage through the second quarter fiscal 2010 at prices lower than fiscal 2009.

Crab is contracted or purchased at prices lower than fiscal 2009, with coverage through September of 2009.

And we currently have lobster usage contracted or purchased through January 2010, at favorable prices to last year.

Beef prices are lower on a year-over-year basis, and we've extended our coverage from September of 2009, to January of 2010 depending on the cut, and all those at lower prices than fiscal 2009.

Chicken and poultry prices are slightly higher on a year-over-year basis, and we have contracted our usage through December 2009 at prices slightly above our fiscal 2009 cost.

Wheat prices are lower on a year-over-year basis.

We have contracts taking us through the summer for our bread products and contracts on our pasta products that expire in May of 2010.

We expect that bread contracts will be renewed at prices favorable to what we are experiencing currently.

Energy costs are expected to be lower on a year-over-year basis at least through the calendar year.

We have some coverage of natural gas and electricity in the deregulated markets in which we operate and we will be opportunistic about adding additional coverage.

Turning to labor, as I mentioned we anticipate that labor cost as a percentage of sales will increase due to sales deleverage and modest wage rate inflation the this fiscal year.

We believe that restaurant expenses as a percentage of sales will be flat to slightly higher then the prior year because of sales deleverage.

We anticipate that selling, general and administrative expenses as a percentage of sales will be slightly higher than the prior year.

This is because of sales deleverage and deferred spending in fiscal 2009.

Again, we will also expect to generate solid cash flows which we've done consistently since we became a public company in 1995 and to use these to pay our increased dividend and strengthen our balance sheet.

We expect to payout approximately $140 million in dividends to shareholders, an increase of almost $30 million from fiscal 2009.

Finally for fiscal 2010, we expect our tax rate to be approximately 25 to 26% which is favorable to the 27.5% in fiscal 2009 although this will vary by quarter depending on the timing of certain tax events.

With the new fiscal year, we will return to reporting only GAAP financial results as we now have a full year of comparable revenue and cost results.

This will improve the clarity of our communications and eliminate the need to reconcile the non-GAAP disclosures.

With our same restaurant sales assumption and new restaurant growth plans, we anticipate reported, diluted net earnings per share growing from continuing operations of minus 2%, to plus 8% in fiscal 2010 compared to diluted net EPS of $2.65, in fiscal 2009, which includes approximately $0.06 of benefit from the additional operating week.

Excluding the benefit of the additional week, we anticipate reported diluted net earnings per share growth from continuing operations of 0 to 10% in fiscal 2010 compared to diluted net EPS of $2.59 in fiscal 2009.

As you might expect, there will be some quarterly variability and diluted net earnings per share in fiscal 2010 that mirrors the sales variability I previously discussed.

Overall, the most important point is that we remain confident our results will be competitively superior in what continues to be a challenging environment.

And now Clarence has some final comments.

Thanks, Brad.

I will be brief because I know you've got a lot of questions, but I would say is that in many respects fiscal 2009 is our finest year.

Obviously some of the most challenging times we've seen in our economy and in our industry and despite that we had very, very solid financial performance and that performance is because we were able to get ahead of some deteriorating conditions very quickly, aggressively managing our cost and driving our traffic, and we did that smartly we think, protecting our people, our profitability, and the long-term health of not just our brands but also our business model.

And so we think we are well positioned to succeed in tough times but also our performance gives us confidence that we are going to emerge an even stronger Company.

We'll have wider positive gaps, industry benchmarks whether that is sales or earnings.

As we look ahead our plans for fiscal 2010 as we said a few times, reflects our assumption that economic and industry conditions are going to remain difficult.

We know many of you are more optimistic than that and we certainly hope that you are right.

We think it's prudent to plan this way.

That's because it's easier for us to gear up in response to better than planned conditions than it would be for us to make changes to address weaker than planned circumstances.

The lower end of the sales and earnings per share ranges we are providing are consistent with that approach.

But you should know that if we see some economic improvement, including some stabilization in employment levels, then the upper end of the sales and EPS range we'll provide is certainly achievable.

In either case we're going to manage our business with a relentless focus on guest satisfaction and maintaining or reducing costs wherever possible while still making investments that we got to make in order to have long-term success.

As we said before, we have a portfolio of brands that are proven and collectively have a very strong long-term sales and earnings growth profile, we've got scale and all the advantages that scale bring.

And we've made changes in how we work so our scale works even harder for us, changes that also helped us limit the earnings erosion as sales softened this past year, fiscal 2009.

Then, finally, we've got some great teams, some outstanding teams in our restaurants, in our restaurant support center, these teams are working to successfully navigate the current environment doing a great job of that, but beyond that, they are working to create a great Company.

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

And with that we are prepared to take your questions, thank you.

(Operator Instructions) First question comes from the line of Jeff Omohundro of Wachovia.

Thank you.

Referencing Drew's remarks on Red Lobster, shifting emphasis to value and affordability, is this a messaging change or will there be something more significant occurring at the menu at that concept during 2010?

Thanks.

Jeff, this is Drew, just to clarify comments there, the overarching goal for Red Lobster this year is to continue their brand refresh, continue to broaden appeal, but we know it's a very value sensitive environment where affordability is a major concern in general and the higher your check is, the more of a opportunity is for brands in particular and Red Lobster has taken step to be able to augment their brand building messaging with more affordability and specific value messaging so their quick catch lunch program that started late in the second half this year would be an example of something that they would be using more consistently this fiscal year.

Do you see a need to respond to the more aggressive couponing, discounting and messaging around that within mid scale at that concept?

We have three broad fillers for when we think about our promotion plans and discounting and Clarence touched on these, we want to make sure that anything we do in that area contributes to profitable sales growth, maintains the integrity of our business model and maintains the integrity of our brands going forward.

As we look at what we did in fiscal 2009 all of our brands Red Lobster included, maintained our competitive level of outperformance of the industry in same restaurant sales and so we don't see a, as well as contributing to broaden the appeal of brands.

So we don't see a need to dramatically change what we did in the advertising and promotion side and in fact we're not sure that would be the best thing for our brands long-term in any event.

Our next question comes from the line of Matthew DiFrisco, of Oppenheimer.

Thank you very much.

Clarence, I just wanted to get a little clarification on your guidance with respect to you said you are being somewhat conservative here, on, can you comment on do trends get worse as far as June or the underlying consumer trends you are seeing?

And could you put that in context with what we lapped a year ago with the influence from the rebate checks?

Are you seeing as we get through the end of the June the rebates having potentially less of an affect than they may have had in the beginning of May?

Matthew, this is Clarence.

I would say that we are not going to comment specifically on June, but if we look at our fourth quarter, so March, April, May, each month was roughly about the same.

I mean when you look at the industry, May was slightly weaker but a lot of that I think had to do with the rebate checks a year ago.

It was hard for us to get a real handle on what the contribution was, we talked at that time that maybe it added about a point to the comp side.

Year ago June, I don't know that we saw a whole lot from rebate checks because June was also the month where gas prices spiked north of $4, so I think whatever positive affect stimulus checks may have had it was offset by that a year ago.

As we think about the next 12 months we are looking at what we seen the last three to six.

Which has basically been sales at about the same level really.

There's a little bit of variation from month to month but that hasn't changed all that much.

That's what we are looking at as opposed to any deterioration in June.

I think when we look at our brands, May -- Red Lobster would have continued to outperform at about the level that it's been outperforming at.

Olive Garden is a little bit of shrink but a lot of that is just because they had such a strong year ago May where I think they were up 11% on a same -- I'm sorry, up 11 percentage points versus Knapp-Track which was fairly significant.

And its comp was about 11%.

And then also can you give us a little detail as far as what are you seeing regionally, there has been some industry commentary that Florida may have rebounded.

Are you seeing any of that disproportionately recovering faster than say the rest of the country or California in particular as well?

I'm going to let Brad answer that one because I haven't seen the numbers as recently as he has.

Matt, Brad here, I would say broadly when we look at it in terms of absolute performance versus year ago.

The weakness still continues in the western part of the United States, the Pacific Coast and Arizona, Nevada.

The stronger areas continue to be on a year-over-year basis, the upper Midwest kind of through that area, and Mid Atlantic, if you look at how it's trending from quarter to quarter, there is not a whole lot of change particularly asked about Florida, you are seeing a little bit of improvement there, but nothing significant probably more than one and I mentioned this last time was Texas which continues to be strong but it's trending down there as well.

I think that's the more notable trends that we see.

Our next question in queue comes from the line of David Tarantino of Robert W.

Baird.

Good morning.

Just a quick clarification question on the overall cost outlook for 2010, I was wondering if you could share what the overall net cost inflation or deflation might look like for the year when you add up all the components?

If we look just at the food area, if you will, we probably actually see a deflation on the year-over-year basis, somewhere in the 1 to 2%.

If you are talking about through the entire P&L, which includes wage rates and rents and other of those, we do see those moving up still in that 2 to 2.5%, so if you blend all that together it's a net inflation that's probably approaching 1%.

Just a follow up for that, I know you have pricing of 2% off that or more than offset that type of inflation, is there opportunity beyond the pricing to get some of the cost savings to flow through so that you can push that net inflation or deflation number down a little bit when you include the cost savings?

I think we are continuing a number of our cost initiatives particularly in say the first quarter maybe in to September, our big effort in the past year we call business strengthening initiative, that will help us in the first quarter to continue to reduce the cost and when we start lapping on some of that strong improvement, so the opportunity to go further on that is much more lended although there are some things that we are still pursuing.

So if we try to look at it on a net cost pressure.

If you look historically for the prior year we would be able to get generally close to 50 basis points off of that inflation number.

And we will try to get something close to that again this year as well.

Okay.

Thank you very much.

Our next question comes from John Glass of Morgan Stanley.

Thanks very much.

I wanted to go back to the Olive Garden performance in May and I understand the tough comparison issue, but historically you've had a pretty strong GAAP to the Knapp-Track average of 5 or 6 percentage points, and it narrowed pretty substantially in May.

Understanding that everyone probably faced some tough comparisons, so how do you know you are not losing shares specifically at that brand versus more active value promotions?

And taking maybe, in talking about that, talk about how you view, do you plan on approaching value somewhat differently at Olive Garden next year to protect that GAAP and that value proposition?

Well, as we look at you referenced Olive Garden's same restaurant sales outperformance to the casual dining industry, which is certainly true and if you look at the last four years, our fiscal 2006 through 2009 the year we just completed on average Olive Garden's exceeded Knapp-Track by 5.5 points.

If you look at our fourth quarter a year ago, it was about 6.4 points in March, about 5.7 in April, so pretty much online but it jumped almost 12 points in May.

So the fact that it was more than 6 full percentage points above what it's been averaging over the last four years, led us to expect some erosion in our GAAP to Knapp if you will, in this most recent month of May which was about 2 points, yes just about 2 percentage points.

So still meaningfully superior but not to the same levels.

But it didn't surprise us because of that 12 point GAAP last May.

As we look forward for Olive Garden, the value leadership position that it enjoys already, the breadth of appeal that it enjoys already and a very meaningful value offers that it's already been able to incorporate in to its marketing plan over the last couple of years, we wouldn't foresee a meaningful change to that and we think it will continue to allow Olive Garden to outperform and maintain its brand identity and integrity.

I would just say, if you look at our performance benchmarked against Knapp-Track, so if you look at blended comp for the three large brands against Knapp-Track I think our GAAP increased in the second half of the year compared to the first half of the year even as the promotional activity intensified.

So we are pretty comfortable with where our brands stand.

Again, baked in each of our brands is everyday value, it's part of the reason why they have the strength that they have, and we also, we think have done a good job historically of having a range of promotional activity that goes from premium offers to value offers.

So we don't know that that was necessary for us to do anything additional especially at the expense potentially of long-term brand and business model health.

That's very helpful and then your guidance you're suggesting there was some deferred costs in '09, particularly in SG&A that you have to work back this year, can you remind us or quantify that?

I think I remember like $0.15, there was some near term cost savings in '09.

Does that come back in 2010 or you just saying you can't save an additional $0.15 so that's why SG&A?

It's more of the latter.

We don't see that we can save that much additional as we go in to 2010, but what we also did in 2009 is we did defer some investment that would strengthen our foundation as we try to move forward.

2009 is not quite that opportunity to make those investments pay back in the nearer term.

We still have those and as we see an opportunity with environment in 2010 we would make those because as we demonstrated for quite some time now the ability to grow ourselves, to have the high absolute unit volumes that we have and to continue to grow our GAAP to the benchmark we would make those investments.

But we are looking for more of the opportune time to do that.

That's probably the deferred spending, if you will, that we are talking about.

Our next question comes prom the line of Jeffrey Bernstein of Barclays Capital.

Thank you.

First of all follow up on the cost saving thought.

I think you previously mentioned it was begin going to be in the 31 million to $39 million range for fiscal '09 in terms of cost saving opportunities.

You previously talked about $55 million related to Rare.

Just wonder if you can talk a little more depth about the opportunities -- the magnitude of the cost saving opportunities in fiscal 2010 whether you cliff side a couple of buckets.

What magnitude we should expect lapping the 30 million to $40 million in fiscal '09?

Good point there, Jeff.

Let me break those down in two pieces.

As it relates to acquisition cost synergies.

We did, this year, capture for the entire year bout $45 million.

We still look at the annual run rate of $55 million that we talked about previously as where we are.

And we expect to realize that as we look into fiscal 2010.

So that part of our element gives us roughly $10 million of incremental savings year-over-year and we talked back in January at the investor analyst meeting that we had then about what we called our business strengthening initiatives.

We talked about that being able to give us last fiscal year 31 million to $39 million in savings.

We're in the middle to upper end of that range.

That really got started in late September last year so we do see the opportunity to add a little bit to that.

Probably in mid single million dollar range if the first quarter of the new year.

Then just a part of our ongoing process we look to minimize cost as well.

We don't see those being a significant opportunity in 2010.

Probably looking at an additional $10 million from the acquisition synergies and then another mid single digit from the business strengthening as compared to the mid 30 million or high $30 million range you saw in fiscal '09?

Tha's correct.

We're talking about the year-over-year growth there, yes, the $10 million from synergies and mid single million dollars on our business strengthening initiatives.

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

Thanks very much.

On the topic of discounting or I guess incremental discounting, it sounds like Darden did not go that route, can you give us an update on what you are seeing in the industry.

Have you seen any changes in the level of promotional activity and discounting?

Then I have a follow up.

I will start.

I think we've seen a lit bit of pull back in the last few weeks.

Our sense as we try to figure out the situations we don't know that a lot of folks who did discounting got much for it from a traffic perspective.

And so we seen a little bit of pull back from some of the more significant offers.

Separately, just on media rates, can you give us an update on where they stand, and do you view it as just more bang for the buck or will you, perhaps, let some of that savings flow through to the bottom line?

Thanks.

We think the up front market which won't be finalized for another month or so will probably be flat to slightly down versus last year.

And so it's not going to be a material change but strategically we would be looking to maintain what we think are very effective media rates and media plans already and any meaningful savings would be redirected.

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

Actually a majority of my questions have been answered.

I wanted to do a quick follow up on the discounting aspect.

I want to clarify, I mean you done a great job of stressing the value of your brands versus going the discount route.

That's still the approach you plan on taking in fiscal 2010?

Brad, that is.

We have as you know, we have a calendar where we got features throughout the year at both -- at all three of our large brands.

With those we try to be pretty balanced between value features, features that that are pretty much at core menu margin levels pricing levels and then for appropriate times of the year we have premium features like Lobsterfest for example in Red Lobster's fourth quarter which was again, very successful.

Even as a premium feature in this environment.

So we expect to continue to be balanced, I mean tactically we will make changes around the edges in terms of do we stress or not stress a price point.

Do we add or subtract a week at the margins but those are the kinds of decisions that we have to make every year.

Then just briefly, are there any scheduled debt payments or anything we should expect significant on that avenue throughout fiscal '10?

Brad, this is Brad.

Our next maturity debt is in August of 2010, there's $150 million note due there.

And then the following April is a $75 million.

We have some time to deal with that.

We also have our revolver, which has $700 million of capacity there.

And you can see from our release that we don't have very much of a draw on that.

Should we need to we can roll that into a revolver, we will be opportunistically looking for an opportunity to go back in to debt markets probably later in this fiscal year or early in the next fiscal year would be my best guess at this point.

Our next question comes from the line of Larry Miller of RBC Capital Markets.

My questions were answered.

Our next question comes from the line of John Ivankoe of JPMorgan.

I guess, just given the real estate market and all that we're hearing out there in terms of prices and opportunities of higher quality sites, and I just want to take your temperature in terms of whether we might expect to see Olive Garden for example increasing or any other opportunistic increases in your development pipeline, whether we move throughout the latter half of 2010, and into 2011?

That's the first question.

Secondly, could you give details for us what you are getting out of the Red Lobster remodels, the price that you are paying, in terms of the 50 units that you are doing in fiscal '10 and what kind of sales lift you are getting for the remodeled units?

John, this is Clarence, I'll kick it off on just the real estate side.

You've got two dynamics the one that you described.

Some real weakness in real estate prices, some good availability less competition for the sites.

At the same time you've got a lot of developments that are being deferred and so both of those things are going on.

Which informs our unit development.

We do think we are getting some sites available in some places that typically it's very difficult to get in.

Especially on the premium side.

So you've seen us click up a little bit, -- Seasons 52, for example, that's part of it.

As we look to 2011 we do think the net of all of that is that we are likely to see more sites that are attractive rather than fewer across the entire portfolio.

So that's our current outlook.

Related to Red Lobster remodel I don't think we want to get in to the absolute investment and absolute guest count list but I would say that the results today have been very encouraging.

We think the remodel is contributing to a meaningful improvement in how current and last users think about Red Lobster and use it.

And that the guest count list has also been meaningful and both of those dimensions guest image and guest behaviors relates to traffic.

Are pretty close in parallel to what we saw at Red Italian several years ago at Olive Garden, so it gives us a lot of confidence to move forward.

Next question comes from the line of Joe Fischer of Goldman Sachs.

Good morning.

Just a quick one for Brad.

I was wondering, apologize if I missed it, if you could help us understand the impact from the 53rd week or the 14th week maybe is the right way to say it on the fourth quarter restaurant level margins?

I don't think we went in to that in any great detail.

But basically what happens with that is there is really no leveraging at food and beverage line or really at the labor line.

There is at the restaurant expense line.

So I believe that impact on basis points is around 30 to 40 basis points across all of our brands in this particular quarter.

I the benefit we get from that.

That's great.

Thank you.

Our next question comes from the line of Joe Buckley of Bank of America.

Thank you.

With respect to Red Lobster, same store sales, kind of just vary slightly in the quarter, you mentioned quick catch, I'm curious if the lunch business picked up significantly in that better Red Lobster performance in the quarter?

Yes, it did.

And we think that lunch is a meaningful business building opportunity long-term for Red Lobster both to build sales and to leverage fixed cost and strengthen unit economics.

So it was a significant positive for lunch.

Then question, I know you are not the business of giving quarterly guidance but year ago the first quarter was pretty disappointing and it sets up a pretty easy compare going forward, and I guess I'm curious if you would agree with that assessment?

Or if there is anything unusual about the quarter?

A year ago you started the quarter with some pretty aggressive same store sales assumptions, (inaudible).

Are you assuming that flat to down two holds in the first quarter and what kind of margin--?

Joe, I would say on a first quarter for sure, benefits from some real year-over-year declines in a lot of cost.

So if you think back to the first quarter last year a lot of food commodity costs were pretty high and come down significantly.

Energy costs were very high and have come down significantly.

So certainly the first quarter benefits on the profitability side from that by a lot compared to the rest of the year.

On the sales side, we had not yet gotten the affect that we had of the financial collapse and some of the real onset -- the heavy onset, it was a better environment first quarter last year than it was for much of the restaurant of the year.

So you got those two dynamics working I think is how we think about the quarter.

Just one more, how far in to fiscal 2010 do you have visibility for food cost?

A bunch of major components through the calendar year, elements that go in to the new calendar year the first half a little more of our fiscal year, but as I mentioned in our prepared remarks, there is also we are trying to leave ourself open to the opportunity that it may be some more continued erosion in prices.

We haven't taken all of the coverage that we would but we continue to monitor that and look for those opportunities.

As we think about that last point, to the extent that we don't see further declines it's likely to mean a better environment than we based our brand on in terms of top line.

So we are comfortable with that balance.

Our next question comes from the line of Stephen Anderson of MKM Partners.

Good morning and congratulations on the year.

Very quickly, on the Longhorn I noticed that you started a $6.99 lunch special I wanted to get a little more color on that.

And just want to see if that if you -- as you start picking -- having similar affect on lunch as Red Lobster is having with its quick catch special?

At Longhorn we got on the current menu everyday pricing at range of items that are under $10.

Some as low as $6.99.

What you are referring to is probably just some local marketing efforts to communicate to people the fact that the everyday menu features a range of price points, and some of them at $6.99.

We haven't started a new lunch program or lunch promotion similar to what Red Lobster is doing.

We've got time for one more question, please.

The last question at this time will come from the line of Ms.

Nicole Miller of Piper Jaffray.

Actually, this is [Rob Weiler] in for Nicole.

Quick question for you guys, you mentioned incremental Longhorn marketing spend in FY '10.

Can you quantify how much better volumes were at the units receiving the media last year as well as and also same store sales negative for those units?

We added probably 60 restaurants, maybe a little more than that that were receiving media coverage.

There was a meaningful outperformance and there has been for several years in terms of the markets that are getting television and not getting television.

We haven't in the past disclosed what that difference is.

Thank you.

Thanks for joining us today on the call this morning.

We wish everybody a fun summer and we look forward to speaking with you again in September.

Ladies and gentlemen, that does conclude our conference call today which will be available for replay today at 10:30 a.m., until July 23, midnight of that day.

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