達登餐飲 (DRI) 2010 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the first quarter earnings release.

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

Later we will conduct a question-and-answer session.

Instructions will be given at that time.

(Operator Instructions).

As a reminder this conference is being recorded.

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

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, 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 objects have objectives.

These forward-looking statements could address future economic performance, restaurant openings, 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 the date on which such 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'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, health concerns, including virus outbreaks, a lack of suitable locations, government regulations, a failure to achieve growth objectives through the opening of new restaurants or the development of new acquisitions or dining concepts, weather conditions, risks associated with Darden's plans to expand Darden's newer concepts, Bahama Breeze, and Seasons 52, our ability to achieve the full anticipated benefits of the RARE acquisition, possible impairment in the carrying value, or goodwill or other intangible assets, risks associated with incurring substantial additional debt, failure of internal controls over financial reporting, disruptions in the financial marks, 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 covered in the conference call, including any information required by Regulation G is available under the heading Investor Relations at our website, Darden.com.

We plan to release fiscal 2010 second quarter earnings and same-restaurant sales for fiscal September, October, and November 2010 on Thursday, December 17, after the market close.

We released first quarter earnings results yesterday afternoon.

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

Let's begin by reviewing our first quarter earnings results.

First quarter net earnings from continuing operations were $95 million and diluted net EPS from continuing operations was $0.67 representing a 16% increase in diluted net earnings per share from continuing operations.

Last year diluted net earnings from continuing operations were $82.4 million orders $0.58 per diluted share.

As we discussed last quarter, with the new fiscal year we have returned to reporting only GAAP financial results as both this year and last year now have comparable revenue and cost results.

This improves the clarity of our communications and eliminates the need to reconcile to non-GAAP disclosures.

Brad will now provide additional detail about our financial results for the first 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 2.3% in the first quarter to $1.73 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 sales components of our total sales growth.

Blended same-restaurant sales for Olive Garden, Red Lobster, and Longhorn Steakhouse were down 5.3% this quarter.

For context, industry same-restaurant sales as measured by Knapp-Track and excluding Darden are estimated to be down approximately 7.8% for the quarter.

So we continued to outperform the industry by approximately 250 basis points this quarter, increasing our overall total market share.

Olive Garden same-restaurant sales were down 2.9% for the quarter while total sales increased 1.2%.

Red Lobster had a same-restaurant sales decrease of 7.9% for the quarter and its total sales decreased 6.3%.

Longhorn Steakhouse same-restaurant sales decreased 6.2% for the quarter and its total sales declined 2.0%.

The Capital Grille had a same-restaurant sales decrease of 18% for the quarter and its total sales declined 8.4%.

Bahama Breeze had had a same-restaurant sales decrease of 6.3% for the quarter and its total sales declined 1.5%.

What these numbers show is that the environment remains difficult, but when we look at our industry as measured by Knapp-Track, our three large brands performed well on a same-restaurant sales basis, with Olive Garden and Longhorn Steakhouse outperforming the Knapp-Track benchmark and Red Lobster performing in line with the industry in the face of competitors' heavy discounting.

Not only did we grow total market share in the first quarter, we expanded EBIT margins 89 basis points.

Let's discuss the margin analysis for the first quarter.

Food and beverage expenses were 196 basis points lower than last year on a percentage of sales basis as a result of reduced food costs.

This certainly reflects the fact that we we benefited from declining commodity prices this quarter and we expect to continue to see a meaningful benefit for the remainder of the fiscal year.

First quarter restaurant labor expenses were 129 basis points higher than last year own a percentage of sales basis due to sales de-leverage and increased benefit costs as wage rate was offset by pricing.

Restaurant expenses in the quarter were 82 basis points lower than last year on a percentage of sales basis because of lower utility expense and reduced repairs and maintenance expense.

Selling, general, and administrative expenses were 29 basis points higher as a percentage of sales for the first quarter because of increased media and marketing expense related to Red Lobster, Olive Garden, and the impact of sales deleverage.

The effective tax rate for the first quarter was 27.1%, lowering diluted EPS by $0.01 to $0.02 if you compare net earnings to what they would have been with a tax rate consistent of our annual guidance of 25 to 26%.

Our annual guidance for the effective tax rate remains 25 to 26% but will vary each quarter reflecting our tax planning initiatives and resolution of certain tax matters.

Yesterday we affirmed that with somewhat softer than initially anticipated same-restaurant sales and lower than initially anticipated cost inflation, we continue to anticipate reported diluted net earnings per share growth from continuing operations of approximately minus 2 to plus 8% in fiscal 2010.

This compares to a reported diluted net earnings per share from continuing operations of $2.65 in fiscal 2009.

Our earnings expectation for the fiscal year are based on, one, blended same-restaurant -- same-restaurant sales for Red Lobster, Olive Garden, and Longhorn Steakhouse of approximately minus 3% to flat in fiscal 2010.

Our range is one percentage point lower at the bottom end than the range we provided at the start of the fiscal year.

The opening of approximately 50 to 55 net new restaurants in fiscal 2010 and expansion pace which remains consistent with that disclosed at the beginning of the year.

Total sales growth of between minus 2% and plus 1% in fiscal 2010, which compares to reported sales from continuing operations of $7.22 billion in fiscal 2009, and again, lower net cost inflation than anticipated at the start of the year.

As a reminder, our fiscal second quarter will be adversely affected by the Thanksgiving holiday week shift.

This holiday week shift from the third quarter last year, fiscal 2009, through the second quarter this year, in fiscal 2010.

Last year, same-restaurant sales results were favorably affected by approximately 70 basis points in the second quarter.

There will also be spending in this year's second quarter related to our field supervisory conferences.

Many of these conferences will -- were postponed last year because of the difficult economic environment and the resumption this year will boost selling, general, administrative expenses in this year's second quarter compared to the same quarter last year.

The conferences are important vehicle for aligning our organization so we do not believe it's prudent to postpone them again this year.

In addition, last year's second quarter included employee benefit related favorability that we don't anticipate this year.

That favorability, which was included in selling, general, and administrative expenses was fully offset over the balance of the year by increased tax expense.

It reflects the fact that we hedged certain employee benefit plans and each reporting period this benefit amount was marked to market.

The offsetting effect of this hedge is included in the tax provision and amortized over the remaining periods of the fiscal year.

September is, of course, the first month of our second quarter and our fiscal September ends this Sunday, October the 4th.

While as many of you know, it's not our practice to comment on quarter prior to its conclusion, we do want to provide some sense of how sales are going month to date, given how uncertain today's environment.

From a same-restaurant sales perspective, the blended result for Olive Garden, Red Lobster, and Longhorn Steakhouse is so far in September is tracking at about the level we saw in August.

Our sense is that the same-restaurant sales for the industry are also tracking about the same in September as they were in August.

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

Drew.

Thank you, Brad.

This quarter provided solid evidence that we continue to have the capability to deliver competitively superior results in a tough environment.

More specifically, in the near term we remain focused on profitable market share growth that also allows us to maintain the integrity of our brands and strength of our business model.

And during the first quarter, we maintained or increased market share and increased margins at all three of our larger brands.

We're able to take this approach because we operate a portfolio of differentiated brands.

In the first quarter, for example, we were able to rely on Olive Garden, without a doubt the most value oriented brand in our portfolio and a value leader in the category to respond to the discount driven competitive environment with strong value priced promotions of our own.

Red Lobster and Longhorn Steakhouse, which can't offer as many value priced features were able to focus during the quarter on broadening the appeal of their brands and maintaining margins without discounting.

Preserving the ability to target their value promotions during the most appropriate seasonal periods later in the year.

We were also able to protect margins in the face of a weaker than anticipated sales environment because of our team's disciplined cost management efforts, both in our restaurants and at the restaurant support center.

Despite the challenging environment, we've maintained our long-term strategic direction, continue to invest in our highest priority business building opportunities, and continue our transformational efforts at that time enterprise level to strengthen organization capability and make our support platform even more cost effective.

Now, let me discuss more specifically the first quarter operating highlights of our three larger brands.

Starting with Olive Garden.

Olive Garden's key strategic priority this fiscal year is to sustain strong new restaurant growth while also maintaining same-restaurant excellence, and they continued to delivering against that priority during the first quarter.

While same-restaurant sales were down 2.9% they exceeded the Knapp-Track competitive benchmark by almost five percentage points and total sales grew 1.2%.

First quarter advertising at Olive Garden featured three different promotions, several exciting new dishes, and a strong emphasis on value.

They began the quarter with their Heart of the Village promotion including lasagna rollatini with chicken and lasagna rollatini with sausage, and was starting at $9.95 price point.

In mid-June they featured their Twist on Classics promotion with two new entrees, grilled steak crostata and grilled chicken crostata.

And in mid-August they started their signature, Never Ending Pasta Bowl promotion which is priced at $8.95.

This is typically Olive Garden's strongest guest driving and highest guest satisfaction promotion of the year.

All of these first quarter promotions were supported with National Spanish language advertising and their equity building unlimited soup, salad, and breadstick lunch feature which is priced at 6.95.

The foundation of operational excellence at Olive Garden remains strong and in particular, guest satisfaction improved meaningfully versus last year and controllable cost management was excellent.

Olive Garden opened four net new restaurants during the first quarter and is well positioned to open 30 to 32 net new restaurants during fiscal 2010.

Red Lobster continued to make important progress broadening the appeal of their brand by further demonstrating to guests that they are an approachable fresh seafood restaurant with culinary expertise.

Same-restaurant sales declined 7.9% versus prior year but were in line with the Knapp-Track industry benchmark, a solid achievement considering they have a higher absolute check in the industry and chose not to do any meaningful discounting during the quarter.

Total sales were 6.3% below last year.

In the first quarter, Red Lobster featured two brand building promotions that showcased their new wood-fire grills and we think further strengthen their reputation for culinary expertise.

In June, the Summer Flavors promotion featured two new dishes, honey citrus seafood grill, plus wood grilled lobster and sweet and spicy shrimp.

In July the American Seafood Adventure featured two new dishes.

Maine lobster and crab cake, plus New Orleans shrimp jambalaya.

We saw strong preference for these featured items but they weren't as effective as prior year in driving overall guest traffic given the heightened level of competitive discounting.

In late August Red Lobster began their Endless Shrimp promotion two weeks earlier than last year.

This has historically been one of Red Lobster's highest traffic driving and value rated promotions.

Now, Red Lobster's same-restaurant sales performance clearly softened during the first quarter compared to where it had been over the last several quarters.

As we said earlier, this performance is largely explained by meaningful decline in overall industry performance plus Red Lobster's higher absolute check and our decision not to run a deep discount promotion during the quarter.

It's very important to remember that we are managing the brand to maintain or grow market share and maintain or strengthen margins in the near term while also doing what is required to broaden appeal and position Red Lobster to capture its full growth potential over the long term.

And all of this was accomplished during the first quarter.

We believe the long-term cost of artificially driving short-term same-restaurant sales is quite high.

Deep discounts over an extended period train your most loyal guests that your experience is only worth $9 or $10, essentially turning your brand into a commodity with no meaningful differentiation.

Deep discounts also erode unit economics and undermine your business model, especially in a more normalized cost environment.

We have direct experience with these issues at Red Lobster and know just how painful it can be and how long it can take once you start, to move away from discounting and rebuild the brand on more solid footing.

We've done that with Red Lobster and don't feel the need to jeopardize all our hard work, especially when we were able to generate earnings that are very strong competitively without going down that path.

Now, having said that, we recognize that this is an unusually value conscious environment, and we have settled on what we believe are appropriate ways to strengthen the value in Red Lobster's promotions after Endless Shrimp.

As we make these tactical choices, one thing remains clear.

The operating fundamentals at Red Lobster have never been stronger.

Guest satisfaction showed meaningful improvement and set a new record once again during the first quarter.

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

Longhorn same-restaurant sales were down 6.2% for the quarter, but roughly 1.5 percentage points ahead of the Knapp-Track benchmark, which we believe is strong performance, considering their absolute check, and again, our decision to focus on brand building news versus discounts at Longhorn during the first quarter.

Total sales decreased 2%.

As you recall, Longhorn launched a new ad campaign last May that our research shows is broadly appealing and helps differentiate the brand more effectively than the prior campaign.

Advertising in the first quarter continued to reinforce that guests can trust Longhorn to help them unwind and savor a great steakhouse meal served with genuine western hospitality.

Longhorn started the first quarter with their Summer Gatherings promotion featuring two craveable steak and seafood combinations..

Crab stuffed shrimp and sirloin, plus shrimp and crab gratin and fillet.

During July and August, Western Grilling featured two new dishes that helped reinforce their fire grilling expertise.

New Vidalia onion barbecue ribs and fillet, plus new spiced rum barbecue rubs and sirloin.

In September, Longhorn began a Twist on Classics promotion with a starting at $11.99 price point featuring two new dishes, bacon wrapped whiskey sirloin and three cheese bacon wrapped fillet.

This strong value offering should compete well in today's environment while helping maintain brand image and margins.

Operationally, in the first quarter the team was very successful controlling costs, including food waste and direct labor without compromising the guest experience.

In fact, Longhorn's Mystery Shopper scores set a new record during the quarter.

Longhorn opened one net new restaurant in the quarter and is on target to open approximately 11 net new restaurants for fiscal 2010.

Now, Gene, will discuss the three brands in our Specialty Restaurant Group.

Thanks, Drew.

Specialty Restaurant Group and our brands effectively managed costs in the first quarter.

While also outperforming similar brands in sales.

Macro economic trends, however, are still a concern.

In particular, business travel and entertainment spending remain weak which has a disproportionate effect on the Capital Grille and Seasons 52.

Our teams remain focused on continuing to improve execution in the restaurants, find new and creative ways to deliver value to the consumer, and aggressively manage costs while ensuring long-term health of our brands.

Now let's go into a little more detail on the first quarter performance for each of the Specialty Restaurant Group's brands.

The Capital Grille had total sales of $50 million in the first quarter which was 8.4% below prior year.

This was driven by a same-restaurant sales decline of 18% and was partially offset by an additional five restaurants.

The Capital Grille team continued to outperform similar brands in sales and provided strong guest satisfaction in the first quarter.

In addition, they developed more creative ways to deliver value to the guest while strengthening the brand.

Like the Master's wine tasting event held in July and August, this offer featured unlimited tastings of highly rated wines from multiple global wine regions all for $25.

The Capital Grille successfully opened their 38th restaurant in the first quarter in Cherry Hill, New Jersey, and on Monday opened in New York City's financial district, their third location in Manhattan.

They plan to open one additional restaurant this fiscal year.

In the first quarter, Bahama Breeze had total sales of $35 million which was 1.5% below last year.

Same-restaurant sales were 6.3% below last year which was better than the Knapp-Track benchmark despite having a higher check average than the competitive set.

This is a result of the culinary and service enhancements the Bahama Breeze team has made during the past year and speaks to the brand's overall strength.

Bahama Breeze continues to aggressively manage controllable costs and remains focused on capturing more market share.

Among other things, they continue to communicate the brand's value message of 25 items under $12 through multiple marketing channels.

With all this progress, we are actively building the site pipeline for future restaurant growth at Bahama Breeze.

Seasons 52 continues to perform well in this difficult environment while also focusing on growth.

The brand will open three additional restaurants this fiscal year and they are building a pipeline of future sites, taking advantage of favorable real estate opportunities.

At the same time, the team is diligently working to build organizational capabilities to support growth while maintaining operational excellence as evidenced by strong guest satisfaction in the first quarter and positive results from the brand's first ever menu satisfaction study.

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

Thanks, Gene.

Now, while this continues to be a very challenging time for our economy and for our industry, we think our performance this quarter is evidence that Darden is well positioned to succeed in tough times.

We continue to build market share, and we continue to do that in what we think is the right way, by building profitable market share.

As Drew mentioned, we have experience trying to hold on to market share in ways that are not profitable, and we've learned that that is not the path to success.

Our outlook for fiscal 2010 continues to reflect our assumption that tough economic and industry conditions will continue, but that outlook also reflects our confidence that we'll continue to have industry leading sales and earnings performance, and again, we're focused on doing so without taking steps that adversely affect the long-term strength of our brands or the long-term strength of our business model.

In fact, although we're relentlessly focused on reducing costs wherever appropriate, we're equally focused on improving guest satisfaction and we're still investing in our business to drive long-term success.

I believe we're performing as well as we are because we have a portfolio of proven brands that enjoy strong guest loyalty today.

And collectively, these brands also have a strong long-term sales and growth profile -- sales and earnings growth profile which, of course, is just as important.

Our competitive success also, I think, reflects the fact that we have the scale and all advantages that come with scale, advantages that are reflected in the cost synergies we achieved with the acquisition of Longhorn Steakhouse and Capital Grille and are reflected in the success of our cost containment efforts last year and so far this fiscal year.

All of this is a result of outstanding teams, outstanding teams in our restaurants, outstanding teams in our restaurant support center.

These teams are working to successfully navigate the current environment and beyond that, as we've always said, create a great Company.

And we're especially proud of just how focused they are on the key drivers of success.

They remain focused at a time in an environment where that's not easy, where there's plenty of opportunity to become distracted.

And with that we will take your questions.

(Operator Instructions) First we'll go to the line of David Palmer with UBS.

Please go ahead.

Hi.

Thanks.

Question on the guidance and your outlook.

You had 10% growth in EPS with over 5% same-store sales declines in this quarter, and I realize comparisons are different, but your guidance implies down 2 to up 2 same-store sales if I'm calculating correctly and down 10 to up 2 EPS growth, so obviously your guidance implies a very significant improvement in same-store sales that will yield worse EPS growth.

Obviously there's comparison differences from the cost cutting last year, but I wonder, does this also partly signal some of the things that you were hinting at in the call that Darden will be more willing to sacrifice margin through some sort of value initiatives, not deep discounting, but some sort of value initiatives to drive sales?

And separately, from this point forward, again, you're guiding to a sequential improvement in blended comp of about 3 to 7 points.

How much of this improvement from this point forward is a bet on the industry trend improving, or is this mostly, the vast majority really more of a bet that you, that Darden, can close or widen the gap, I should say, to the industry trend?

Thanks very much.

David this is Brad here.

That's a good question, and there's a few technical aspects and a few more global question to that so let me start in.

On the comparison to last year, you're right, there are some very unusual comparisons on a quarter over quarter basis.

The first quarter is a tremendous quarter for us in terms of commodity costs and energy costs that help our growth and earnings in the first quarter.

That does continue somewhat into the second and into the third quarter and a little bit unsure what the fourth quarter looks like.

But in the fourth quarter last year we had pretty meaningful improvement on a year-over-year basis then.

So meaningful improvement probably tails off what we're looking at as we get through the year as well.

We did have significant cost initiatives that really got underway in the second quarter last year.

So we have that advantage in the first quarter in terms of our performance and we're continuing to find cost opportunities, although I will say not as great as we had last year.

So there will be some improvement there in terms of aiding our earnings growth.

The other part of the question, I'll maybe turn it over to Drew, but we're not envisioning any dramatic changes in our promotional strategy or feature strategy.

I think Drew went through that in a fair amount of good detail about how we view the right way to market and position our brands as we go forward, so there's always some new nuancing around the edges, if you will.

And we will take advantage of the opportunities we see there but no dramatic shifts there.

We do have a pretty wide range because we don't have great visibility through the rest of the fiscal year.

There's a fair amount of uncertainty as to where the economy may go.

Our assumption, though, is that there is modest improvement in the industry and that we will continue to lead in that industry as we go through the remainder of our fiscal year.

Just a couple other thoughts, David, this is Clarence.

One is, we talk about minus 2 to plus 8% EPS growth for the year.

That is up against a 53-week year.

So we've got one less operating week in the fourth quarter.

And so that certainly affects the balance of the year.

In terms of what we're thinking about, again, as Brad said, a lot of uncertainty about the macro environment for the balance of the year, which is why the range that we've given you is as broad as it is.

At the bottom of that range we do expect on a percentage year over year basis, so same restaurant sales, some improvement in the industry.

A little bit of that is the arithmetic of going against weaker prior year for some of the balance of the year than we've had in the first quarter.

When we talk about our delta though, to the industry, we expect it to be roughly 3%.

That's what we said in June.

First quarter was 2.5%, 250 basis points.

We expect roughly 300 for the year.

And so we're pretty comfortable with that spread.

Thanks very much.

Next we'll go to the line of Steve West of Stifel Nicolaus.

Hey, guys, just real quick, I wanted to talk about your assumptions with the same-store sales as you go forward.

Really what are you thinking about with unemployment, kind of what your assumptions are for unemployment rate going forward or the employment rate, or however you want to look at that going forward and does that improve, stabilize, or does that get worse, in your view?

I don't know that we built it that way.

I think we are -- as we put our plan together, we expected unemployment to be about where the consensus was, which was roughly 10%.

I think as we think about the business and what might affect it, it's less about the unemployment rate itself and more about job loss.

And so certainly consumer sentiment I think reflects where we are on job loss.

And as long as there's meaningful job loss that's going to be a drag on consumer sentiment, so to the extent that job losses stop, that's a good thing.

Don't necessarily need job growth, but we need to see the end, I think, of some of the more meaningful job loss on a month to month basis.

All right, thank you.

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

Please go ahead.

Thanks.

Can you talk about some of the visibility you have in food costs now and if you've contracted into 2010 and if the current level of cost of goods is reflective of what you think can be achieved ongoing, or could it even be better?

Similarly, you talked about finding new forms of cost savings this year.

Can you talk about what they are and particularly what the order of magnitude is?

Because I think in November you began to lap the real cuts you made last year.

Thanks.

Hey, John.

Brad here.

Let me give you a little bit, just a broad overview.

For the remainder of -- really, the second quarter, our first half of the year, we have a fair amount of coverage, and basically all of our major ingredients, I'd say the 80 to 90% range.

But as we've been talking about for some period of time, we did see the opportunity that commodity costs would have some downward pressure, and so as we look to our back half of the year, I would say, you know, most of our predicts were in the 30% coverage range, with the exception being beef and utility costs, where we're probably in the 50, 60% range, just in general terms.

So we want to be able to take advantage of these spot market prices, if you will, from many of these commodities.

We see them as being low.

We'll continue to look at those, and opportunistically we have taken some selective longer positions there.

So we have good visibility over our costs for the second quarter, and a fair amount over the back half of the year as well.

I'm sorry, I think there was a second part to your question as well.

I thought you said you found additional cost savings opportunities which I guess are more discretionary in nature.

Can you outline what those are and how much?

Last year we really got going in the second quarter with some pretty meaningful cost initiatives that took a lot of costs out of our headcount positions, if will you, principally in our support center, but also some selective positions in the field, going after a lot of our travel expenses, and, just some of our outside services, if you will, being more selective around those as we weren't as sure how productive they would be in this short term.

What I would say right now is we continue to go after those to find improvements, although not as great as they were last year, and I would say our efforts around sustainability, that Drew and Clarence have talked about, have been showing meaningful improvement as well.

So when we look at the second quarter, I still think there will be improvement over the prior year.

Guessing maybe $0.01 or $0.02, but probably no greater than that each of the last two quarters of the year, just because we were hitting our stride in the last half of the year at a pretty high level.

Just one clarification, as Brad talked about headcount.

It really has been not filling open positions has been the approach that we've taken.

We feel that's the right way to go.

And it's served us well.

Thank you.

And next we'll go to the line of Steve Kron with Goldman Sachs.

If I can to start, just go back to Dave Palmer's question, and really talking about the balance between market share and margins.

Drew and Clarence, I certainly appreciate the comments around protecting the brand.

I don't think anybody would disagree with that.

But the fact is that the gap that you guys have had to the Knapp-Track averages has certainly started to close, at least on a blended basis, and unfortunately it seems as though some of your peers out there might be a little more desperate to kind of drive traffic in their stores and as a result, the environment of the discounting which seems to be closing that gap might be with us for a little bit, or at least for a while, perhaps.

So I guess question is, the tactical things that you're thinking about on the value side, if that proves to not be enough, kind of what, then, since you do have kind of the margin buffer, how do you reinvest to try to get that traffic back in your stores?

That's the first question.

Well, I think some of the traffic that's available is not worth having in the stores.

I guess that's a global thought.

I've tried to think of a way to say that in a nicer way, but we've been there where we've had unprofitable guests in our base.

We've weaned ourselves off of that it takes a long time to do it.

We're fortunate, I think, Drew talk about the fact that we have a portfolio of brands.

And so we are able to make choices about where tactically we're going to attack where we're going to use our menus to really respond competitively.

We've done some of that with Olive Garden.

It has the opportunity to do more of it than the others, but certainly the others have opportunity to do some.

We chose not to do that in the first quarter.

We think there are other periods of the year that are more value sensitive, so to some degree, saved our powder for those parts of the year with Red Lobster and Olive Garden.

Gene talked about capital growth, where we also think we've been responding in a smart way to very significant discounting.

We're not prepared to offer that brand on a buy one get one free basis.

But we do think there are other smarter ways to do it, and Gene outlined some of those.

And it isn't clear to us, frankly, how well that discounting is working, for all the people that are doing it.

It may be helping with some traffic, but check in the industry dropped almost 1.5 points in the first quarter compared to the fourth quarter, and it's down almost 3.5 points.

The check is down almost 3.5 points compared to the first quarter a year ago.

So even the people that are doing it, we're not sure how well it's working against their objectives, even in the short term, and without getting into the specifics of our promotion plan going forward, all of our promotions are designed to give people a reason to visit in the short term and to reinforce our brand equity in the long term.

There's a range of promotions we'll do, use Red Lobster as an example, a very indulgent, differentiated promotion that you can't get anywhere else, like Lobsterfest, and a much more value oriented promotion, like endless shrimp, that they're doing now what.

What we did in the first quarter was sort of in the middle of those two things, and we think we need to, and are, refining our approach in the second half to be more -- a little bit more about value.

But not deep discounting.

And I would say, the way we think about it, if you look at our first quarter, so earnings per share growth of 15%, on a blended comp for a three large brands of minus 5.3%, we could have discounted, got a better same-restaurant sales number, and still came out with the same earnings per share growth.

The price we would have paid would have been brand degradation, and so we think getting there the way we got there is the right way to do it.

All right, thanks for that.

I appreciate those comments.

Then secondly, Clarence, taking a step back, bigger picture industry question, it seems as though, as you guys indicated in September, things are similar to August, and if we look at July as perhaps maybe an anomaly for the industry on what we saw from the Knapp data, it doesn't seem like the industry is really -- we feel they were bouncing a little bit off the bottom here and not getting any sequential improvement to speak of, where as in other parts of the economy we are seeing maybe a little bit of sequential improvement, and that might be different in past cycles.

So I was wondering if you had any thoughts on whether there's any systemic changes to consumer consumption that you guys are thinking and preparing for on a go forward basis, any read through that you have there?

I think the way that I think about it is a lot of the categories that you're thinking about, outside of casual dining, had much steeper declines.

And so specialty apparel and hotels and all of these places, very, very steep declines compared to restaurants, which I think speaks to the strength of restaurants.

And so restaurants are a lot less discretionary than some of the other discretionary categories.

And so we haven't had had as much bounce-back because we didn't go down as far is the way that I think about it.

I think that point of view is supported by the research that we do.

I think you've seen it reported by others, and so when you ask people whether the things that they would do more of, if they felt better from a financial perspective, eating out more, dining out more is one of the things at the top of the list.

So I don't really see a lot of secular change.

In fact, I think you could look at the past year or two, and the relative performance of restaurants, full service and quick service, and say that it's a stronger category than most.

So we are sort of stabilizing at this level but we've been at a better level.

Other people are coming back from double, triple and in some cases with hotels even worse than that, sort of negative revenues.

We see that because we do have one brand that does correlate to the hotel business reasonably well, and that is Capital Grille.

Thank you very much.

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

Baird.

Good morning.

Question coming back to the cost outlook.

I think on the last call you mentioned you expected commodity deflation to be in the 1 to 2% area for the year and that you thought other costs would lead to net cost inflation overall of about 1%.

Could you give us an update on those two numbers as you see them today?

David, Brad here.

I don't know that I've reran it for the whole year, but it's definitely pointing to lower numbers than we had before.

The commodities I think we're seeing some relatively meaningful reductions from there, and as I mentioned earlier, we have not locked in a lot of those costs for the back half of the year.

So we would expect to participate in that.

The overall cost inflation number I would say is down maybe 0.25% or so.

As I mentioned earlier, we continue with our efforts to look at avoiding the costs that maybe we shouldn't be incurring right now through various activities.

So trying to separate all those out gets to be a little bit more of an art than a science.

But I would tell you that we're working pretty diligently to avoid the costs that we don't think is helping improve the guest experience, and that may not be adding as much to our business model right now as we'd like for it to.

Okay.

And just a quick follow up on that, given that there seems to be some opportunity for costs to be better than you originally expected, maybe meaningfully better.

How would you handicap your ability get to sort of the low end of your guidance if comps remain maybe towards the low end or below the low end your guidance?

Well, as we look at it right now, at the low end of our same-restaurant sales guidance we would expect to be at the low end of our earnings range.

You see that we have pretty significant savings in many of our lines on the P&L, but one that we don't enjoy as good an advantage on is in the restaurant labor.

We know the importance of continuing to deliver, consistently deliver a strong guest experience, and that takes not only the food that we put into it, but the labor, which is not as a variable piece as, say, the food is.

So we'll continue to make our investments there.

So I'd say we still feel pretty good with our alignment of where same-restaurant sales track to the earnings guidance as well.

Okay, thank you.

Next we'll go to the line of Jeff Omohundro with Wells Fargo Securities.

Just a question on marketing and the market spending outlook, where there's any changes in mind on that?

And particularly about the spending rate.

Just wonder if there are any thoughts around perhaps stepping up support of the existing strong value offerings such as never ending pasta and endless shrimp, taking advantage of the media market in an effort to drive sales that way?

Thanks.

Well, the media market that you mention is almost done, and there are about 3% savings roughly in our media buy this year, some of which were tactically reinvesting brand by brand.

But in a broader sense, we feel that we have very strong media budgets already, and we're really asking ourselves, what's the best thing for us to talk about, what's the best thing for us to feature to get the most out of the investment that we're already making.

So we don't see a substantial increase in the amount of media we're investing.

We are looking at what we say, to make sure we get the best return for it.

And then as a follow-up, around Red Lobster specifically, I wonder if you could give us an update on the mix progress with the wood fired grill platform in this environment?

And do you see post endless shrimp that growth continuing, or will there be a shift towards value in another direction?

Thanks.

We don't view the wood fired grill results as being mixed at all.

We think it's very clearly a positive investment and a positive signal to our guests that Red Lobster's experience is evolving and becoming a little more culinary forward than what they thought in the past, and this is a great representation of that, it's an energizing investment for our employees as well who deliver the brand so we think it was the absolute right thing to do.

Over time.

In this environment, as you say, is very value conscious, we probably need to balance how much we talk about culinary differentiation and uniqueness, more overtly with value in the second half, but it isn't going to be continuing an endless shrimp promotion longer or doing something like that.

It's really going to balance, just balance a little bit better value offerings with differentiated products that also build equity over time.

We think there's a way to do both.

But as we said before, we're not going to go down the deep discount path.

Thanks.

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

Please go ahead.

Great, thank you.

Couple questions.

First kind of a cash usage priorities.

Looks like we saw some debt pay down in this first quarter.

Just wondering what your thoughts are in terms of the rest of the year, kind of balancing that versus perhaps future share repurchase?

I think you mentioned you might refocus on share repurchase in the back half?

Wondering whether that's in guidance.

Then a separate question, just as you mentioned, September, similar to August, I know specific to Red Lobster that you're going up against compares that are 600, 700 basis points more difficult.

I'm just wondering whether that is brand by brand, that each brand is similar in September to August or as a portfolio?

Because that would seem to be a very strong improvement for Red Lobster in September if you were to maintain that August level.

Jeff, Brad here.

I'll take your first part of your question on cash usage.

We have not really changed our plans at all.

What we set out for ourselves at the beginning of the year we still seem to be on that pace, we're at this point still, we'll be waiting for the back half of the year in terms of how the industry is performing and how we're performing against that before we would change any of our outlook in terms of share repurchase or any of those.

We do appreciate the value of having a strong balance sheet, so we'll continue to work towards that.

And on the September piece?

Yes, the comment that we made really is the combined number.

So when you look at Red Lobster, Olive Garden, Longhorn together, we don't really want to get into separate brands because each of them is in the middle of a promotion.

And those promotions have a ways to go, and from a competitive perspective, we don't want to provide a whole lot of visibility about how each of them are doing.

And, Clarence, if I could just ask you kind of a broader question, as it relates to kind of supply/demand for the casual dining space, was wondering, as we see kind of Knapp-Track and the broader industry continue to suffer and still bouncing along that bottom, just wondering whether there's any change or whether you're seeing potentially greater independent closures, whether that leads to better Darden sites, which to more importantly whether that supply/demand imbalance might be getting better or whether it's still a very slow slug from here.

Yes, Jeff, it's a great question.

I would say the best database that we have is not a great one, when it comes to really counting units, especially the independents.

I think what we've seen, in the better part of the database is major change.

And major change there is no growth, and the data suggests actually a little bit negative.

So a little bit of closings.

Now, that's data that goes through March.

And so my guess is, directionally, it's probably more closings, if you updated it.

That's my sense.

That same data on independents, again, it's not as good, which suggests that it's flat, I guess is the best that we've seen.

I think just in terms of locations, because we are one of the few operators that still expanding from unit perspective, and because our non restaurant competition for sites has also slowed or halted expansion, that includes a lot of branch banking, for example, we are getting much, much better sites than we would get in a normalized environment.

And so we feel good about that.

Thank you.

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

Please go ahead.

Mr.

Ivankoe?

Yes, I'm sorry, hi, guys.

Two related questions.

First, I mean, this major economic contraction has caused a lot of companies to really think about how their corporations are run and lead to some fairly significant restructurings, kind of above the unit level in terms of, hey, let's kind of clean slate this business and think about the absolute most efficient way this business should be run today, while really maximizing returns.

I guess my first question is, have you gone through that exercise and do you think there might be opportunities to really rethink how Darden Corporate, again, above the store level, is really run?

So that's the first question.

And the second one, just so I can get it in, is, the last year has seen us in a perfect combination of a strengthening US dollar and slower global demand, and now maybe that's beginning, I guess it is, switching that the dollar significantly weakened, and global demand is going up.

So is there any way that you can, especially in terms of your global view on the supply chain, kind of think about commodities long term and if there's anything that you can do to take advantage of that as we go over the next couple of years?

Thanks.

Just on the first one, we have spent a lot of time thinking about how we run the business.

I'd say one of the reasons why we feel good about how we're navigating this environment is that we actually put a lot of thought into that three, four years ago.

And so we came into this environment with some fundamental changes underway in how we run the business, that we think make it a much more effective business, but also much more efficient.

And so some of that has to do with really consolidating into centers of excellence at the enterprise level, some activities that historically have been done in each of our brands, and we're seeing significant benefit from a cost perspective to those initiatives.

There is more to go on that.

We've also looked to really do some transformational things in some high expenditure areas, and that works been underway.

We're seeing the benefit of that as well, but there's still more to come, and so further automating our supply chain is one of those.

Being better at managing our facilities by really moving to more and more regional and national contracts with significant savings there.

We're doing things to significantly cut our water and energy usage.

Again, those last three transformational things, the annualized savings for each of them is in the tens of millions of dollars, and we're seeing some of that benefit already.

And so we do think we're taking those steps.

We're fortunate because we started to take them about three to four years ago, and that just reflected our point of view that there were some costs that would be persistent that we needed to offset and that we would be in a situation where sales growth on a normalized basis, without a recession, was going to be a lot lower on a go forward basis than it's been historically.

And one important addition to what Clarence said is, all of that work isn't designed just to save money in the short term.

It's a very disciplined enterprise-wide approach to say, what level -- what type of support and at what level does that support need to be for us to create and deliver brands that can take market share.

And that's not something you do in a quarter or two.

It's a very thorough, very disciplined view on what it takes to run this business for the next decade.

And I would say, on the commodity cost side, again, we think, we see all the developments that you outlined.

We think on a near-term basis, so looking out next 6 to 12 months, still not a lot of upward pressure on those costs.

To the extent that it is, we think it will be because we're in recovery, and so if we fail to lock in a little bit of that, we feel comfortable because our top line will be moving in the right direction, and ultimately we'd prefer to have that happen, than to have depressed commodity costs.

Thank you.

Next we'll go to the line of Joe Buckley with Merrill Lynch.

We've got time for one more question here, thank you.

Thank you.

I'd like to ask a couple of questions on Red Lobster, because that's where it seemed like the sales change was pretty dramatic.

So can you talk a little bit about wood fired grill, which I know is featured in some of the promotions, maybe the quick catch lunch program, and any changes that you saw in Red Lobster in terms of how customers use the brand or when they use the brand, and maybe tie into that, if you can, the customer responsiveness to endless shrimp.

I guess where I'm going with this should we think about the first quarter sales at Red Lobster as an anomaly, or as the economic forces -- have the economic forces finally caught up with it and the brand is going to struggle more than we would have thought at the beginning of the year?

This is Clarence, I'll let Drew provide a more detailed answer, but I'd say from a global perspective, Red Lobster has consistently outperformed the industry.

There are changes from month to month.

It really does reflect to some degree the promotional calendar.

In some cases, that gap to the industry widens because we're stressing value, in other cases it widens because we've got a premium promotion in place that is just proven.

And so if you look at the fourth quarter, a lot of that had to do with our premium promotion, Lobsterfest.

And so it really is very much driven by the choices we make promotionally.

In the first quarter, we didn't have a proven premium promotion like Lobsterfest, and we chose not to discount.

Again, because we felt it was more prudent to save our powder for periods of the year that would be even more value oriented.

I think that gets it.

I'm not sure what else I would say.

The only addition would be, as we look at the Red Lobster business and the desire to further broaden appeal, and further increase average unit volumes what all our research has shown us in the last several years is that the people that have stopped coming or come less frequently think about Red Lobster as chain that serves frozen seafood that really doesn't have much culinary expertise.

They inappropriately think about Red Lobster in that manner.

So the initiatives that the team has been putting into place over the last couple years, whether it's around today's fresh fish eats or wood fired grills are all designed to tell a singular story that addresses that singular opportunity to broaden appeal.

Quick Catch lunch has clearly helped lunch performance because Red Lobster has been a little softer at dinner than it has at lunch, and all of that really is about the competitive discounting we talked about in a less than proven premium promotion in the first quarter, as Clarence said.

Okay.

And could you comment on whether endless shrimp -- will you run it for -- into the second quarter for the same period of time, and the August number for Red Lobster was down 6.

Did that improve as the month went on when you launched endless shrimp?

From a competitive perspective, we don't think it's prudent to talk about how long we're going to do something in a quarter that still has eight weeks, nine weeks to go.

So we're not going to get into that on Red Lobster or the other brands.

Okay, can you talk about August, if it got better as the month went on?

It did get better.

In part, it's because we introduced a more value oriented promotion a little earlier in the month compared to what we did last year.

We'd like to thank everybody for joining us this morning on the conference call.

We appreciate your interest in Darden.

Of course, we're here in Orlando if you have further questions, additional follow-up, please give us a call, and we look forward to speaking with you again in December.

Thank you very much.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation and for using AT&T Executive TeleConference.

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