達登餐飲 (DRI) 2010 Q4 法說會逐字稿

Ladies and gentlemen, good morning.

Thank you for standing by.

Welcome to the Darden Restaurants fourth quarter earnings release.

(Operator Instructions).

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

At this time, I would like to turn the conference over to our host, vice president of Investor Relations, Mr.

Matthew Stroud.

Please go ahead.

Thank you, Tom.

Good morning, everyone.

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

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

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

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

By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to materially different 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 day.

The most significant of these uncertainties are described in Darden's Form 10-K, Form 10-Q and Form 8-K reports, including all amendments of 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 of or difficulty in recruiting key personnel, information technology failures, increased advertising and marketing costs, higher than anticipated costs to open or close restaurants, litigation, unfavorable publicity, health concerns, including virus outbreaks and food safety, a lack of suitable locations, government regulations, including healthcare reform, a failure to achieve growth objectives through the opening of new restaurants or the development or acquisition of new dining brands, weather conditions, risks associated with Darden's plans to expand Darden's newer brands, Bahama Breeze and Seasons 52, our ability to achieve the full anticipated benefits from other acquisitions, possible impairment and the carrying value of our good will or other intangible assets, risks associated with incurring substantial additional debt, a failure of our internal controls or financial reporting, disruptions in the financial markets, volatility in the market value of our derivatives and other factors and uncertainties discussed from time to time and filed by Darden with the Securities and Exchange Commission.

A copy of our press release announcing our earnings, the Form 8-K used to furnish the release to the Securities and Exchange Commission, and any other financial and statistical information about the period covered in the conference call, including any information required by Regulation G is available under the heading Investor Relations on our website at Darden.com.

By way of information, we plan to release fiscal 2011 first quarter earnings and same-restaurant sales for fiscal June, July and August 2011 on Tuesday, September 21 after the market close.

Let's begin by talking about the quarter.

We released fourth quarter and fiscal year earnings yesterday afternoon.

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

We recognize that most of you have reviewed our fourth quarter and fiscal year earnings results, so we won't take the time to go through them in detail once again, in an effort to provide more time for your questions.

We will offer a line item summary of P&L and discuss our financial outlook for fiscal 2011, as well as briefly discuss our brand by brand operating performance summary.

We expect this call to last approximately one hour, but we are prepared to extend that if necessary.

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

Drew will briefly review our operating performance of our larger brands, Gene will discuss the specialty restaurant group.

Brad will review our fiscal 2011 outlook, and he will be followed by Clarence, who will have some final remarks.

We'll then respond to your questions.

Brad?

Thank you, Matthew, and good morning.

Darden's total sales from continuing operations decreased 6% in the fourth quarter to $1.86 billion.

You may recall that the prior year included an additional fiscal week that contributed approximately $124 million in sales.

Comparing total sales on a 13-week versus 13-week basis would have resulted in a 1% increase in sales.

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

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

For context, industry, same-restaurant sales as measured by Knapp-Track and excluding Darden were estimated to be down approximately 1.4% for the quarter.

Note that the Knapp-Track benchmark is calculated on a calendar week basis, which is different from our fiscal week basis methodology.

Knapp-Track aligns the same calendar weeks year-over-year, while our fiscal weeks were off one week in fiscal 2010 due to the 53rd week in fiscal 2009.

As such, our fourth quarter is adversely affected by the fiscal week comparison.

On a calendar week comparison, though, which is consistent with how the Knapp-Track benchmark is calculated, Darden's blended same restaurant sales results for the fourth quarter were down 0.9%.

On a calendar week comparison, Olive Garden's fourth quarter US same restaurant sales declined 0.8%.

Red Lobster's fourth quarter US same-restaurant sales declined 1.7%.

Longhorn Steakhouse's fourth quarter US same restaurant sales increased 2.3%.

The Capital Grille's fourth quarter same restaurant sales increased 6.9% and also on a calendar week comparisons, Bahama Breeze's fourth quarter same restaurant sales increased 0.9%.

As noted in the press release yesterday, we recognized a $12.7 million reduction to revenue related to gift card breakage in the fourth quarter.

This reduction in gift card breakage revenue was a noncash charge.

The reduction was applied ratably across our brands on the basis of total sales, and has had an adverse effect on our margins this quarter, but I would also mention it does not impact the same-restaurant sales results.

This correction to our third quarter estimate of gift card redemption -- unfortunately, that was not included in our analysis in the third quarter, and we did not fully recognize the impact that occurred from the significant increase in consumer redemption behavior that occurred during the year.

Now, let's discuss the margin analysis for the fourth quarter.

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

The additional week leverages restaurant expenses, selling, general, and administrative expenses, and depreciation expenses.

As some of these expenses are incurred or amortized on a monthly or 52-week basis.

Food and beverage expenses were 81 basis points lower than last year on a percentage of sales basis, as a result of reduced food costs.

We have continued to see benefits from declining commodity prices in the second half of this fiscal year.

The sales deleverage created by the gift card correction adversely affected food and beverage expenses by 20 basis points.

For the fourth quarter, restaurant labor expenses were 47 basis points higher than last year on a percentage of sales basis due to wage rate inflation and increases in manager bonus that were partially offset by productivity gains and reduced employee turnover levels this quarter.

The sales deleverage created by the gift card correction adversely affected labor expenses by 22 basis points.

Restaurant expenses in the fourth quarter were 48 basis points higher than last year on a percentage of sales basis, because of the sales leverage due to the additional operating week in the prior year, and unfavorable workers' compensation and public liability cost development.

However, we did experience lower utility costs this quarter on a percentage of sales basis.

The sales deleverage created by the gift card correction adversely affected restaurant expenses by 10 basis points.

The sales deleverage created by the extra fiscal week in the prior year adversely affected restaurant expenses by 35 basis points.

Depreciation expenses in the quarter were 41 basis points higher than last year on a percentage of sales basis, because of sales deleverage due to the additional operating week in the prior year and the increase in new restaurants, remodels, and the opening of our new restaurant support center.

The sales deleverage created by the extra fiscal week in the prior year and the gift card correction adversely affected depreciation expense by 25 basis points.

Selling, general, and administrative expenses were 24 basis points lower as a percentage of sales for the fourth quarter.

Last year, expenses included investment spending of 50 basis points related to the extra fiscal week, partially offset by higher incentive pay this year and the sales deleverage created by the gift card correction of seven basis points.

The effective tax rate for the fourth quarter was 26.2% and our annual effective tax rate of 25.1% was in line with our previous outlook.

Turning to the full fiscal year, Darden's total sales decreased 1.4% in fiscal 2010 to $7.11 billion.

This decline was driven by the additional operating week in the prior year.

On a 52-week versus 52-week fiscal basis, total sales would have increased approximately 0.3% driven by 51 net new restaurants partially offset by our blended same-restaurant sales decrease of 2.6%.

On a brand by brand basis, Olive Garden annual same restaurant sales decreased 1.0% and its average unit volumes were $4.7 million, well above those of any other nationally advertised full service restaurant brand.

Red Lobster had a 4.9% same-restaurant sales decrease for the year and its average unit volumes were $3.6 million.

Longhorn Steakhouse same restaurant sales decreased 1.9%, and its average annual unit volumes were $2.7 million.

The Capital Grille same restaurant sales decreased 7.8%, and its average unit volumes were $6.2 million.

And Bahama Breeze same restaurant sales fell 2.9%, and average unit volumes were $5.4 million.

For comparison, same-restaurant sales as measured by the Knapp-Track benchmark, excluding Darden, were down an estimated 4.9% for our fiscal year.

We think both our outperformance on same-restaurant sales and high average unit volumes demonstrate that Darden has a strong portfolio brand that can perform well in any environment.

In fiscal 2010, Olive Garden opened 32 net new restaurants.

Longhorn Steakhouse opened 10 net new restaurants.

Red Lobster opened four net new restaurants.

The Capital Grille opened three net new restaurants.

Bahama Breeze opened one net new restaurant and Seasons 52 opened three net new restaurants.

We repurchased $85 million of our shares for the year.

In the last five years, we have repurchased over $1.19 billion of our stock, which speaks to the significant cash flows that we generate on a consistent basis.

We have 8.3 million shares remaining in our current repurchase authorization, and I will discuss our plans for share repurchase in fiscal 2011 following Gene's remarks.

Demonstrating our ability to consistently generate strong cash flows, yesterday we announced an increase in our dividend to $0.32 per share, payable on August 2, 2010 to shareholders of record on July 9, 2010.

We previously paid a quarterly dividend of $0.25 per share, or $1 per share on an annual basis.

Based on the $0.32 quarterly dividend declaration, our indicated annual dividend is $1.28 per share, an increase of 28%.

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

Thank you, Brad.

This morning, I'll share a few highlights regarding industry same-restaurant sales dynamics, our fiscal 2010 fourth quarter sales performance, and fiscal 2011 strategic priorities for Olive Garden, Red Lobster, and Longhorn.

Then Gene Lee will do the same for the brands in our specialty restaurant group.

During the fourth quarter, estimated same-restaurant guest counts were down 3.2%.

However, implied checks increased 1.8%.

So as a result, same-restaurant sales were down only 1.4%.

This represents continued sequential improvement in both the absolute result and underlying dynamics for the industry.

Compared to the third quarter, guest counts improved 90 basis points.

Check improved 190 basis points.

And so same-restaurant sales improved 280 basis points.

In fact, this was the first quarter of check growth for the industry during fiscal 2010.

Stepping back even further, same-restaurant guest count and sales during the fourth quarter marked the best industry performance in roughly two and a half years, since the first quarter of our fiscal 2008.

While industry guest counts and sales remained negative, we are encouraged by the continued improvement in both metrics, as well as a reduction in the amount of competitive deep discounting so prevalent earlier in the year.

Now, our strategy during the fourth quarter was consistent with the approach we've discussed with you throughout this fiscal year.

We continue to be wary of utilizing deep discounts to address difficult economic conditions, given our concerns about what this might do to the long-term brand equity, business model integrity, and the potential for sustained profitable growth, so our approach is to build upon the broad appeal and strong guest loyalty of our brands, leverage the cost advantage that comes with our scale, and utilize selective value offers across our portfolio that are designed to be profitable in the near term and maintain the integrity of our brands and the strength of our business model long-term.

As Brad mentioned earlier, on a calendar week basis, the blended performance of our three large brands exceeded the Knapp-Track benchmark during the fourth quarter by 50 basis points.

Still, this was below our implied guidance for the quarter, primarily due to promotional weakness at Olive Garden and Red Lobster during April that was only partially offset by better than expected performance at Longhorn.

Olive Garden same-restaurant sales during the quarter on a calendar week basis were down 0.8%, which was 60 basis points above the Knapp-Track benchmark.

As a reminder, Olive Garden was ramping on a competitively strong year-ago period when they exceeded the industry by more than six percentage points.

And that was driven in part by incremental media support and one additional week of price point advertising compared to this year.

We chose to keep our investment in media and value promotions at normalized levels during the fourth quarter this year.

In addition, the dishes featured in this year's Culinary Institute of Tuscany promotion, which started in mid-March and ran through April did not create the same level of special visit interest that we had seen from this promotion in prior years.

Our view that Olive Garden's April softness was promotion related was reinforced when same-restaurant sales improved significantly once their Heart of the Village promotion started in mid-May.

It featured two new dishes called Crespelles, which are authentic hand rolled Italian crepes, filled with Italian cheeses supported by a starting at $10.95 price point.

Red Lobster same-restaurant sales in the fourth quarter on a calendar week basis declined 1.7%, which was 30 basis points below the Knapp-Track industry benchmark.

Red Lobster was also wrapping on a competitively strong year-ago period, where they exceeded the industry by more than six percentage points.

As we mentioned during our third quarter call, Lent started earlier this year compared to last year.

This holiday shift and the resulting promotional and advertising shift made by Red Lobster negatively impacted sales results compared to prior year during both March and April.

However, the impact to April was more significant than we assumed in the implied sales guidance we provided during our third quarter call.

Starting in mid-April and running through May, Red Lobster introduced a new Festival of Shrimp promotion, with a starting at $11.99 price point to help address the elevated need for value we typically see after Lobsterfest.

This promotion improved post-Lobsterfest sales trends and looked consistent with our expectations.

Longhorn achieved same-restaurant sales growth of 2.3% on a calendar week basis during the fourth quarter, exceeding the industry benchmark by nearly four percentage points.

Longhorn began the quarter with a Big Bold Steaks promotion, featuring two new steak dishes, and their industry outperformance accelerated during May when they began advertising their Steak and Seafood combination, with a starting at $14.99 price point.

Now, with all of that, on a combined basis, we still outperformed the industry in the fourth quarter, capping a year of same-restaurant sales that were about 2.5 percentage points better than the industry benchmark.

Now, let's take a look at our fiscal 2011 strategic priorities.

Darden has three priorities overall.

First, we will continue to build strong brands, capable of consistently winning the market share contest in our increasingly mature industry.

Second, we're focused on creating an increasingly cost-effective brand support platform to ensure we further enhance our margins and leverage sales growth profitably.

And third, we are working to create an even more vibrant organization, where engaged employees volunteer their discretionary effort and we are able to respond quickly and decisively to changing market conditions and capture our full growth opportunity.

Turning to our three large brands, we believe Olive Garden is well positioned to deliver superior growth and value creation again during fiscal 2011.

They continue to have a compelling and differentiated brand that offers a broadly appealing cuisine, competitively superior value and the opportunity to help make you feel like you're enjoying an idealized Italian family meal.

They also have a very strong business model that is delivering near record return on sales and generating significant free cash flow.

Our variable leverage is the strong foundation to deliver meaningful industry outperformance in same-restaurant sales complimented by aggressive new unit growth.

Specifically during fiscal 2011, they will introduce culinary news that further broadens the choice and variety on their menu, launch a new service initiative that will increase guest throughput during peak demand period, double their investment behind digital media, and open 30 to 35 net new restaurants.

Red Lobster continues to dominate the seafood segment by offering a variety of seafood choices and cravable signature dishes, unmatched in casual dining.

They have also made significant improvement in most of their business fundamentals over the last several years and now have solid operating margins that support meaningful reinvestment while generating substantial free cash flow.

During fiscal 2011, they will continue their efforts to reposition Red Lobster as an approachable, fresh seafood restaurant, that makes togetherness special for their guests.

Their biggest growth opportunities going forward are to further address the remaining experience barriers necessary to recapture more lapsed users, as well as the affordability barriers necessary to increase frequency among some current users.

To address these experience barriers, Red Lobster will accelerate their Bar Harbor remodels from 50 units last year to 100 units in the current year, introduce a new service initiative to make every guest feel special, and continue evolving their menu by featuring delicious dishes inspired by the regional tastes of America.

To address affordability barriers, Red Lobster plans to feature affordable price points and cravable dishes in more promotions during fiscal 2011 and refine the price point strategy in their core menu to increase guest value, while also protecting margins.

Red Lobster plans to open three to five net new units this year.

Now, we know there's been some concern about what the Gulf oil spill means for product availability and costs at Red Lobster.

First, we recognize that the spill is an incredible tragedy for the families of the workers who were killed in the initial explosion on the rig and for all the others whose livelihoods and way of life depend on the Gulf.

We do source some product from the Gulf and all of it, with the exception of oysters, is from areas that have not yet been affected by the spill.

And perhaps more importantly from a commercial perspective, we source the large majority of our seafood products globally.

So we have seen very little impact on costs and availability, and don't expect to see much adverse impact going forward.

Still, as I said at the outset, this is a very disconcerting tragedy for so many, and we'll try to help the partners we have in the Gulf area to get through it.

Turning to Longhorn, they achieved positive and growing momentum over the last six months.

The business has always enjoyed a strong foundation of operational excellence and this heritage strength has been complimented by sharper brand definition, stronger advertising, and more effective promotion.

The combination helped Longhorn deliver same-restaurant sales growth of 1.8% on a fiscal week basis during the second half of fiscal 2010, which, combined with strong cost management and favorable commodity cost trend, has strengthened operating margins and positioned the business for accelerated unit growth that is fully funded by the cash flow from their current business.

Their brand strategy is to delight guests with a great steakhouse experience that is inspired by the ideals of the American West, especially the growing consumer longing for a time when life was simpler, we could all count on each other to lend a helping hand, and reward ourselves with a delicious steak after a hard day's work.

During fiscal 2011, Longhorn will focus on consistency of grilling to the requested temperature, addition of more cravable menu items and continued expansion of their ranch house remodel program that offers a warmer, more refined dining atmosphere.

This will include the remodel of an additional 90 restaurants this year.

Longhorn's Discover the West Anew advertising campaign will continue to help build more consistent brand image by featuring cravable steakhouse dishes, as well as the timeless values of the American west that help further differentiate the brand.

Spot advertising support will expand from 200 restaurants last year to 280 restaurants in fiscal 2011.

In addition, all restaurants will benefit from the addition of national cable advertising during three of their six promotions during fiscal 2011, starting in September.

Longhorn plans to open 20 to 25 net new restaurant this is year.

Two additional thoughts I would like to briefly share with you before Gene reviews our specialty restaurant group.

First, we announced last April that John Caron would move from leading the marketing team at Olive Garden to become Darden's first Chief Marketing Officer.

We believe this promotion and additional organization enhancement that John is working on will further strengthen our brand management capabilities and help accelerate our progress on longer-term brand building innovation and growth.

Finally, we continue to make significant progress transforming the way we run our business and support our restaurant that will make our brand support platform even more cost effective in the future.

Three core projects in particular, the automation of our supply chain, the centralization of our facilities maintenance support, and the adoption of more sustainable inner restaurant operating practices related to energy, water and cleaning supplies, are all on track to meet or exceed the cost reduction targets we've discussed with you in the past.

Combined, we anticipate capturing $10 million to $15 million of incremental savings from these projects during fiscal 2011.

Gene?

Thanks, Drew.

In the fourth quarter, The Capital Grille outperformed it peers in the premium steakhouse category with same-restaurant sales growth of 6.9% on a comparable calendar basis.

This growth, along with three additional restaurants and solid cost management, resulted in strong operating profit for the quarter that was significantly above last year.

In fiscal 2011, The Capital Grille team will continue to focus on increasing the brand's share on the premium steakhouse category, by building on their competitive advantage and service.

They will strengthen relationships with guests and further personalize their dining experience by enhancing customer relationship management capabilities, including using new software that will enable the restaurant teams to recognize and delight the brand's most frequent and loyal guests in any Capital Grille they visit.

The team will also leverage their culinary and beverage expertise, provide value to guests in unique ways, while still delivering on the brand promise.

An example would be the master wine tasting event that's going on in restaurants right now.

This unique offer allows guests to taste several different domestic and international wines with their meals at an approachable price point.

The Capital Grille plans to open four restaurants in fiscal 2011, including the first two locations in Southern California.

While it's been a difficult two years for the Capital Grille as the premium steakhouse category was significantly impacted by the recession, we nevertheless managed the brand effectively and remained solidly profitable during the downturn, without this kind of brand or lowering the business model.

By continuing to invest in our people, our footprint, and in technology like our customer relations management enhancements, The Capital Grille is well positioned to capitalize on rebounding trends and business travel and entertainment spending, as well as a rebound in luxury consumption in the future.

Now let's discuss Bahama Breeze.

In the fourth quarter, Bahama Breeze outperformed the casual dining same restaurant sales benchmark by 230 basis points, with same-restaurant sales growth of 0.9% on a comparable calendar basis.

The team made significant progress on strengthening the brand's business model and opened a new prototype restaurant in Jacksonville, Florida.

Construction costs for this prototype are similar to Darden's other casual dining brands and the new restaurant is approximately 7,000 square feet in size compared to about 10,000 square feet for the original Bahama Breeze prototype.

This new design will be the platform for future expansion.

In fiscal 2011, Bahama Breeze will focus on further evolving the brand delivery and growing same-restaurant sales through operational excellence.

The team will also work on reinvigorating the alcoholic beverage experience, which is still a strong core element of the brand, representing more than 22% of its total sales.

Bahama Breeze will open one restaurant in fiscal 2011 and begin to expand more rapidly in 2012, opening four additional restaurants.

Seasons 52's average unit volumes for fiscal 2010 were $5.9 million and same-restaurant sales for the year declined 0.2% on a comparable calendar basis.

The team made significant progress on strengthening the brand's business model and service culture, while continuing to build organizational capability to support accelerated growth.

This is a highly differentiated brand that is right for the times in so many ways.

After a disciplined development phase, Seasons 52 will be ramping up its growth and transitioning from our regional brand to a national platform.

They will open six restaurants in fiscal 2011, including the first entries into Texas, California, and Arizona.

The specialty restaurant group continues to make progress on building our integrated portfolio of brands and as a group, we are significant contributor to Darden's total sales and earnings growth.

Now, I'll hand it back to Brad for the fiscal 2011 financial outlook.

Thank you, Gene.

Our outlook for fiscal 2011 reflects a very strong business model.

In fiscal 2010, we generated over $900 million in cash flow from operations, along with the challenging economic environment.

And we anticipate generating strong cash flows again from operations in fiscal 2011, driven by the combination of same restaurant sales growth, accelerating new unit growth, and improvement in our already strong margins, and after investing in our businesses, we plan to return even more capital to shareholders through an increase in our dividend, which we announced yesterday, and a step-up in our share repurchases.

In fiscal 2011, our outlook is based on a combined same restaurant sales growth for Red Lobster, Olive Garden and Longhorn Steakhouse of between plus 2% and plus 3%.

This includes approximately 2% of pricing in fiscal 2011 and our assumptions that together, traffic and mix changes will be positive.

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.

Looking ahead to unit growth, the new restaurant plans we outlined mean that we expect a net new restaurant increase of approximately 70 to 75 restaurants, which is about to pay 4% unit growth on our current base and approximately 3.5% growth in operating weeks for 2011 due to timing of the unit opening.

Given our same-restaurant assumptions and new restaurant plans, we anticipate that total sales increase for the year will range from 5.5% to 6.5%.

With more unit development in fiscal 2011 and our accelerated remodel programs at Red Lobster and Longhorn Steakhouse, we expect capital spending to be higher in fiscal 2010.

We anticipate it to be approximately $475 million to $525 million, which compares to $432 million in fiscal 2010.

Looking at operating profit margins from continuing operations, we expect results to range from margin expansion of 70 basis points to 100 basis points on a full year basis compared to fiscal 2010 reported results.

We expect to see continued benefit from food and beverage expenses in the first half of the fiscal year, but this will begin to level out in the second half of the fiscal year.

We anticipate lower restaurant labor expenses as a percentage of sales this fiscal year because of the same restaurant sales growth leverage.

The remaining line items of restaurant expenses, selling, general, and administrative expenses, and depreciation expense are expected to be relatively unchanged on a percentage of sales basis.

Our supply chain-related cost savings initiatives and relatively stable commodity prices should contribute to lower food and beverage expenses as a percentage of sales.

We had many of our products contracted through the end of calendar 2010, which I will discuss in detail shortly here, but we had about six months of full visibility on our costs.

There is less visibility beyond calendar 2010, in part because we believe some commodities will continue to experience cost erosion as supply exceeds demand and we want to be in a position to benefit from that decline.

In terms of specific food items, total seafood prices for fiscal 2011 are expected to be slightly higher than fiscal 2010, as global demand has increased.

Seafood accounts for approximately 30% of Darden's total food and beverage costs.

Category by category, shrimp is our highest volume protein and we have coverage through the fourth quarter of fiscal 2011 at prices in line with fiscal 2010.

Crab is contracted or purchased at prices flat to fiscal 2010, with coverage through the fourth quarter of fiscal 2011.

And we currently have lobster usage contracted or purchased through calendar 2010 at prices that are favorable to the prior year.

In calendar 2011, though, we anticipate higher prices for lobster.

Beef prices are lower on a year-over-year basis and we have extended our coverage to January of 2011, depending on the cut, at lower prices than fiscal 2010.

Chicken, poultry market prices are slightly higher on a year-over-year basis, but we have contracted our usage through December of 2010 at prices below our fiscal 2010 costs.

Wheat prices are lower on 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 September.

We expect that bread and pasta contracts will be renewed at prices favorable to what we are experiencing currently, given the oversupply in the market.

Dairy prices are higher on a year-over-year basis.

We have contracted our fluid dairy usage through August of 2010 at prices 25% above our fiscal 2010 costs.

We have contracted our solid dairy usage through December of 2010 at prices slightly higher than our fiscal 2010 costs.

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 market in which we operate, and we will be opportunistic about adding additional coverage.

Turning to labor, as I mentioned, we anticipate that labor costs as a percentage of sales will decrease due to sales leveraging, despite modest wage rate inflation this fiscal year.

We believe that restaurant expenses as a percentage of sales will be flat to the prior year because of sales leverage and our transformational cost savings initiatives, offset by inflationary pressures.

We anticipate that selling, general, and administrative expenses as a percent of sales will be flat to the prior year.

This is due to sales leverage and cost savings that will be offset by media inflation of approximately 5% to 6%.

Finally, for fiscal 2011, we expect our tax rate to be approximately 27%, although this will vary by quarter depending on the timing of certain tax events.

Again, we expect to generate solid cash flows in fiscal 2011, which we've done consistently since we became a public company back in 1995 and used these cash flows to pay our increased dividends and repurchase shares.

We expect to pay out $180 million in dividends to our shareholders, an increase of approximately $40 million from fiscal 2010.

We also expect to repurchase approximately $300 million to $350 million of our stock in fiscal 2011, a large increase from the $85 million share repurchase in fiscal 2010.

With our same restaurant sales assumption and new restaurant growth plans, we anticipate reported diluted net earnings per share growth from continuing operations of 14% to 17% in fiscal 2011 compared to our reported diluted net earnings per share from continuing operations of $2.86 in fiscal 2010.

As you might expect, there will be some quarterly variability in diluted net earnings per share growth in fiscal 2011 that mirrors the sales growth variability I previously discussed.

Overall, the most important point here is that we remain confident and our results will be competitively superior, even in an improving economic environment.

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

And we do want to get to questions, so just a couple of follow-ups.

As we look ahead to 2011, we do expect operating conditions to improve and that's going to be a continuation of the improvement we think that we saw throughout this fiscal year.

And we think we're very well positioned to take advantage of that improvement for two reasons.

One is that we've been relentlessly focused on guest satisfaction throughout the past couple of years, and the second is we've made the right investments, we think, for long-term success, investment in our employees, investment in our guests, and investment in our operating infrastructure.

And so as we look out, we think that for Darden, the best is yet to come.

And with that, we will take your questions.

(Operator Instructions).

Our first question today comes from David Tarantino, representing Robert Baird.

Please go ahead.

Hi, good morning.

Just a question on the outlook for the comps for fiscal 2011.

I guess what has given you the confidence that you can reach that 2% to 3% goal, and maybe if you could put that in the context of what you've been seeing in recent months, and how much improvement might be needed to get to that number?

Well, David, this is Clarence.

I'll start off.

I think it really is the improving underlying industry trend is the first pillar there, and so this past quarter, we talked about the industry at minus 1.5%.

You may recall we started at minus 8%.

In our fiscal first quarter, roughly minus 6% in the second quarter, and I think about 4% roughly in the third quarter.

We've seen an improving trend through the year.

We don't expect dramatic improvement next year, so as we think about the industry, our planning assumption is that it will be down 1%.

So a little bit better than what we saw here in the fourth quarter, even with the comps that I just mentioned.

As we think about our gap to the industry, do we expect that to expand.

So this year is about 2.5 points and we would expect next year to see more like 3.5 points.

And part of that is the confidence we have in our plans.

We also think that we were adversely affected by a lot of the deep discounting that we saw competitively.

We don't see a cost environment that's going to allow as much of that as we've seen this year.

And then if I could ask one quick follow-up, perhaps Brad, could you talk about what the underlying May comp was adjusted for the fiscal calendar impact because that's a little bit hard to read.

I assume the fiscal period impact was largest in May.

But if you could just give some color on that.

And then if there's any comment on June comps, that would be helpful.

Thanks.

Yes, good question, on the comp question there.

First off, I mean, we continue to look at the fiscal week basis because that best explains our fiscal reported results.

And so that's why we'll use those.

A truer gauge of the performance and how Knapp-Track performs the benchmark that we compared to, we look at the same calendar weeks, if you will.

And so those are better lined up.

You are correct that most of that impact occurs in the month of May, although it does occur some even from March forward.

But I would say the majority of that is due to that weak comparison in the year-ago shifting basically to weeks 2 through 14 last year compared to weeks 1 through 13 this year.

So the weeks are lined up.

And so most of that occurs in the month of May there.

Can you blend them together?

Yes, we can do that.

If you look at the same-restaurant sales by month for the three large brands blended together, it would be down 1.1% in the month of March, down 2.8% in April, and positive 1.4% in the month of May.

That's, again, for the three big brands.

So you can see each month is affected a little bit, but more so towards the end of the quarter.

Next question, please?

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

Please go ahead.

Thanks.

Wonder if you could elaborate a little bit on the charge that was taken in the period.

I think Brad mentioned it was related to breakage and maybe could explain in Q3, was there a large breakage gain and then that was adjusted?

Perhaps you can explain that?

Thanks.

Yes, good question, Jeff.

What the charge really relates to is the breakage that we've seen in the gift cards.

What we have seen is a dramatic increase in the redemption of those cards.

Approximately 60% of the adjustment we took in the fourth quarter relates to cards that are 3 to 10 years old.

And so that really speaks to the consumer's desire for our brand.

They are digging those cards up and coming into our restaurant.

We do think that's helped drive some of our same-restaurant sales performance that is there, but, this is a charge that ideally we would have made in the third quarter.

We were still looking at that information.

And so it's of a similar nature there, but, really relates to the change in consumer behavior over the past year in our gift card usage.

And so just to follow up, we raised our assumption about the percentage of cards that would be redeemed based on that change in consumer behavior and so as a result of that, took a charge in the third quarter.

An additional charge in the fourth, because with some additional information, we realized it should have been larger than what we, what we had in the third quarter.

And so in both cases, it's a charge appropriately calculated really in the third.

So the fourth quarter was a little bit of a catchup.

Okay.

That's very helpful.

And then just one other question on Red Lobster performance, just curious if in the southeast you're seeing any change in consumer behavior perhaps related to Gulf oil spill or are they just working through that?

Thanks.

We haven't seen any meaningful change in consumer behavior, other than we're not selling the oyster appetizers that we had before, but beyond that, we haven't seen any change.

Jeff, this is Brad.

I'll just add onto that.

Beyond that, we continue to see weakness, looking on a regional basis, in Florida, as well as California and the mountain area as well.

So -- but to Drew's point anything specifically tied to that incident, no, we haven't.

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

Please go ahead.

Hi, this is John Dravenstott on the line for Brad.

Again, with Red Lobster, could you speak a little bit more to your price point strategy there.

Do you think that you found the right mix of price point/quality promotions?

And then speaking specifically to the fourth quarter, was there more or less in April than we saw in the other months?

Well, as it relates to your first question, we don't want to talk too much about our promotional strategy in specifics going forward, but what I can tell you is it's important to have news.

So we're always promoting.

And we also know it's important to communicate affordability.

So the foundation of Red Lobster's promotional strategy as it relates to price points is to provide price certainty, is to provide a sense of affordability.

And we did two this year in the second half and they were in the $12 to $15 range.

They were designed to be profitable in the short-term and to communicate value and affordability and we were pleased with how they worked.

I think I would leave it at that for now.

Your second question, I couldn't hear.

Oh, I'm sorry.

In April in particular, was there, was there more or less use of price points than in May or March?

No, there's no price point difference.

There's no price point at all in April this year or last year.

Everything that was going on in April was related to the shift in Lent and the shift in advertising and promotion support related to that at Red Lobster that basically moved up advertising and that adversely impacted March and April this year, particularly April.

Okay.

So April of this year did not benefit from a price point?

No.

It didn't start until May.

Okay, thank you.

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

Please go ahead.

Great.

Thanks very much.

When thinking about the earnings per share growth outlook for fiscal 2011, the first half versus the second half, I guess you have pretty easy comparisons in the first half and on a comps perspective, the 2% to 3% comps target, is there a progression that we should assume throughout the year, given the difference in comparisons on a quarterly basis?

Yes, if you look across the coming year, there is a little progression from quarter to quarter, although not dramatic when you look at the prior year comparison.

There is a little bit more of a skew on the earnings to the back part of the year, particularly as you look at wrapping over the gift card charges that we mentioned earlier.

Okay, great.

Thank you.

And could you quantify the benefit that you received perhaps from people, consumers using old gift cards in the fiscal fourth quarter and third quarter?

I don't have that number.

But you said fourth quarter versus the third quarter?

I'm sorry?

In the third quarter, there was the gift card charge as well.

Those adjustments, if you kind of work backwards, the average value on those cards was approximately $25 let's say, our average transaction is, depending on the brand, two to three times that amount.

So it did help aid same-restaurant sales growth.

I don't have the exact number, but it was a contributing factor, but by no means a major factor in our outperformance to Knapp-Track.

And Mitch, that would have occurred throughout the year.

The adjustments took place in the third and fourth quarter, but the activity, behavior that resulted in the assumption change occurred throughout the year.

Next question is from the line of Joe Buckley with Banc of America.

Please go ahead.

Hi, it's actually [Steven Bono] for Joe.

You noted the promotional weakness at Red Lobster and Olive Garden during the quarter.

Do you expect to be more aggressive around price point advertising next year?

And then could you talk about just marketing expenditures overall next year and how does the weighting look by brand compared to the share?

Well, on the question of price point strategy, as I said a minute ago, we don't want to enter into too detailed a discussion about our forward-looking plans there.

We did see the importance and the benefit of communicating affordability and price certainty at Red Lobster this year, but done in a way that was consistent with the brand equity, consistent with the high quality, fresh seafood experience, consistent with the business model and margins, and we were pleased with the results.

So we're going to lean into that a little bit more next year, but I don't think I would want to layout the number or the cadence just yet.

The same can be said for Longhorn as well.

We did a couple there this year, selectively throughout the year, consistent with the brand, consistent with the business model, and communicated affordability and they worked effectively.

In terms of investment in marketing, probably the biggest thing to note would be an increase in media support for Longhorn.

So they are going from 200 of their restaurants receiving spot television support in our prior fiscal year to 280 restaurants receiving spot television support, and that's largely been enabled by continued unit openings that make spot TV efficient in more trade areas.

In addition to that, we've decided to add network cable for Longhorn so all restaurants are going to get some level of television support a couple times a year in fiscal 2011, where they didn't get anything last year.

So that's, that's positive that will help.

It's incremental media support, but I would reinforce what we said at our analyst and investor day, that the media waits at Longhorn are still well below what they are at Olive Garden and Red Lobster in terms of number of weeks and points per week.

I think Brad mentioned that media inflation is up a little bit, up about 4%.

Media is up about 5%, 6%.

What I would add to Drew's comments, is that if you look at it as a percent of sales on a year-over-year basis, it's going to be roughly in line with that, even taking into consideration some of the items that Drew mentioned there.

If you are looking at quarterly comparisons year-over-year, there will be some variability, just because the natural change in our promotional calendars that we look at and some of the changes at Longhorn there.

So it will have some movement on a quarterly basis year-over-year.

Great, thanks.

We'll go to the line of Jason West with Deutsche Bank.

Please go ahead.

Yes, just a couple quick ones I guess.

On the commodity outlook, you guys, I think at the analyst day, gave specific numbers in terms of the inflation targets for fiscal 2011.

Wonder if you could kind of update us on that number and kind of how it may look in the first half versus the second half, and just wanted to clarify, on your shrimp comments that you said you were locked on prices through the end of fiscal 2011, I believe you said.

Just want to confirm that.

Thanks.

This is Brad.

And yes, we are locked on our prices on shrimp through basically the end of our fiscal 2011.

If we go back and look at information that we shared at the February conference, not a whole lot has changed from those planning assumptions.

We're looking at an overall inflation rate on our cost basket of about 1.5%, 1.75%, if you would.

With the food portion of that being about a 0.25% to 0.5%.

So a fairly modest cost environment there.

We do have some of the other cost and wage rate, and some of those items going up to 2.5% to get that back to the basket level there.

And in terms of kind of first half of the year, by the back half of the year, I think we'll see a little bit more than that average in the back half of the year, a little bit less, but no dramatic first half to back half of the year differential there.

Okay, and then just along those lines, you guys are saying that you expect the promotional environment to be less aggressive this year because of the less positive, or I guess food storage -- are you seeing that already in terms of the promotional environment, or is that something you expect to develop as inflation starts to flatten out later in the year?

Yes, if you look at the check discounting on an overall macro basis that we get from the industry sources, you're seeing a pretty significant reduction there.

We've gone from deflation in the prior couple quarters of about 1.5% to the most recent quarter being pretty much flat, and within that quarter, seeing that moving up a little bit.

But I think the fundamental thing is the opportunity that many of us in the industry have benefited from a declining commodity cost environment.

We don't see continuing declines.

Some items will, but more stability there.

The whole industry has benefited from continued lower turnover on front line employees.

And so the cost of securing new employees and the training costs and all of those, we're going to work really hard to keep ours where they are, but I don't know that there's going to be an additional cost benefit there that's going to allow the industry as a whole to continue discounting their overall check.

Just one added comment to what Brad just shared.

For most of the big national advertisers that we compete against, excluding Darden brands, we're continuing to see them offer price points in their promotions.

They just aren't as deep a discount as they were in the past.

So there's still a lot of price points out there, but they are not as deep.

Next we'll go to the line of Jonathan Waite with Precipio Research.

Please go ahead.

Yes, hey, guys.

Quick question for you on the outlook on the group.

With your fiscal 2011 comps being the 2 to 3 versus group assumptions down 1, do you expect kind of a higher bifurcation between the brands, the haves and the have-nots, especially in light of what the CPK announcement earlier last week, and give me some thoughts as far as how you view the rest of your competitors doing?

That's a tough question.

It's tough because you've got a lot of folks who had some pretty significant comp declines that will find a level, right, and so we think some of the competitors have been high single digit will help the average a lot by moving to low single digit decline.

So there's a lot of dynamics.

That's one.

We think some of the folks who have outperformed will continue to outperform, because they have been disciplined when it comes to how they manage the brand and they are offering a compelling experience.

It's a tough question.

There's so many moving parts inside that number.

And what is your thought then on the macros here?

You look for the group to be down 1.

You look for the macro to be more still sluggish, still difficult for the consumer?

Yes, I would say that assumption assumes that the environment will improve, but at a relatively slow rate of improvement, because down 1 on a down 5 fiscal 2010 year following a down 7 I think, fiscal 2009 year, 5, 6 I guess.

So we do see improvement, but we don't think we're being aggressive when we look at that overall industry number.

Next, we'll go to the line of Tom Forte with Telsey Advisory Group.

Please go ahead.

Great.

First question and follow-up.

On the first question, how confident are you, or do you believe you have the appropriate rate of investment now for the remodels at Red Lobster?

And can you talk at all about the expected lift in same-store sales from the remodeled locations?

Yes, we're very confident that the remodel investment at Red Lobster is both changing the way people think about the brand in a positive way and changing the way they behave with the brand in a positive way.

So it's very consistent with updating the image, refreshing the image, and it is driving positive same-restaurant sales I think in the 5% range.

So we're very confident that it's going to earn a return on the cost of capital.

And Kim and the team there have had a very disciplined process of testing different levels of investment, combining high and low investments on the exterior and the interior and measuring the difference.

Yes, we are very confident.

That's why we're accelerating it in 2011.

Great, and then second question is related to the state of the consumer.

Similar to what others have asked, but asked a little differently, are you seeing a lot of volatility in sales when you have headline events like the Gulf oil spill, what's been going on in Europe and the thousand point move in the Dow for 20 minutes, and then also in your assumption, what's your general thought on where unemployment would be at the end of fiscal 2011?

I would say that, that sales are very bumpy from week to week.

So we talked about the months, but even from week to week.

And so we do think consumers do respond to the headlines.

So a lot of what we're seeing reflects sentiment, and sentiment is very much tied to the headlines beyond the underlying fundamentals, which would argue for a little bit more improvement actually than we've been seeing.

So the headlines are there.

We do think ultimately that there is a lack of confidence in the capability of various institutions.

And so these headlines sort of reflect some of that, a little bit of disappointment in the Gulf not so much with the accident, but with the inability to get our arms around it, so confidence in the oil industry, but also confidence in the federal government.

Same thing with Europe.

And so for sure, those things matter.

Tom, Brad here.

One quick thing I would add to Clarence's comments is that week to week volatility, really makes it challenging to run great experiences in the restaurant in terms of having the right amount of labor there, preparing the right amount of food.

We think we have a number of tools that help us manage through that better.

Strong managers in the restaurant allow us to use those, and again, part of the reason that we feel confident in being able to grow our GAAP versus the industry benchmark as we look forward, to being able to navigate better through some of that volatility.

And I would just say we think that when you've got that kind of fragility when it comes to consumer trust, being consistent as a brand is important.

We think moving from deep discounts back to core pricing that happens to be 5 points higher than the prediscount price, all of that, doesn't help, doesn't help confidence in your brand.

And so we think that we've benefited from being more consistent and dependable in that kind of environment.

We'll go to John Ivankoe's line with JPMorgan.

Please go ahead.

Good morning, thanks.

This is actually [Amod Galterman] for John.

Just a question on your comments about advertising for Longhorn.

Is most of the ramp in that advertising going to be kind of product-specific, or will some of it be positioning the brand?

And how would the positioning of the brand be indicated relative to competitors?

The advertising we think needs do both.

It needs to establish Longhorn as a great steakhouse that's going to consistently deliver a very cravable steakhouse experience with a point of difference in terms of the emotional attachment people could have for the brand.

We think one of the things this advertising campaign has been doing for more than the last year is communicating a more consistent brand image, both as it relates to the quality of the experience and the values of the brand that Longhorn has benefited from in some of their prior campaigns.

So it's all about being a great differentiated casual dining steakhouse and we think this campaign does that both functionally and emotionally.

Okay, thanks.

Our next question is from Karen Lamark with Federated Investors.

Please go ahead.

Hi.

Wonder if you can talk a little bit about the improvement in the high end concepts, capital growth, for example.

What has changed in your opinion?

And are sales maybe there a little less bumpy from week to week at the higher end?

Just your level of confidence in their durability?

Thanks.

The biggest change has been the return of the business travel and entertainment spending.

We've seen our business improve Monday through Thursday greater than on the weekend.

And on your second question, I do believe that the upscale, the luxury businesses are much more volatile to changes in what's going on in the macroeconomic -- macro environment, whether it's what's happening with the Dow or what's happening in the Gulf.

We do see that fluctuate much more than casual.

Terrific, thank you.

Next question comes from the line of Steve Anderson, with MKM Partners, please go ahead.

Very quick question.

As we do our models for the year, do you have any guidance for the interest expense for this year, probably can't project into next, but that would be helpful for our model, given the variability on the Q3 to Q4.

Thanks.

I think our interest expense as we look at it is going to be relatively close to last year.

It is obviously going to depend on our operating cash flow and the timing of that and the assumptions on the interest rates.

But I wouldn't forecast any meaningful movement from where we've been this year with what we know today.

Okay, thank you.

Our next question comes from the line of Keith Siegner with Credit Suisse.

Please go ahead.

This is actually [Karen Holpass] for Keith today.

One more point of clarification on the comp trend in the quarter.

When you give the adjustments for the calendar week, calendar to calendar week comps instead of fiscal week comps, does that adjust for anything else other than just like the 14 to 13 weeks like Lent or any other shift?

Well, it's more closely lining up the calendar weeks, so you have everything from the Lent shift that's in there, you have a better alignment of spring breaks and things like that.

Plus, you also have the similar weeks and we do have, if you compare it to the fiscal week comparison, beginning weeks that are more -- similar sales volume.

As we talk about the 53rd week last year, it was a $124 million sales week.

That was significantly below our average rate.

I think it's about 15%, 20% below the typical week.

So you're better lining those up so you have that lower volume week in both comparisons, so there's that, plus just the natural alignment that you have between the Lenten period, gets closer, and vacations -- excuse me, spring breaks are the bigger drivers on that movement on a week to week, month to month basis.

Okay.

One thing the calendar week doesn't adjust for is any changes in advertising promotion timing that occurred for our brand.

So when we think in particular about Olive Garden having one less week of price point advertising in April this year or Red Lobster starting Lobsterfest in February this year versus March last year, those sorts of timing shifts aren't reflected.

All right.

Thanks.

That's very helpful.

And then one other quick one, which is with the potential disruption in oyster supplies from the Gulf, what percent of your menu would that effect, or what percent of your mix would that effect?

It's a very small percent of Red Lobster's business, less than 0.2% today.

Okay, great.

Thanks.

We'll go to Matt DiFrisco's line with Oppenheimer.

Please go ahead.

Thank you.

Just going back to the Red Lobster, you mentioned Red Lobster affordable price points and more promos.

I'm just curious on how have you factored in, or should we look at that as far is there any incremental labor, any LTO, some stress to the margins at all, or is that not necessarily going to happen?

How are you going to manage those incremental promotional activities?

It's not incremental promotional activity.

All three of our brands have six to seven promotional windows during the year.

All of those windows feature new dishes, for every brand.

So the level of activity that the organization is going to take on in terms of craving new concepts, developing new dishes, testing them in restaurant, et cetera, is no different.

I guess what's going to be different is the balance of promotions at Red Lobster that could feature price certainty at an affordable price point, so the dishes will be designed on the front end to be consistent with that, with that message.

So it's not more work.

It's just a different strategy.

Understood.

I heard more promos, so good, it's just more price point promos.

Okay, and just looking at the cable advertising comment, with respect to Longhorn, three of the six promos will have national cable.

Just to be clear, that is versus this year of no national cable supporting any of those six promos?

That's correct.

And it starts in September.

And we do expect it to be a positive impact to the business, but, again, for perspective, it's still not at the weight levels that an Olive Garden or Red Lobster has.

And next we'll go to the line of Todd Duvick with Banc of America.

Please go ahead.

Yes, this is actually Greg Heckman standing in for Todd.

I just have a question about plans to pay off or refinance the $150 million note that matures in August.

Is some of the cash on the balance sheet earmarked for that?

This is Brad, Greg, and you're correct.

We have ended the fiscal year with a strong cash balance, more than we typically have, and so that, along with our strong operating cash flow we will plan to pay that really out of our existing cash and cash flow of $175 million.

In addition we have $75 million that comes due in April of 2011, and would intend to do the same there, as well.

We do have our revolver that's available to us.

It has a capacity of $750 million, which doesn't expire until September of 2012, so we have plenty of flexibility to pay those off.

As the right situation, we may opportunistically go to the market somewhere near the end of this fiscal year, and go to the market and refinance some of that, but right now, our thinking is that we can pay off our current cash balance and operating cash flows.

Okay, thank you.

Our next question is from [David Darthman], representing Morgan Stanley.

Hi, thank you.

Just a follow-up on that, given the debt payments you'll have to make, and the $500-million plus you mentioned in buybacks and dividends, can you give us what you're thinking for your ability to generate free cash flow for the year?

Well, our business has a very strong cash flow, and if you look at that, we're going to take, I think on an EBITDA basis, it's a little over $1 billion there.

Half of that, or a little bit more than half of that, we would go to invest in the growth opportunities that we have, in terms of new restaurant opportunities and remos opportunities.

And then the other half through dividends and share buyback, we would return to our investors.

We also, during the fiscal year that just ended, really worked down some of our debt.

We have no draw on our revolver, and we've improved our debt metrics.

As we look to the coming year, we see our debt metrics being stable to improving, and so again it demonstrates the strong cash generation abilities that our business has to fund the growth opportunities that we see ahead as well as return a meaningful amount of that to our investors.

Okay.

And are the buybacks, are you spreading them throughout the year, or do you have repurchases planned?

We generally don't go into those details, but if you look at our history, we've been a very disciplined average cost repurchaser of our shares.

And one last question is, and I appreciate the color on how the brands do against the industry average, but do you have a sense of how they do against their own segments, most importantly for Longhorn?

Is steak improving versus other segments in general, or is Longhorn even improving against steak?

Well, the biggest competitor in steak is obviously Outback, and we now really have much less visibility to the same-restaurant sales results at Outback, so in terms of the last three months, it's difficult to answer that question.

But I would I say it's important to remember that it's a variety-seeking category, and while steak -- the category is competitive, people are moving between the brands throughout the year.

And we have a question from Nicole Miller with Piper Jaffray.

Please go ahead.

Hi, how are you doing?

This is Joshua Long on for Nicole.

I just wanted to touch on the service program real quick, especially at Red Lobster and Cap Grille.

Can you talk about the adjustment at Cap Grille and the new program there, and then also, have you had to make any specific adjustments to the Red Lobster service initiative, given what's going on in the Gulf, just to reassure the guest that comes in?

Thank you.

Yes, this is Gene.

I'll comment on the Capital Grille service initiative, which is really wrapped around our customer relationship management and how we can enable our restaurants to better identify our top 10,000 guests as they move amongst the brand, across the country, can they get the same consistent level of service in Boston and Las Vegas, and that's really been the initiative, and secondarily, how do we communicate with those folks on a regular basis in a way that they want to be communicated with, through the right technology.

An example would be, today, how you confirm a reservation at Capital Grille.

Two years ago, you would call people, the morning of the reservation.

Today, people don't want to be called.

So we are enabling technology to reach out to them, or to better understand how do they want to be communicated with, so that we can confirm their reservation.

Those are the types of things that we're working on.

Okay, thank you.

And there's two service initiatives.

There's a service initiative at Olive Garden and at Red Lobster.

The Olive Garden service initiative is designed to do a better job of quoting wait times and seating guests more efficiently in a way that increases guest count throughput, particularly on high-volume periods like Friday and Saturday.

At Red Lobster, it's more about taking the time to try and understand the occasion for which guests have come in the restaurant, and as a result, what their needs and expectations are, and then tailor the rest of the experience to those needs and that occasion.

It's called VIP service.

Great.

Thank you.

And we'll go to Robert Derrington's line, with Morgan Keegan.

Yes, thank you.

Hey, Brad, could you help me for a second?

Looking at the results, as we went through the course of this past fiscal year, I'm trying to draw some conclusions to use in our modeling for this fiscal year, and you had a couple of line items that seemed unusually lumpy, the changes quarter-to-quarter and year-over-year looked different.

For example, in your depreciation, it was higher on an actual dollar basis in the third quarter versus the fourth quarter, and I'm trying to understand what drove that increase in the third quarter by about 9%.

And then secondarily, on the interest expense line, I think it was mentioned, from quarter-to-quarter, it fell substantially in the third quarter, versus both what it was in the previous quarter, as well as what it was in the fourth quarter.

Can you help us understand those dynamics, and will we see more of that lumpiness in this coming fiscal year?

Robert, those are very good questions, pretty tough ones.

I don't have the exact answers, I'm going to have to get back with you, but what I would talk about on the depreciation side is during the course of the year, we brought online our new restaurant support center here, where in our old center, we had sold that and leased it back, sold at a very advantageous time, and leased it back, and then we moved into this center in the fall, and so that depreciation started to ramp up as we got into use of this center.

The other thing that we've talked about is the remodeling efforts that we have going on.

Those are adding depreciation, but some of the lumpiness that you describe is some of the old remodels that have reached the end of their accounting useful life, and so those are some of the things that are rolling off there.

Off the top of my head, that's the major items that I can think of that would be driving depreciation.

There's no other really meaningful items or adjustments that come to mind there.

I think on the interest side, is to the accounting rule looking at interest, because there are certain costs that we amortize into that, certain construction costs are capitalized as part of the building investment there, so that would probably be more of what's driving that.

As I look to next year, I think, I can't say it's perfectly straightlined, but it is probably a little less lumpy than it is this year, and remember, we went from having a draw on a revolver at the beginning of the year to not having that, as we get towards the end of the year.

In fact, we were building cash and getting some interest income would be the real driver of that quarter-to-quarter variability.

Would you anticipate any accelerated depreciation this new year for some of the remodeled items that you have got to impair, possibly?

No, we've looked at that.

There's no accelerated depreciation of those useful lives.

We typically have an accounting life that's shorter than the economic life that we use, so the big example would be the Olive Garden and their RevItalia remodel program that really got started in the late 1990s and ramped up in the early 2000s.

Those are 7-year-lives, and so some of those are starting to ramp up, so in that brand, you'll see it go down.

On a Darden consolidated basis, though, we have Red Lobster that's adding remodels, so you'll see some going up there, so net-net, when I look at Darden, I really don't see any big change in depreciation expense.

Gentlemen, there are no further questions at this time.

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

We're here in Orlando, available.

If you have additional questions, please let us know.

Otherwise, I wish you all a safe and happy summer, and we'll talk to you again in September.

Thank you.

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