達登餐飲 (DRI) 2011 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the second-quarter earnings release conference call.

At this time, all participants are in a 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 your host, Matthew Stroud.

Please go ahead.

Thank you, Greg.

Good morning.

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

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

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

Forward-looking statements are made under the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

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.

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

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

The most significant of these uncertainties are described in Darden's Form 10-K, Form 10-Q, and Form 8-K reports, including all amendments to those reports.

These risks and uncertainties include -- food safety and food-borne illness concerns, litigation, unfavorable publicity, federal, state, and local regulation of our business, including healthcare reform, labor and insurance cost, technology failures, health concerns including virus outbreaks, the intensely competitive nature of the restaurant industry, factors impacting our ability to drive sales growth, the impact of the indebtedness we incurred in the RARE acquisition, our plans to expand our newer brands like Bahama Breeze and Seasons 52, a lack of suitable new restaurant locations, higher than anticipated costs to open, close, or remodel restaurants, increased advertising and marketing costs.

A failure to develop and recruit effective leaders, the price and availability of key food products and utilities, shortages or interruptions in the delivery of food or other products, volatility in the market value of derivatives, general macroeconomic factors including unemployment and interest rates, severe weather conditions, disruptions in the final markets, a possible impairment in the carrying value of our goodwill or other intangible assets, a failure of our internal controls over our financial reporting, and other factors and uncertainties described 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 on our website at darden.com.

By way of information, we will hold an analyst and institutional investor meeting in Orlando on January 31 through February 1, 2011.

This event will also be webcast for those unable to attend.

And we plan to release fiscal 2011 third-quarter earnings and same-restaurant sales for fiscal December 2010, January and February 2011, on Thursday, March 24, 2011 after the market close.

We released second-quarter earnings results yesterday afternoon.

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

We recognize that most of you have reviewed our second-quarter results, so we won't go through them in detail once again, in an effort to provide more time for your questions.

Rather, Clarence will offer a brief overview.

Brad will provide some additional line-item detail about the financial results for the quarter.

Drew will review the second-quarter operating performance of our larger brands, followed by Clarence, who will have some closing remarks.

After that, Clarence, Drew, Brad, and Gene will then respond to your questions.

Clarence?

Thank you, Matthew.

As many of you know, after what's been an extended period of same-restaurant sales declines, this is the second consecutive quarter of same-restaurant sales growth here at Darden.

And as the economy recovers, even at a pace that's much slower than any of us would like, we are increasingly confident we can sustain same-restaurant sales growth going forward.

So, we think this is a good time to reiterate how we view success for our business in an environment that supports growth.

And quite frankly, we feel good being able to talk about that after what's occurred over the last couple of years.

Our long-term target for same-restaurant sales growth is 2% to 4%, and that's been the target for some time now.

It's a level which when combined with the 4% to 5% new unit growth our brands will generate collectively, enables us to do two very important things.

One, grow market share in full-service dining, and two, grow diluted earnings per share 10% to 15%, which is our long-term target range.

The other important variable in all of this, of course, is cost, especially labor and food cost.

And we are confident that with the level and composition of top-line growth I just described, we can deliver 10% to 15% earnings growth, even as we see volatility in one cost category or another.

And the reasons for our confidence are our very robust support platform, and we think just as important, our track record of success in working on a consistent basis across the Company to make that platform more and more efficient and more and more effective.

This year, we're better able than we've been in a couple of years to show how our approach works.

And that's because given our results for the first half of the year, we're on a pace to be at the lower end of our long-term range for same-restaurant sales growth for the full year, and likely to be at or higher than the top end of our 10% to 15% long-term target range for EPS growth.

So from a big-picture perspective, we're delighted, the worst seems to be behind both our economy and our industry, and we're even more delighted with how our Company's year is shaping up and with how we are positioned here at Darden for the future.

And with that, I'll turn it over to Brad for more details.

Thank you, Clarence.

And good morning.

Darden's total sales from continuing operations increased 5.2% in the second quarter to $1.73 billion.

This strong top-line performance compares to plus 1.7% total sales growth for the industry, as measured by Knapp-Track, indicating meaningful market share growth for us as Darden.

On the blended same-restaurant sales basis, Darden's second-quarter sales were up 1.4%.

For context, industry same-restaurant sales, as measured by Knapp-Track and excluding Darden, are estimated to be up 1% for the quarter.

Olive Garden second-quarter US same-restaurant sales increased 2.0%.

Red Lobster second-quarter US same-restaurant sales decreased 1.6%.

I should note that Red Lobster had a promotional mismatch in the quarter concerning Endless Shrimp, which Drew will discuss in more detail in his remarks.

LongHorn Steakhouse second-quarter same-restaurant sales increased 6.8%.

The Capital Grille second-quarter same-restaurant sales increased 5.6%.

Bahama Breeze second-quarter same-restaurant sales increased 3.2%.

And Seasons 52 second-quarter same-restaurant sales increased 3.8%.

Now, let's review the margin analysis for the second quarter.

Food and beverage expenses were five basis points lower than last year on a percentage-of-sales basis as a result of reduced food costs, mostly offset by approximately 60 basis points of negative mix changes related to our promotional offering strategy, which Drew will discuss in a moment.

In the second half of the fiscal year, our commodity costs will be 1% to 1.5% higher than last year.

And, on a percentage-of-sales basis, food and beverage costs will be flat to last year for the full fiscal year.

We have most of our commodity needs locked in for fiscal 2011, offering us good visibility on our cost for the next two quarters.

The commodity we have the least amount of coverage on for in the second half of the year is beef, which is approximately 25% covered and represents 14% of our food cost basket.

We believe that there will be a better opportunity to extend coverage after the holidays on this commodity.

We will share more detailed purchasing information at our upcoming analyst and institutional investor meeting next month.

Second-quarter restaurant labor expense was 122 basis points lower than last year on a percentage-of-sales basis, due to productivity gains and continued low employee turnover levels, partially offset by increased benefit expense.

Restaurant expenses in the quarter were 24 basis points higher than last year on a percentage-of-sales basis, because of additional preopening expenses this quarter from our higher restaurant opening pace and increased credit card usage.

Selling, general, and administrative expenses were eight basis points higher as a percentage of sales for the second quarter, due to increased media expense, partially offset by lower compensation-related expense.

Depreciation expense in the quarter was marginally higher than last year on a percentage-of-sales basis as a result of 63 net new restaurants.

For the quarter, operating profit as a percentage of sales was unseasonally strong 7.3%.

That's 93 basis points better than last year, and came from the combination of strong new unit growth and our blended same-restaurant sales growth.

We are on track to achieve an operating profit return on sales for the full year that would see us approaching historical peak margins.

Now, that's a tribute to the progress we have made strengthening our operating platform and business model, and demonstrates our earnings capability as economic improvement supports the resumption of same-restaurant sales growth.

We continue to experience some movement in the quarterly effective income tax rate.

We now expect a 50 basis point increase in the annual effective rate to the mid-27% range.

We expect to be above that rate for the third quarter, and below it in the fourth.

We are raising our capital spending expectations by $25 million to $525 million to $550 million, because we are accelerating LongHorn's remodel pace and we're filling the pipeline for next year's new unit openings a little faster than anticipated.

During the second quarter, we spent $75 million buying back 1.6 million shares of our common stock.

And we announced yesterday that our Board of Directors has authorized an additional $25 million shares for repurchase -- excuse me, 25 million shares for repurchase.

This amount, coupled with the 4.3 million shares remaining from the previous authorization, means our total share repurchase authorization is now 29.3 million shares.

We are on track to spend between $300 million and $350 million on share repurchase this fiscal year.

When you add it all up, it was a very good quarter, with sales growing over 5% and earnings per share up nearly 26%.

And it capped an excellent first half of the year.

Yesterday, we affirmed that we continue to anticipate reported diluted net earnings per share growth from continuing operations of approximately 14% to 17% in fiscal 2011, which is consistent with the outlook we provided at the beginning of the year.

This compares to a reported diluted net earnings per share from continuing operations of $2.86 in fiscal 2010.

Our earnings expectations for the fiscal year recognize that the pace of the economic recovery continues to be uncertain and are based on, first, a blended US same-restaurant sales in fiscal 2011 for Red Lobster, Olive Garden, and LongHorn Steakhouse of approximately plus 2%, the opening of approximately 70 to 75 net new restaurants in fiscal 2011, and total sales growth in fiscal 2011 of between plus 5% and plus 6%.

Now, here's Drew with some comments.

Thanks, Brad.

I'll start by sharing a few thoughts about the industry, and then comment briefly on the strategy and performance of our three large casual dining brands.

We estimate that industry same-restaurant sales, excluding Darden, during the second quarter were up approximately 1%, and this represents a 120 basis point improvement versus the first quarter of fiscal 2011, and the first quarterly same-restaurant sales increase for the industry in 19 quarters.

The underlying dynamics in industry guest counts and check also continued to improve.

Industry same-restaurant guest counts, excluding Darden, of approximately minus 1.4% improved 150 basis points compared to the first quarter, and that's the fifth consecutive quarter of improvement.

And industry check growth of approximately 2.4% represents a 30 basis point reduction versus the first quarter and, in our view, is approaching a more sustainable level.

Now, many of our large casual dining competitors continue to run very aggressive discount promotions.

Consequently, our view is that industry check growth during the second quarter was driven less by a significant reduction in discounting and more by a combination of other factors, including more normalized levels of pricing and menu mix, which we view favorably.

We also believe industry check growth could be driven in part by a changing guest mix, where less affluent guests who tend to have a lower check are reducing their restaurant visits, and a changing brand mix, where same-restaurant sales performance at some casual dining chains with a higher absolute check are rebounding versus a soft year-ago period.

As it relates to Darden, we continue to be wary of utilizing deep discounts to combat difficult industry conditions, given our concerns about what this might do to the long-term integrity of our brands and business models.

In fact, our second-quarter promotion plans at Olive Garden represent a significant reduction in the level of value-oriented price point advertising compared to prior year.

LongHorn had one less week of value-oriented price point advertising this year, but benefited from a more effective promotion and increased media weight.

Red Lobster had a number of promotion timing and tactical changes versus last year, which I'll discuss in just a minute.

From an individual brand perspective, Red Lobster same-restaurant sales fell 1.6% in the second quarter, which was clearly below our expectations, especially during the first two weeks of September.

However, we believe Red Lobster is making the appropriate course corrections to both elevate affordability for their core guests, while also increasing profitability.

I want to spend a couple of minutes recapping the timing, duration, and tactics of Endless Shrimp, to help you fully understand the same-restaurant sales dynamics and trends at Red Lobster during the second quarter.

Last year, Red Lobster decided to add a week to their Endless Shrimp promotion and to start it earlier than normal to help address the very difficult business conditions and more elevated consumer need for affordability that they faced at that time.

This year, they chose to return to a more normalized duration and timing.

As a result, this fiscal year Endless Shrimp began two weeks later and was one week shorter in duration.

More specifically, the promotion began in the second fiscal week of our second quarter this year, compared to the last fiscal week of the first quarter last year.

Consequently, Red Lobster had one less week of Endless Shrimp support during both August and September this year, when the promotion had higher launch weights of television support last year, and one additional week of Endless Shrimp support during November, when the promotion was winding down and had lower weights of television support.

Beyond timing and duration, the promotion started somewhat slower than we expected in September, prompting us to change marketing tactics in October.

Similar to last year, the promotion was originally priced at $16.99 in approximately one-third of our restaurants, and $15.99 in the remaining restaurants.

In October, we lowered the price to $15.99 in all of our markets and featured that price point in our advertising, something we have not done in the past.

We also developed a new commercial with greater focus on the food and value message.

These changes brought about an immediate increase in sales and traffic, as evidenced by our October and November same-restaurant sales improvement.

While this change resulted in slightly higher food costs as a percent of sales, which is part of the promotional mix change that Brad mentioned previously, it also contributed to meaningfully stronger sales and improved profitability versus prior year.

In the final two weeks of the fiscal quarter, Red Lobster introduced a new surf and turf promotion, featuring several new dishes at price points of $14.99, $17.99, and $19.99.

We are pleased with the early performance of this promotion during the last two weeks of the quarter, and in combination with the Endless Shrimp improvements discussed previously, we believe it helped Red Lobster delivered deliver same-restaurant sales growth of 1.8% in November.

Red Lobster also launched a new core menu in November with several new dishes in the $15 range, which we believe will help address affordability concerns among our current core guests.

In addition, Red Lobster completed the roll-out of their VIP service initiative, which will deliver more personalized service to guests.

And early feedback is very positive and guest satisfaction scores continue to increase.

The Bar Harbor remodel program at Red Lobster continues to help strengthen brand image and deliver same-restaurant sales growth in excess of our value creation hurdle.

At the end of our second quarter, 118 restaurants have been remodeled, including 34 that were completed during the second quarter, and we anticipate completing the entire chain by the end of fiscal 2014.

So, to summarize, Red Lobster same-restaurant sales started the quarter slower than anticipated, and following some tactical changes to their Endless Shrimp promotion, they achieved a recovery in sales and traffic during October and maintained this momentum through November.

This resulted in Red Lobster delivering solid operating profit growth for the quarter.

Olive Garden achieved same-restaurant sales growth during the second quarter of 2%.

Olive Garden began the quarter with their popular Never Ending Pasta Bowl promotion, featuring two new sauces and an $8.95 price point.

This was followed by their Passion for Cheese promotion, featuring two new entrees -- shrimp sacchetti and chicken sacchetti.

And in case you didn't know, sacchetti are small, purse-shaped pastas stuffed with four Italian cheeses.

Both promotions were supported by national Spanish-language advertising, similar to last year.

However, there were two significant changes to our marketing strategy at Olive Garden during the second quarter.

Last year, given the more challenging economic environment, we added soup, salad, and breadsticks secondary lunch advertising with a $6.95 price point during the Never Ending Pasta Bowl promotion, and we also featured our Passion for Cheese promotion last year at a $9.95 price point in our advertising.

This year, with expectations for an improving economic environment, Olive Garden returned to a normalized second quarter marketing plan with less media pressure, given the absence of lunch advertising during Never Ending Pasta Bowl, and less value messaging, primarily due to no price points during the Passion for Cheese promotion.

In total, Olive Garden went from 18 weeks of value-oriented price point advertising last year, to ten weeks this year.

We believe these actions will help us maintain the long-term integrity of the Olive Garden brand and business model, while also being fully consistent with achieving profitable same-restaurant sales growth in the near term.

They also completed the national roll-out of their Welcome Excellence service initiative, including a new, automated table-management system that provides more accurate wait time quotes for guests and enables increased guest through-put during peak demand periods.

Olive Garden achieved total sales growth of nearly 6% during the second quarter, including the impact of 33 net new restaurants compared to prior year, driving continued profitable market share gain.

And they remain on track to open 30 to 35 net new restaurants this fiscal year.

LongHorn Steakhouse achieved same-restaurant sales growth of 6.8% during the second quarter.

They began the second quarter with a new steakhouse dinner for two promotion, featuring a choice of two entrees and either an appetizer or dessert to share, for a total of $29.99.

This was also LongHorn's first promotion to benefit from national cable media support, which began in mid-September and ran through October.

Historically, LongHorn has run spot network and spot cable advertising, covering approximately 60% of their restaurants in media-efficient markets.

During the steakhouse dinner for two promotion, all restaurants received cable media support.

And clearly, the combination of a strong promotion and national cable was a success, with same-restaurant sales growth of 8.3% and 6.5% in September and October, respectively.

We will continue to leverage national cable advertising on select promotions, but not all promotions, going forward.

Beginning November 1, LongHorn once again ran their stuffed filets promotion, with a choice of a new three-cheese or crab-stuffed filet.

This promotion, while not featured on national cable, was well received by guests during November and will continue to run through the holiday season.

The ranch house remodel program continues to help strengthen brand image and deliver same-restaurant sales growth in excess of our value creation hurdle at LongHorn as well.

They have remodeled 60 restaurants so far this year, and should complete the entire chain during the first quarter of fiscal 2012.

LongHorn also generated total sales growth of over 12% during the second quarter, including the impact of 17 net new restaurants versus prior year, driving continued profitable market share gain.

And they remain on track to open 20 to 25 net new restaurants this year.

We're pleased with the strong momentum at LongHorn, and look forward to continued industry outperformance going forward.

So, as we reflect on the second quarter, we are pleased that we were able to outperform the industry by 350 basis points on total sales, and by 40 basis points on same-restaurant sales, increase our operating margins at all three of our large brands, and deliver 26% diluted EPS growth.

We believe this is further evidence of the strength of our brand portfolio, our business model, and the appropriateness of our strategy to achieve consistent sales and operating profit growth.

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

Thank you, Drew.

Let me close by just saying we're very pleased, of course, with our 26% earnings per share growth this quarter and with our sales growth of over 5%.

We were more pleased with what that says about the state of our business.

As I said at the outset, we've worked hard for some time now to develop a more robust and more cost-efficient brand support platform, and our level of earnings growth as we begin to enjoy same-restaurant sales growth is a reflection of progress we made.

In parallel with that work, we've taken steps to strengthen our portfolio of brands.

More specifically, we put in place the portfolio that has very strong unit growth prospects and our total sales growth, which reflect meaningful growth in our share of full-service dining, speaks to our success on that front as well.

In short, we're delighted that Darden is extremely well positioned.

Again, we have great brands.

We have an increasingly effective and efficient brand support platform, and most importantly, we have exceptionally talented people who are working well together.

Those are the reasons we were able to deliver financially once again this quarter, and they are also why we believe that as the economy continues to recover, the best is yet to come for our Company.

And with that, we will take your questions.

Thank you.

(Operator Instructions) Your first question comes from the line of David Palmer from UBS.

Please go ahead.

Thanks.

Just one long-winded question here.

Forgive me.

It looks like the first half of fiscal '11 you had a big earnings year, big earnings half, 24% tax-adjusted, with just 1.3% same-store sales growth.

The guidance, of course, implies something more conservative on earnings, but of course more aggressive on same-store sales.

And I can imagine that the lower earnings guidance is partly due to the rising input costs and the fact you might be trying to reasonably be conservative on EPS, but I wonder how much is due to two things.

First is your incentives as the management, literally your pay incentives, which may mean delivering much above 15%, or much above the high end of your guidance, this year may not get you paid a lot more.

In other words, reasonably, you guys would love to be more of a consistent mid-teens delivery Company, and that's where you're focused, especially on the eve of a more inflationary food year in fiscal '12, you're going to find ways to reinvest and expense things this year.

And then second, there seems to be some realization, particularly at Red Lobster, that you've got to push more food value to the guest, and perhaps a lot of that is what's driving some of this into the second half.

Would love your thoughts.

Thanks.

Yes, I think I'll invite everyone to comment.

So I'll start.

This is Clarence.

And I would say for sure it's not about pay incentives.

And so, we've got an incentive structure that really pivots off both sales growth and earnings growth, and beyond that, it also pivots off relative sales growth and relative earnings growth.

So real incentive to make sure that we have competitively superior growth in both of those metrics.

And pay goes up a lot north of 15%.

And so, there's certainly an incentive to work there.

I think Brad really touched upon it.

We've got an economic recovery where the pace continues to be uncertain.

We've got a consumer environment, while stronger than it has been, continues to have some level of fragility to it.

We've got a winter quarter ahead of us, and weather is always a wild card in our business.

And so we think it's prudent, given all of that, to provide you with the guidance that we provided you with.

I think from a invest-in-the-business perspective, we feel comfortable with the level of investment in the business that we started the year with.

And so, I don't know that we're ramping a whole lot up.

I think Brad mentioned one of the places where we are, and that's just on the capital expenditure side, because we are accelerating the remodels at LongHorn, and we are taking advantage of a challenged real estate market to build the pipeline for new units for next year a little faster than we had anticipated.

And as it relates to your question on Red Lobster, what we're doing now is refining some marketing tactics to address affordability needs of their current guests more effectively, while at the same time continuing to do what we need to do long-term to refresh the brand and attract lapsed users.

So, continuing to invest in remodels, continuing to leverage wood-fire grills, continuing to elevate service in our restaurants, but utilizing select price points and advertising more consistently, introducing some more moderately priced but highly satisfying dishes to the menu in the $15 range, for example.

But we think we can do all of that and drive profitable -- increase profits in the second half.

Thank you.

Your next question comes from the line of David Tarantino from Robert W.

Baird.

Please go ahead.

Hi, good morning.

Drew, just a follow-up on Red Lobster, two-part question.

First, could you clarify the benefit in November from the extra week of Endless Shrimp promotion, first?

And then second, perhaps maybe share some of the learning that you've had on some of the tactical changes you've made in promoting that brand that you just mentioned, and talk about your level of confidence that you can reduce the volatility in the same-store sales trends going forward with those types of tactics.

Thanks.

Okay.

As it relates to Endless Shrimp, the benefit in November was probably about a point in same restaurant sales.

And the broader question of what we're learning about Red Lobster is the current guest base, which compared to casual dining is at the margin slightly less affluent, and as a result, has a more elevated need for affordability.

What we've learned is that in promotions, at Olive Garden and at LongHorn we were able to use starting at price points, starting at $10.95 or starting at $11.95, effectively.

At Red Lobster that didn't provide sufficient price certainty to guests, because they do have some highly cravable, highly satisfying dishes that core guests buy that are in the $20s.

So what we learned is, we need to be more specific in what the price point is that we're communicating to give price certainty.

And so, for instance, that's why we added $15.99 into the Endless Shrimp commercial this year.

The same price it's been in a majority of the country for the last couple of years, but current guests needed a reminder about what it was.

And so, that's probably the biggest learning that -- that we've gotten.

We don't need to discount aggressively and cheapen the experience or erode margins.

We need to give high quality seafood at affordable prices, and then communicate it more consistently than we have in the past.

And, at the beginning of this year we had starting at price points in our promotions, versus absolute price points.

I would think -- just one quick add is we certainly learned the importance of television advertising.

I mean, we did make a slight shift at Red Lobster into digital from television, and we learned that that's probably premature.

Yes, and I should have mentioned that.

So the first week of September this year, Red Lobster had no television advertising support.

And that was comparing to the first week of September last year, which was the second week of Endless Shrimp at elevated launch levels of advertising support.

And that mismatch is something that we probably wouldn't do again in the future.

Helpful.

Thank you.

Your next question comes from the line of Steve West from Stifel Nicolaus.

Please go ahead.

Hey, good morning, guys.

Could you maybe talk about your same-store sales trends that you're seeing at the specialty restaurant concepts, like Cap Grille and Bahama Breeze.

Maybe that -- you -- Clarence, you mentioned the more affluent consumer coming out.

Is really that what you're seeing at the specialty concepts, or is it more an easy comp story?

And as a follow-up to that, could you maybe discuss, as you're looking into 2011, the healthcare reform, talking about putting menu counts on the menus, how you guys are maybe thinking about trying to avoid some sticker shock with the consumer?

Thanks.

Yes, I will -- I will kick off on the -- on the Specialty Restaurant Group, and then Gene will add the real observations, real insight, and Drew will handle the second question.

I'd say for sure we've seen a greater bounceback in the more affluent customer.

And so, we see that at our mass market brands.

We certainly see it at our specialty restaurant brands as well.

But they also have other pieces to their business that are bouncing back nicely as well.

Good morning, this is Gene.

We're experiencing balanced growth across all aspects of the business.

We're seeing strong growth across lunch and dinner, weekday, weekend, and private dining is real strong.

So we're seeing -- I think it's a combination of both luxury consumers is back in the marketplace, and we're continuing to see strength in business travel and entertainment, which continues to grow and get more robust.

As it relates to menu disclosure, we've got a handful of restaurants that already disclose calories today, and we have not seen meaningful menu mix changes there.

But it's a small group of restaurants.

We have been testing menu disclosure in a bigger group of restaurants for about -- to see if consumer behavior changes or not, and what the implications of those potential changes might be.

As I said, we're only about halfway through the test, but so far we haven't seen any meaningful shifts in behavior, shifts in menu preference, with any meaningful check or margin implications, yet.

Your next question comes from the line of Jeff Omohundro from Wells Fargo.

Please go ahead.

Thank you.

Another question on Red Lobster.

It seems like both with Crabfest and now Endless Shrimp there's been something of a mismatch between the pricing strategy and what consumers seem to be willing to pay for these promos.

And I'm wondering, is this a function of perhaps just a too positive view on your part about the pace of recovery or do you need to further refine the consumer testing before launching promos like this?

Thanks.

No, I would say we certainly see improvement and we expected improvement.

As we looked backward to the more difficult times that we all experienced in 2008 and 2009, we started to emphasize value a lot more than we had in the past.

And we -- our goal is to get back to more balance in our -- in our promotional calendar, in our message to consumers, in our advertising.

And we're starting to try to pull back a little bit, and that pullback is going to take more time at Red Lobster, and it's going to take a high level of skill.

And so, those are the two parts of it.

And that skill part is where it gets a little tricky, but what I would say we've learned is to effectively address the need for affordability, we need to do a couple things.

We have to have cravable new dishes combined with price point certainty, and those two things have to work together.

And earlier in the year, we didn't -- we either didn't have cravable new dishes, so an American Seafood Adventure, where we were featuring a seafood jambalaya, we didn't have a cravable new dish.

In Crabfest, starting at $12.99 price point didn't, we've learned, didn't give the absolute price certainty that their core guest wanted.

It starts at $12.99.

But are all the dishes -- are most of the dishes going to be in the $20 range, for instance?

And what we learned with Endless Shrimp, when we changed the marketing tactics, is that communicating a specific price point, $15.99, with some new flavor preparations, gave people the certainty they need and it drove meaningful improvement in October and November.

It's not unlike what we learned last January when we introduced seafood dinner for two at $29.99, basically a specific price of $15 for specific new dishes.

So the combination of cravable dishes and price point certainty, executed with good commercials and so forth, works.

I would say -- Drew talked about Red Lobster's current promotion, which is a surf and turf promotion, and we're very specific about the price points there.

So three different price points, $14.99, $17.99, $19.99, versus a starting at and only mentioning the bottom one.

So we don't think it means that we have to have a low price across every promotion, but certainty about what the price is is very important.

Very good.

Thanks.

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

Please go ahead.

Thanks very much.

On your revised comps guidance of 2%, that still implies about 2.8% comps in the back half of fiscal '11.

Can you discuss, particularly off of more difficult comparisons, where you see that uptick?

And maybe if you can address -- you did mention to us in this quarter there was 18 weeks of -- or ten weeks of value-oriented promos versus 18 weeks last year.

In the back half of fiscal '11, can you give us a sense of where that -- that relative value will be?

And in general, where do you expect this comps uptick on a one-year and two-year basis to come from?

Thanks.

Yes, I don't think we want to get very specific, but I would tell you that tough is a relative word.

So, last year, the overall environment was pretty difficult.

And this year, it's better in the first half of this year than it was in the first half of last year.

We expect it to be better still in the second half of this year.

And when you compare the second half of this year to the second half of last year, it's a much better environment.

And so, while on the math the numbers may be as you've said, when we talk about the environment in which we operate, it is a much better environment.

And we think that we should expect to do much better in that environment than we did in the tougher environment, and we-- I think we've shown that just through the first half.

Mitch, this is Brad here.

I mean, if you take Clarence's point and just look at where we've been in the most recent two months of October and November, really, it's just a continuation of our current level of performance, as he said, an environment that's better than it was last year, and probably some modest improvement as we move through the rest of our fiscal year.

Your next question comes from the line of Andrew Barish from Jefferies.

Please go ahead.

Hey, guys.

Still trying to figure out the move in food costs.

You talked about promo shifts, but with less value here in the quarter, other than the shift at Red Lobster on Endless Shrimp, I'm not quite getting why that would have a negative impact on food costs.

Was there something else going on there?

When we talk about that, we're also looking at the entire promotional shifts there.

So, one, we did feature LongHorn, they had a price pointed feature on there that was well received, but also had a little bit higher food costs.

Guests, you give them an array of products, and they typically find the better products on there.

So, that upward cost pressure for us, as well as what Drew talked about on the Endless Shrimp, particularly changing the price point for the latter half of that promotion, were the, really, two big drivers of that.

In particular, the percent of guests ordering LongHorn Steakhouse dinner for two this year was much higher than the percent of guests ordering their price pointed promotion last year, in part because it was a more compelling promotion, in part because more people knew about it, because of the network cable.

And I would just remind us that we're talking about food cost as a percent of sales.

So, the percent of guests ordering was higher, but there were a heck of a lot more guests.

And so, at the end of the day, the operating profit is significantly higher.

And that's the whole -- that's the whole goal here.

I think that shows up on our restaurant labor line, where you see the productivity gains there when we do have meaningful same-restaurant sales, how our business model can convert then to meaningful earnings growth.

So we -- I mean, obviously, we pay attention to each line item on our P&L, but we're more about optimizing the total than any particular line.

Thank you.

Your next question comes from the line of Matt DiFrisco from Oppenheimer.

Please go ahead.

Thank you.

My question's a little bit of a follow-up on to Mitch's, with respect to sort of the degree of optimism into the future, and looking even at what I guess we're classifying as a rebound in October and November, your November traffic trends is on a -- what a metrics a lot of us look at on a two-year basis declined in November, even though it sounds as though this is a tolerable pace, and I think the reference was continuation of current trends.

I guess if we look at that two-year trend stabilizing out throughout, you wouldn't -- stabilizing out through the back half of fiscal '11, you wouldn't be able to get to guidance.

So, it doesn't look like that trend has moved too much on a two-year basis.

I'm just wondering, is there something as far as a promotional calendar, more advertising dollars, or something more aggressive that gives you confidence?

Or is it even just the current underlying trends that -- you did allude to a strong holiday season, and the strongest one that you've seen in several years, does that mean then we should have some confidence in this back half improvement as it's tangibly happening?

And then, just a follow-up question, looking at your text, you mentioned in the two brands, Red Lobster and LongHorn, SG&A working against those brands' margins.

One brand surpassed expectations, one brand fell on the same-store sales versus expectations, I presume.

I'm just curious, what are the drivers there in those G&A levels?

Is that the advertising dollars that I'm trying to get at?

Well, before the SG&A, just three broad things that we're thinking about.

One, as it relates to same-restaurant sales trends, one is continued industry improvement, as Clarence mentioned.

Second is, LongHorn's going to benefit more from advertising in the second half than they did in the first half.

And third, Olive Garden's not going to have the same type of year-over-year promotional mismatch in the second half that they did in the second quarter.

And then, on Red Lobster, we think we're getting smarter each quarter about how to deliver affordability profitably as well.

Okay.

And I guess, specifically, when you look at SG&A, obviously with LongHorn going to a national cable buy, had a meaningful impact on their marketing as a percent of their sales.

So that was the big driver for them in their SG&A, just because, that's not what they had last year.

And I think your other comment was on Red Lobster, I believe.

You have, for them, a little bit of the sales through leveraging that's going on.

Drew talked some about their investments in digital for us that didn't work as well as we anticipated, so that was some investment level for that particular brand.

Okay.

Thank you.

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

Please go ahead.

Thank you.

First, a follow-up on the food cost question.

You mentioned promotional issues, I guess, at Red Lobster and LongHorn.

But the text of the three brands kind of indicates food costs were favorable for those two brands and unfavorable for Olive Garden.

I guess I'm curious what happened at Olive Garden on the food cost side.

Well, I think, again, on a year-over-year basis there, they have experienced much higher wheat costs than the prior year.

We in the first quarter had a very similar trend, where they had higher year-over-year cost of sales as well.

So that trend has basically continued for them.

No meaningful change.

Okay.

And then, question on the remodels at both Red Lobster and LongHorn.

Could you be a little bit more specific about the cost and the sales lift for each brand?

There's really no update for them.

The cost levels have stayed pretty much the same that we had anticipated.

Let me look those up real quickly here.

But the sales lift continues to be strong for both of the brands.

I'd say right now, when you also have the national advertising that we've done for LongHorn, you're blending a lot of items together.

The synergy effect of that is -- becomes pretty meaningful in terms of its impact on driving that strong top-line sales result.

Okay.

Do you have any numbers around those costs or the sales lift?

No, sorry.

The costs are the same.

Go ahead, Matthew.

Hey Joe, it's Matthew.

The remodel costs are essentially what we've been talking about all along here.

At Red Lobster, we're spending close to $500,000 per remodel.

Now, about $150,000 of that remodel is related to deferred maintenance, so I don't know that you want to put that in the calculation.

The remainder is the true remodel cost for the restaurant, and again, we're seeing 4% to 5% lift in sales at Red Lobster.

So, we're very pleased with the results there and what we're seeing with remodels.

LongHorn, it's a little -- a little less investment.

I think it's about $350,000 is what we're spending at LongHorn on the remodels.

There is some deferred in there as well.

And we're seeing about 3% to 4% sales lift at LongHorn.

So, good performance there, good returns at both of those brands when we look at the remodels on a return-on-investment basis.

Thank you.

Your next question comes from the line of Jeffrey Bernstein from Barclays Capital.

Please go ahead.

Great.

Thank you very much.

Two questions.

Just one, looking at the guidance for the full year with comps now looking at the lower end of your prior range, and a lot of people struggling, I guess -- question whether or not you'll hit that, but yet it seems you reiterate the comfort around the earnings numbers.

I'm just wondering whether you could talk about the cost saving outlook perhaps being more favorable to maybe mitigate that lower end of the comps.

I don't know if there is -- what are the large incremental cost saves in fiscal '11?

I'm assuming it's not necessarily the commodity side of things.

And then, separately, just on the share repurchase authorization, I mean, it seems like a significant boost.

I didn't know how we should read into that, or whether it's just you guys liking to have flexibility, whether we should assume a meaningful acceleration in repurchase from the $300 million to $350 million that you're doing in fiscal '11, kind of what the thought is for fiscal '12, with north of 20% of the Company potentially repurchased.

Thank you.

Yes.

On the margin piece that you were talking about, the first part of your question, is we talked about a modest increase in how we look at the commodity costs going forward.

But we're also seeing a meaningful improvements on other lines of our P&L, and particularly restaurant labor.

So as we look to the rest of the year in terms of trying to look at our earnings expectations, we talk about margins continuing to improve.

In fact, by the time we get to the end of the year, we will be approaching record-level margin for us.

And so, that's how we look at that.

On the share repurchase, yes, I mean, our current path for this year, we reiterated, was at $300 million to $350 million of share repurchase.

We do have the additional authorization to, as you mention, remain -- have that flexibility to repurchase as we see it.

But I'd step back and say we've been through some pretty tough times here.

We have a large cash flow from our business -- more sustainable, I think, that many folks have thought.

And so, it allows us to continue to repurchase shares, return capital to our investors.

And so, we would look from where we are now, all things being equal, that share repurchases should continue to grow, as well as our dividends, as we move into a period of improving economic conditions, and our ability to grow the same-restaurant sales and generate even more cash flows than we have in the current period.

And this is Clarence.

I would just say as we look at that level of share repurchase authorization that's out there, we would expect three to four years to use that.

So, it will be some acceleration from where we are today, so to where we are within that range will depend on some future decisions about the mix between share repurchase and dividends.

And that's yet to be determined, but we want to make sure that we keep good balance there, and we'll be back to you as those decisions get finalized.

Your next question comes from the line of Brad Ludington from KeyBanc.

Please go ahead.

Thank you.

You know, I wanted to ask on Red Lobster, it's encouraging to hear that the new promotions are showing improved traffic and same-store sales.

But if you look at the seafood dinner for two last January, you were up a 5% comp that month.

Are you expecting to have a rougher time going up against that comp in that popular of a promotion?

I don't think we want to comment on what our promotion's going to be in January, but obviously, we've got increasing confidence about what it's going to take to deliver affordability and increase same-restaurant sales profitably.

And that's reflected in the tactics we're going to put in the market in the third quarter.

Okay.

Thanks.

And then, I'm sorry if I missed this, just to follow up on the increased CapEx for some of the LongHorn remodels.

Did you quantify how many more remodels you expect to do this year?

About 20 more this year, and we'll complete all of the remaining restaurants within the first quarter of our new fiscal year.

Thank you.

Your next question comes from the line of Alvin Concepcion from Citi.

Please go ahead.

Thanks.

Just a quick question back on Red Lobster.

Can you talk about what kind of traction the new menu items in the $15 range -- that was launched in mid-November, what kind of traction that is having?

And also, where does your overall check at Red Lobster stand now, relative to its competitors?

It's a little too early for us to comment on preference on the new items.

It was the third week in November that we introduced the menu.

But things like New England lobster rolls, under $15, parmesan-crusted tilapia, pecan-crusted jumbo shrimp, they all tested well, and they all earned their way on to the menu, meaning they were going to get at least menu average preference.

So, we'll have -- we'll know more in January -- at the end of January, early February, at our meeting, after two or three months in the market.

And then, the overall average check at Red Lobster, where does it stand now versus competitors?

It's in the $18, $19 range.

So it's above the average in casual dining.

Okay.

Great.

Thank you.

Your next question comes from the line of John Glass from Morgan Stanley.

Please go ahead.

Thanks.

Darden's calling card as a stock for years was your gap to the industry sales, and you had always had a two to 300 basis points lead.

And I know you have described the reasons why that lead is not present today.

But is there something in your mind that is more permanent and structural that's occurring where you don't expect to regain that sales lead, for example, just the math of having higher average unit volumes at two of your core concepts?

Or do you think once we get past this period of kind of a mix shift going on you do regain that gap?

Yes, I would tell you, as we think about it, John, our goal, our long-term target range, is 2% to 4%.

And sort of where we are within that range is going to depend on the macro environment.

And obviously, when the environment gets as challenged as it's been over the last couple of years, and we see the kind of softness that we haven't seen in generations, it will fall well below that.

But 2% to 4% is about what we think.

As we think about that range on a normalized basis, we would expect pricing to be 2.5 -- two, 2.5 points of that, so the balance would be traffic.

We think about the industry having total growth of 4%, and that's total growth.

And so, with 2% to 4% comp growth, we would expect that we're probably ahead of the industry with an industry that's growing 1%, 2% in units.

I think the important thing is, on top of that 2% to 4% comp growth range, we think our brands -- our brand portfolio today is capable of 5% new restaurant growth over the next five years.

And so, we are looking at a top line that would be 7% to 9% in an industry where total sales growth, in our view, will be about 4%.

So we see growing market share, and we define success as exactly what I describe -- 2% to 4%, with that 5% on top of it.

With that kind of top line, again, we think 10% to 15% earnings growth on a consistent basis is quite achievable, even as costs bounce around -- even as costs bounce around.

Obviously, today, I know there is elevated concern about costs, but we're actually below normalized levels, and so we're getting more out of that bottom of that range than we think we would get in a normalized environment, not only because food costs are relatively low on a historical basis, but also because labor costs are as well.

And just to take one more run at this next few months of more challenging comparisons at your two major brands, particularly at Red Lobster, I know you have a confidence that you're seeing more difficult comparisons doesn't necessarily mean softer sales for you, in other words, two of your trends may not be that important.

Are you actually seeing that come through, though, in December, since this is the first month which you're going to be facing those more challenging -- I'm not asking for the number, I'm just saying, are you -- even as we stand here in the third week of December, you're still confident that rolling over those more difficult comparisons, you can do so and produce positive sales?

We are.

I mean, which is why we provided the outlook we provided.

I mean, I would just say on December, on a combined basis, on a comp basis, we're in positive territory.

And as we, I think, tried to emphasize throughout the call, good things happen in positive comp territory, and we'll take a lot of other concerns around costs and other things as long as we're in positive comp territory.

Extremely helpful.

Thank you.

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

Please go ahead.

Hi, thanks.

This is actually (inaudible) for John.

Couple of questions.

Brad, you mentioned some of the benefit to labor in the quarter came from efficiencies through productivity gains.

Just wondering if you could talk a little more in detail about where these gains are coming from, and how long you think you could continue to see these benefits?

And then secondly, this would particularly affect visibility in a Red Lobster.

It seems that shrimp costs -- we're still seeing sustained increases year-over-year, and obviously, you do have one of the strongest and most developed supply chains in the industry and contracts through fiscal '11.

But I was wondering if you have any early take on commodities in fiscal '12, and how much confidence that you have that you can offset potential material increases in that year?

This is Brad.

I'll take the second part of your question first.

On shrimp, I mean, first off, what you see in the spot market is not necessarily what we -- what we pay.

What I would say is that you'll notice our inventory values are up at the end of our fiscal second quarter.

And so, we have really good coverage on shrimp and many other products through the end of the fiscal year.

I think to get more into your question, we'll save that part until we meet in January.

We'll have some of our supply chain management folks there that can do the question more justice there.

But we do feel that that's a competitive advantage for us as we move forward.

If I go back to your restaurant labor question, I mean, what I would say is the productivity gains are pretty broad-based across the different brands and different parts of the P&L there.

I think that's attributable to the work that our operators do on day in, day out, of using our tools and managing to the -- to the traffic that they're seeing.

So, you've heard us talk in the past about investments we make to increase our support platform.

That includes the tools that they use to estimate guest counts and to schedule their labor so that we can be as efficient there as we would like.

I would also say that we continued to benefit from the low turnover that's present for us.

We continue to exceed or be better than the industry turnover.

We think that's a lot of the investment that we make about ensuring that we have a high employee engagement.

I think there's a lot of side benefits that come with that, of the continuity of staff.

And so, we are investing less in new employee acquiring costs and training costs, and this also benefits consumers coming in and seeing some of their favorite servers time and time again.

Great.

Thanks.

We have time for one more question, please.

Okay.

That question comes from the line of Jason West from Deutsche Bank.

Please go ahead.

Yes, thanks, guys.

Just a question on the commodity side again.

I just want to clarify, you said you think that the cost of goods sold outlook or margin will be flat in the second half.

Or was that for the full fiscal year?

And you mentioned, I think, commodity inflation in the back half up 1%, 1.5%, and I just want to clarify that that was versus the prior guidance of up about 50 basis points.

That's exactly correct.

So we're looking at a full-year food and beverage cost that's going to be approximately flat, and in the back half of the year we've seen our expectations with -- we largely get locked in, going from a 50 basis year-over-year increase to the range of 1% to 1.5% increase over the prior year.

And just a follow-up on that.

Your thoughts around pricing, with that moving up a little bit, I know you're trying to maintain the affordability message at Red Lobster, but broadly, do you think you have some room at each brand to continue to move up pricing?

And should we see that moving up more so in the back half of the year than what we see in the numbers so far this year?

Well again, we don't want to comment on any forward actions like pricing, but I would say that we believe all the brands are strong and can take an appropriate amount of pricing.

But we've got other levers to pull to help manage the cost equation, and we've alluded to these before.

But given the size of the enterprise and our focus on a more effective operating platform -- we didn't talk about them today, but the things that we're doing to improve sustainability, supply chain transformation, facilities maintenance, all those things are adding -- are making our support platform meaningfully more cost effective this year and next year.

I guess specifically what I would add in, though, is that for the remainder of this fiscal year, these costs haven't caused us to change our pricing outlook.

And to Drew's point, as we think about next fiscal year, we'll share that with you at a later date.

Okay.

Thank you.

We would like to thank everybody for joining us on the call today.

We realize there's still several of you that were in the queue for questions.

We are here in Orlando today.

We'll be able to take your questions if you want to give us a call.

We are available.

We would like to thank you again.

We wish everybody a safe and happy holiday season, and we look forward to seeing several of you here in Orlando in January for our analyst and institutional Investor Day.

Thanks again.

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