達登餐飲 (DRI) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

And welcome to the Darden Restaurants third quarter earnings release.

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

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

(Operator Instructions).

As a reminder, this conference is being recorded.

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

Please go ahead.

Thank you, Robert.

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 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 date.

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 costs; technology failures; failure to execute a business continuity plan following a disaster; 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; our ability to successfully integrate Eddie V's restaurant operations; 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 and other products; volatility in the market value of derivatives; general macroeconomic factors including unemployment and interest rates; disruptions in the financial markets; risks of doing business with franchisees and vendors in foreign markets.

Failure to protect our service marks or other intellectual property; a possible impairment in the carrying value of our goodwill or other intangible assets; a failure of our internal controls or financial reporting; or changes in accounting standards.

And other factors and uncertainties discussed from time to time in reports filed by Darden with the Securities and Exchange Commission.

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

We plan to release fiscal 2012 fourth-quarter earnings and same-restaurant sales for fiscal March, April and May 2012 on Friday, June 22, 2012, to discuss our financial outlook for fiscal 2012, and discuss our brand by brand operating performance summary.

To begin, Brad will provide detail about our financial results for the third quarter.

Drew will review the operating performance of our brands and Clarence will offer some closing comments.

We will then respond to your questions.

With that, let me turn it over to Brad to walk you through the financial details for the quarter.

Thank you, Matthew.

And good morning, everyone.

Darden's total sales from continuing operations increased 9.3% in the third quarter to $2.16 billion.

This strong top-line performance compares to an estimated 4.1% total sales growth for the industry, excluding Darden, as measured by KNAPP-TRACK.

So we had meaningful market share growth.

On a blended same-restaurant sales basis, the results for Red Lobster, Olive Garden and LongHorn Steakhouse were up 4.1% in the third quarter.

This compares to industry same-restaurant sales as measured by KNAPP-TRACK, and again excluding Darden, that were estimated to be up 2.6% for the quarter.

And we also saw continued strong same-restaurant sales gains in our Specialty Restaurant Group with 5.8% same-restaurant sales growth on a blended basis.

Traffic at Red Lobster, Olive Garden and LongHorn Steakhouse this quarter was strong, up 2.3% on a blended basis, driven by successful promotions, remodeling and other brand enhancements.

This compares to industry same-restaurant sales traffic as measured by KNAPP-TRACK, and excluding Darden, that's estimated to be down 0.2% for the quarter.

We are particularly pleased that Olive Garden same-restaurant traffic outperformed KNAPP-TRACK by approximately 180 basis points this quarter.

An acceleration from the 70 basis points positive spread in the second quarter.

We estimate that less severe winter weather this quarter positively affected blended same-restaurant sales by approximately 200 basis points.

This impact was nearly the same for each month in the quarter.

There was also a benefit from the earlier start of the Lent season.

We estimate that for the third quarter, the blended same-restaurant sales results were positively affected by approximately 60 basis points due to the earlier start of the Lent season and Lobsterfest.

Brand by brand, Red Lobster same-restaurant sales were positively affected by approximately 480 basis points in February.

While LongHorn Steakhouse same-restaurant sales were adversely affected by approximately 40 basis points in February.

There was no impact to Olive Garden same-restaurant sales related to Lent.

Food and beverage expenses for the third quarter were approximately 175 basis points higher than last year on a percentage of sales basis.

About 80% of that unfavorability was expected, based on the inflationary food cost environment and our decision to price below inflation.

For the third quarter, restaurant labor expenses were approximately 100 basis points lower than last year on a percentage of sales basis, due to sales leverage and improved wage rate management.

The favorability for the quarter was consistent with our expectations.

Going forward, though, we do not expect to see the same level of favorability we have experienced the last four quarters as both Red Lobster and Olive Garden have now lapped the one year implementation date of the labor optimization initiative.

Restaurant expenses in the quarter were approximately 20 basis points lower than last year on a percentage of sales basis despite higher pre-opening expense related to opening eight more restaurants in the third quarter this year compared to last year.

Selling, general and administrative expenses were approximately 70 basis points lower than last year as a percentage of sales due to sales leverage and lower year-over-year incentive compensation that more than offset higher media expenses.

Depreciation expense in the quarter was essentially flat on a percentage of sales basis compared to last year.

For the quarter, operating profit as a percentage of sales was 11.4%, that's about 10 basis points higher than last year despite higher commodity cost on a year-over-year basis that we chose not to fully price for.

Our tax rate this quarter, at 24.7%, was approximately 90 basis points higher than the prior year, driven partially by our increase in earnings before taxes.

We estimate our annual effective tax rate will be approximately 25%, which is about 100 basis points below last year's effective tax rate.

This lower effective tax rate is a result of several tax planning initiatives and increases in available tax credits from the FICA tip credit and the solar energy credits related to our recently-installed solar array at our restaurant support center.

Now I'd like to take a moment and discuss our margin performance this quarter.

I know there was some confusion stemming from our discussion of margins at our recent analyst meeting in February.

We often speak to margins at three different levels.

One is the margin for guests which we look at as the margin after food and labor expenses.

We also look at restaurant level margins which, broadly speaking, is margin after food, labor, restaurant expenses, marketing or the selling expense, depreciation expense.

But excludes pre-opening expense, implied interest costs and our rent payments and rent averaging, as well as general and administrative expenses.

Also, we talk about EBIT margins or operating profit margins which include all of those expenses.

Our ultimate goal from a financial perspective is to grow EBIT margins or operating profit margins.

As we said last month, we manage EBIT margins and have done so for a number of years.

Our long-term goal is to grow EBIT margins approximately 200 basis points or 40 to 50 basis points a year from the 9.9% we reported in fiscal 2011, to approximately 12% in fiscal 2016.

Now, at times we may target lower margins per guest through a particular promotion, recognizing that promotions may drive much higher guest counts, leveraging our fixed cost and restaurant expenses, selling, general and administrative expenses, as well.

If done successfully, this should lead to higher restaurant level margins and EBIT or operating profit margins.

In the third quarter, our total Company operating profit margin increased approximately 10 basis points, compared to the prior year.

Despite dramatic increases in commodity costs that led food and beverage expenses to be 175 basis points higher on a year-over-year percentage of sales basis.

All of the large brands and the Specialty Restaurant Group saw absolute dollar operating profit margins increase this quarter.

Olive Garden delivered operating profit margin growth and operating profit growth resulting from same-restaurant sales traffic driven by their two promotions, including the three-course Italian dinner for $12.95.

That was neither a deep discount nor eroded profitability.

Only Red Lobster experienced a decline in operating profit margin percent, but still managed to increase total operating profit.

So, we were pleased that we were able to grow EBIT margins on a percentage and absolute dollar basis this quarter, even as we featured several price point promotions at our three larger brands.

Now turning to our financial outlook.

For the full fiscal year, we expect combined same-restaurant sales growth from Red Lobster, Olive Garden and LongHorn Steakhouse of approximately 2.5% to 3%.

And we continue to expect net new restaurant increase of approximately 85 to 90 restaurants excluding the purchase of Eddie V.

Which is about 4.5% unit growth on our current base.

And approximately 4.0% growth in operating weeks or capacity for fiscal 2012, given the timing of those openings.

With these same-restaurant sales assumptions and new restaurant growth plans, we anticipate a total sales increase for the year of between 7% and 7.5%.

Today we also affirm that we anticipate that reported diluted net earnings per share from continuing operations for fiscal 2012 will be between 4% and 7%.

This outlook implies double-digit earnings growth for the fourth quarter.

We recently offered a thorough update of our commodities outlook at our recent analyst meeting in New York City.

So I won't go into any additional details about our coverage other than to say we have about 85% of our total food spend contracted through the end of the fiscal 2012.

If you have any questions about our commodities outlook for fiscal '13 please review the slides from our analyst meeting which can be found on our website at www.darden.com under the Investor tab.

Now, I'll turn it over to Drew to comment on Red Lobster, Olive Garden and LongHorn Steakhouse and the Specialty Restaurant Group.

Thank you, Brad.

As has already been mentioned, we are certainly pleased with the results for the third quarter across all of our large brands and the Specialty Restaurant Group.

We recognize that less severe winter weather benefited our brands this quarter.

However, we also believe that many of the strategic initiatives we launched have also positively affected our third quarter results and should continue to do so in the quarters to come.

Olive Garden same-restaurant sales were up 2% during the third quarter, roughly 60 basis points below the full service restaurant industry benchmark.

However, this is a sharp improvement from the 320 basis point shortfall in the second quarter.

During the third quarter, Olive Garden featured two new promotions.

The first was baked pasta which ran from December through the third fiscal week of January and offered guests unique and indulgent comfort food during the seasonally appropriate time period.

We believe this promotion was meaningfully stronger than the promotion featured last year and helped Olive Garden's same-restaurant traffic outperform the KNAPP-TRACK benchmark in both December and January.

Same-restaurant sales performance stabilized in December and turned positive in January.

But trailed the industry due entirely to the check at Olive Garden being down roughly 50 basis points versus the implied industry check being up 2 to 3 percentage points.

In the fourth fiscal week of January Olive Garden launched the three-course Italian dinner for $12.95.

This promotion featured five new entrees specifically designed for this price point.

And included soup or salad plus the choice of one of six individual sized deserts.

This promotion, combined with appetizer and nonalcoholic beverage news, contributed to solid same-restaurant sales growth during February versus the prior year that also exceeded the industry benchmark.

This promotion is representative of our strategy going forward, where we plan to emphasize a broadly appealing platform idea, rather than just one or two new dishes.

Many of these promotions will include an advertised price point, but not all.

As we discussed in February at our analyst meeting, we continue to view Olive Garden as a business where the vast majority of fundamentals remain competitively strong, from average unit volumes and restaurant level profit margins to brand perception and employee retention.

We believe the primary cause of our same-restaurant sales softness during the past year or so had been a narrowing in the value leadership advantage Olive Garden enjoyed versus other large brands in the industry.

Going forward, Olive Garden is focused on strengthening their value leadership competitive advantage by improving affordability for their more economically-challenged guests.

While also updating and evolving key elements of the guest experience to meet the increasing quality expectations that all guests have, especially more economically-stable guests.

As a result, over the next several months you should expect to see a continuation of our new promotional strategy, advertising that is more product and promotion focused, and has a more overt value message, as well as more affordable core menu dishes.

Operationally, the restaurant teams at Olive Garden are focused on reducing false weights to more effectively capture the guest demand they each have.

We believe these initiatives will help build on our same-restaurant sales trends.

At the same time, we continue to work on even more meaningful changes, including a new advertising campaign that features a more genuine and relevant communication of the idealized Italian family meal promised by Olive Garden.

A new core menu featuring greater everyday affordability to ensure the brand remains accessible to as many families as possible.

As well as some distinctive dishes with slightly higher prices to ensure Olive Garden remains relevant and compelling for guests where the what-you-get part of the equation is the more important dimension.

In addition, these bolder improvement initiatives will also include a remodel that updates and refreshes the dining atmosphere in their 430 non-Tuscan farm house restaurants.

The advertising campaign and new core menu should be in market during fiscal 2013.

While the remodels will begin in fiscal 2013 with an estimated completion by the end of fiscal 2015.

Olive Garden opened 13 new units during the third quarter and is on track to open 35 to 40 net new restaurants this year.

These new Tuscan farm house units continue to significantly exceed their sales and earnings hurdles.

Red Lobster same-restaurant sales increased 6% during the third quarter, 340 basis points above the full-service restaurant industry benchmark.

Red Lobster has delivered competitively superior same-restaurant sales since October 2010, when they began emphasizing craveable new seafood dishes and price certainty in their promotions.

And that momentum continued during the third quarter.

They began the quarter advertising their surf-and-turf promotion which featured three new steak and seafood entrees priced under $20.

This was followed by the four-course seafood feast for $15 promotion for six weeks.

And then during the last two weeks of February they began their signature Lobsterfest promotion, which is still running.

As Brad mentioned, the earlier start to the Lenten season and Lobsterfest promotion positively affected Red Lobster's February same-restaurant sales by 480 basis points.

As a reminder, Red Lobster's fourth quarter same-restaurant sales will be adversely affected because of the shift forward in Lent and Lobsterfest.

Red Lobster remodeled 16 restaurants during the third quarter and is on track to complete more than 150 remodels this fiscal year.

Remodeled restaurants continue to exceed their guest count and earnings growth hurdles.

LongHorn same-restaurant sales increased 6.7% during the third quarter, which was 410 basis points above the full-service restaurant industry benchmark.

LongHorn same-restaurant sales have now grown versus the prior year for nine consecutive quarters.

And exceeded the industry benchmark for 13 consecutive quarters.

These competitively strong results during the third quarter were driven by two successful promotions, the new lunch menu introduced during the second quarter, and strengthened advertising.

The quarter began with the continuation of their stuffed filets promotion that featured their new lobster stuffed filet and white cheddar and bacon stuffed filet.

This was followed by the five great steaks, one great price for just $11.99 promotion, that featured a new bacon wrapped bourbon sirloin and garlic herb-crusted sirloin.

Importantly, their new lunch menu is contributing meaningfully to profitable guest count growth at LongHorn.

And, given the lower check at lunch versus dinner, this dynamic was the biggest driver of the negative menu mix we reported for the quarter.

New units at LongHorn continue to significantly exceed their sales and earnings hurdles.

LongHorn opened seven net new units during the third quarter.

And they're on track to open 30 to 35 net new units this fiscal year.

Now let me spend a moment to comment on the Specialty Restaurant Group.

The Specialty Restaurant Group had another strong quarter, with total sales of $178 million.

Which represents a nearly 28% increase over the same quarter last year and 21% of Darden's overall sales growth.

This growth was driven by strong same-restaurant sales increases of 5.7% at the Capital Grille, 5.9% at Bahama Breeze, and 6.1% at Seasons 52.

As well as the impact of 10 new restaurants and operations at these three brands compared to the prior year.

Plus the addition of 11 Eddie V's restaurants.

In addition to delivering strong sales growth, the team also maintained effective cost controls, which has allowed restaurant level margins to continue to expand.

The Specialty Restaurant Group remains focused on their key priority which is to effectively manage accelerated growth, while continuing to improve operational delivery and insuring that their brands stay relevant.

To support this priority, the Specialty Restaurant Group is developing a strong pipeline of new restaurant locations, and improving the way they open restaurants, making it a more efficient and effective process.

During the third quarter, SRG opened one new Bahama Breeze.

In the fourth quarter, they plan to open one Capital Grille restaurant, two Seasons 52 restaurants, and two Bahama Breeze restaurants.

Now I'll turn it over to Clarence.

Thanks, Drew.

As Brad and Drew have said, this was a very strong quarter financially.

And that's even more so when you consider that we still had quite a bit of commodity inflation from a year-over-year perspective.

So we were very encouraged by the strengthening that we saw at Olive Garden.

And by the continued momentum we had at Red Lobster, at LongHorn and within the Specialty Restaurant Group.

And as our outlook for the full year suggests, we expect to deliver strong financial performance in the fourth quarter.

And just as importantly, we believe we can perform strongly from a financial perspective well into the future.

Now, as those of you who follow us and the industry know, ours is a dynamic industry.

And so there are going to be headwinds and tailwinds from year to year and even from quarter to quarter.

Still, as we've outlined at our recent Analyst Day, we have a compelling opportunity, we believe, at Darden.

Over the next five years, that opportunity represents a potential to add another $3 billion to $4 billion in revenues, another $2 to $3.50 of added earnings per share.

And the opportunity to return somewhere between $2.6 billion and $3.3 billion to our shareholders in the form of dividends and share repurchase.

Some of this potential is driven by an increasingly cost-effective support platform that has realized more than $50 million in cost savings since fiscal 2008.

And we think that we could get another $110 million in cost savings by fiscal 2016.

We also have a winning culture.

We talked about that at the Analyst Day.

And that is evidenced by exceptional employees across all of our brands who are just committed to the business.

We were recently recognized by Fortune magazine as one of the 100 best companies to work for.

That was for the second year in a row.

That recognition really is a testament to the commitment and capabilities of our employees.

Ultimately, that commitment and those capabilities are why we remain on track to our ultimate goal of becoming a great company.

And it's why we're so excited about the future.

With that, let us turn to your questions.

So let's get started.

(Operator Instructions).

Brad Ludington from KeyBanc Capital Markets.

I just wanted to ask a couple of things.

First off, a couple of quarters ago you talked about Olive Garden having income level of $30,000, and that being about one-third of the sales, and that might be part of the strain.

Have you seen an improvement in recent months in that segment of your customer base?

I believe what we talked about was seeing a change in households with income below $50,000, median household incomes.

And that is an important segment for Olive Garden.

But in the last quarter, we really need to look at more than just one quarter to see if a trend change has occurred.

But we're certainly focused on building that aspect of their business.

Okay.

And then just one follow-up.

On your same-store sales guidance and what happened in the third quarter with about 260 basis points of benefit, while still positive, I would assume you're guiding to a sequential slowdown in same-store sales trends because those benefits roll off in the fourth quarter.

Correct?

We maintained, I think, it's 2.5% to 3% for the full year and so I'd have to back into what that is in the fourth quarter.

It does mean a pretty broad range, I think, in the fourth quarter.

We think that's appropriate given the environment we're in.

Because if we look at the environment, if we step back and look at t it, I'd say last two years it's been a slow improving trend inside casual dining.

But that two years has also been marked by choppiness.

And that choppiness has been based on consumer sentiment.

It's been based on jobs headlines, gas and food price shocks.

And today we're seeing more of the same.

So the underlying trend continues to be an improving trend, but there continues to be choppiness.

So periods of strength followed by periods of weakness, as consumer sentiment today is mixed with decent job news.

But that's offset certainly by a spike-up in gas and food prices.

And so if you look at today's environment across the industry, it is somewhat weaker than it was during the holiday and immediate post-holiday period.

And so that all, we think, warrants having a pretty broad range of estimates for comps for the fourth quarter.

And Brad, this is Brad.

Our guidance is still the same that we shared in February.

But also remember the benefit that we got in the quarter from the Lent shift is going to reverse out in the fourth quarter.

So we're going to make that up and still be on our original guidance.

Michael Kelter from Goldman Sachs.

I wanted to ask about, again, trying to get at what the industry is looking like today, and what might have been just weather, what's underlying improvement.

Anything you can give us to help us understand that.

Ranging from maybe geographic differences and how your same-store sales performed during the quarter, and maybe in regions that didn't have a weather impact.

Or any changes in ordering patterns from consumers.

Anything to help us get an idea of what the industry is looking like would be helpful.

Thanks.

I'll take a stab at it first.

I think if you back out weather for the industry for our third quarter, up roughly 1 point.

That's a solid comp.

And that's comping on improvement from prior year.

So we think slowing improving trends is what we continue to see.

I'd add, from a consumer dynamic standpoint, the need for affordability continues, particularly in households that are more economically challenged.

And we see that in a variety of areas.

We saw it in a more pronounced way early in our fiscal year in terms of add-ons and negative check management.

While we're still seeing some softness in add-ons and still seeing some check management continue, compared to what we've seen historically, it is not at the same elevated levels that we saw in the first quarter.

Part of that is because we've taken proactive steps to introduce more news but part of it could be on the consumer side, as well.

On the geographical basis, obviously in the northern climates we saw more of an improvement there mainly due to the weather.

But even in the areas of the country that traditionally don't have much weather impact -- California, Texas, Florida -- those regions continued to build, as well.

So it's more broad-based ex the weather factor which affects more the northern part of the country.

Thank you very much.

David Palmer from UBS.

I know you can't tell us explicitly what you're going to be doing with your Olive Garden marketing.

But perhaps you can elaborate a little bit more on the strategy.

Touch on any reasons why you're confident that your existing marketing pipeline will do what you expect it will do.

Because up through a quarter or so ago it felt like Darden was a little surprised by some of the outcomes on the marketing.

And I know you've spent some of this last fiscal year doing things.

So if you could tell us what that is that would be great.

Thanks.

The biggest change in the near term to Olive Garden's marketing is a difference in the way we're approaching our promotions.

So for the last several years, Olive Garden has focused primarily on introducing new dishes.

Typically two new dishes in a promotion.

And occasionally we had a price point on those promotions.

And I think what we've learned is that the environment's gotten more competitive, and to compete for consumers' attention, we need bigger ideas.

So the biggest change is we're moving to what we've called a broader platform idea that by itself can capture more consumer attention than just two new dishes.

So historically, Never Ending Pasta Bowl is an example of a platform idea.

Lobsterfest is an example of a platform idea.

Stuffed filets is an example of a platform idea at LongHorn.

This three-course Italian meal is an example of a broader platform idea that by itself is more important than the new dishes underneath it.

And it performed well.

So that's the basic way we're approaching a change in promotions.

Broader ideas brought to life with new dishes.

And we're going to be featuring brand-appropriate price points in those promotions going forward periodically to help address the need for affordability.

But that's in the near term.

We've also adjusted our advertising.

So historically a lot of our commercial has been spent telling a story about an experience that consumers have in our restaurants.

And how that makes them feel like family.

And that story has incorporated a message about our new dishes.

Now with this transitional advertising, we've toned down the story and elevated more of the commercial to focus on the platform idea, the dishes, and the price points so that there's a more overt message of news and value that guests are hearing.

Those are probably the two biggest changes in the near term.

But I'd remind you that over time this is more than a promotional response.

It's going to involve core menu news.

It's going to involve a different advertising campaign.

It's going to involve a remodel to those non-Tuscan farm house restaurants.

And all of that's coming on a base for a business that we think remains very strong.

And you see that in all the fundamentals we talked about at our analyst conference -- average unit volume, restaurant returns, et cetera.

Just a quick follow-up on the check trends.

You just redid the value lunch, the $6.95 lunch at Olive Garden.

If promotions like that work, or value tiers like that work, are we going to be looking at a check decline, meaningful check decline this year that might offset the price?

No, we're not anticipating a check decline at Olive Garden.

We are anticipating increasing traffic with the consumers, with a guest segment that's more affordability-minded.

And that's going to drive increases in total sales and total margin dollars, as well as our EBIT margin.

But we're not anticipating, not planning on a check decline.

David Tarantino from Robert W.

Baird & Company.

Just first a quick clarification, Clarence.

On the comments related to the industry outlook, seemed to imply some softening recently.

And I'm wondering, if that's the case, if you meant to signal that.

And if so, do you think it's more just the benefit from weather abating?

Or do you think there's some real demand pressure on an underlying basis?

I think, as I was trying to discuss, if you look backward and you take weather out of KNAPP-TRACK third quarter ex us, it's roughly 0.7% up, maybe up 1 point.

That's pretty consistent with the second quarter, our fiscal second quarter.

It's also pretty consistent with the fiscal first quarter.

And really, even as you go back into our last fiscal year, and that fiscal year was up about a fraction below 1 point, as well.

And those are percentages on top of percentages.

So it's been an improving trend, albeit slow.

And through that period, there has been volatility around that trend line.

And that volatility from month to month and season to season, ex weather, primarily reflects headlines around economic strength or weakness.

And so a lot of jobs data driving some of that, a lot of geopolitical headlines driving some of that.

And it also has been affected by spikes in some important categories of costs like food and gasoline.

And so that's been what we've seen.

And I would say today we see more of the same.

And so you've got a mix picture right now because the jobs news is actually positive.

But you do have the spikes in gasoline and food.

And so we think, given that, because all of those things could change, the jobs picture could get worse, the spikes in food and gasoline could abate, that it's appropriate to have a pretty broad range as we look out to the fourth quarter and think about what the comps ought to be.

And so that's where we are.

Okay.

That's helpful.

And then Drew, if I could just ask one clarification on Olive Garden.

You mentioned that part of the strategy is to improve the value equation or the value perception.

Yet if I look at the February pricing factor at Olive Garden approaching 3%, just wondering if you could reconcile the increase in the pricing factor and your strategy to improve the value equation.

Yes, the February year-over-year pricing is just a modest difference in timing versus the prior year.

So we introduced some affordability-oriented items to the menu.

And at the same time we added some pricing to the menu.

But for the full year, we anticipate our pricing to be very similar to what it's been historically in that 2% to 3% range.

So this isn't a ramping up in pricing in a meaningful way.

It's just a difference by a month in the introduction of news to the menu.

[Will Splavone] from Stephens Company.

I wanted to hit on Red Lobster quickly.

Impressive run there.

As you look at lapping tougher comps, I'm just wondering if you could talk a little bit more about the promotional strategy there to help you lap those.

And to whatever extent you're willing to talk about expectations there.

When we think about Red Lobster growing comps is a big opportunity for sure.

But it's going to go beyond promotions.

So the new advertising campaign that they've introduced, Real People, is doing a better job of communicating the quality of the products and the quality of the menu that people experience at Red Lobster, more so than prior ad campaigns.

So that's going to help.

Remodels -- continuing to roll out remodels aggressively in '13 and finishing in fiscal '14 is going to continue to help.

We're working on meaningful core menu news for next year that's going to, we think, strengthen the same-restaurant sales trends that we've been seeing.

And on top of that, we think they've got a promotion strategy that's resonating with their guest base that's about craveable dishes with price certainty.

That's got a big media investment behind it.

We're going to continue with that promotion strategy and add news to the dishes in it.

But there's going to be a broader range of levers that we're looking at to maintain same-restaurant sales growth.

Thanks.

As a quick follow-up there, the dynamic of menu mix across the restaurants, an in particular looking at the improvement in Olive Garden, especially in the final months, strength at Red Lobster, and then you mentioned the lunch menu hurting LongHorn's mix a little bit, I'm wondering if you could just touch on those trends.

The menu mix at Olive Garden is really a reflection of a couple things.

Add-ons, which have been soft versus prior year got better, particularly appetizers got better later in the third quarter when we added some appetizer news.

We also added some nonalcoholic beverage news.

That was important.

We've seen a little bit less guest trading, as I mentioned earlier.

It's still above prior year but not to the same degree as it's been earlier in our fiscal year.

And then the pricing of our three-course Italian meal at $12.95 was actually $2 higher than the pricing of the promotion we had last year.

So guests are resonating to it.

They feel it's a strong value because it's a compelling platform idea.

But the pricing was actually higher than year-ago.

You already touched on the key dynamic at LongHorn which is growth in lunch.

And the only real difference in trend at Red Lobster was in January where we had the four-course seafood feast for $15 this year versus a seafood dinner for two at $30 last year.

Essentially the same price but we had more preference on the seafood feast this year.

So the menu mix was basically flat in January, but it drove traffic, contributed to earnings growth.

So we were pleased with it.

Joe Buckley from Bank of America-Merrill Lynch.

Thank you.

Just a couple questions.

Brad, first just a bookkeeping question.

The 25% tax rate for the full year of fiscal '12, will that ratchet back up again next year or is that a new run rate?

No, it's going to ratchet up some as we look at next year, although there's a lot that we do in the tax planning and tax initiatives.

So we'll be able to keep that lower than many of our people in the industry.

But it will ramp up some.

We're still working through that.

But probably closer to the 27% range at this point would be my best guess on that.

Okay.

And then I have a couple questions also on near-term sales trends.

As you think about Red Lobster for the fourth quarter, in the context of your blended guidance, and given the Lent shift, are you anticipating Red Lobster will be negative in the fourth quarter?

We do anticipate that there's going to be an impact because of the shift in Lent and Lobsterfest being pulled forward.

Last year they were up 3.5%, I think, something like that.

Yes, 3.8% in the fourth quarter.

We've got solid momentum at Red Lobster and it's driven by more than just promotion, as I mentioned.

So I don't think we want to comment on an individual brand component of our total portfolio.

But we feel good about the business and the trend it's on but we do expect some year-over-year seasonality impact that won't be positive.

Alvin Concepcion from Citi.

It looks like your blended guidance on same-store sales is around the 1% to 3% range next quarter.

If you exclude weather and the Lenten shift maybe it was around 1.5%.

I know that's a broad range, as you mentioned.

But would you characterize the midpoint of the fourth quarter guidance as conservative given the strong momentum particularly at Olive Garden?

No, I don't know that I'd characterize it as conservative, just because we're living through a fairly choppy time here.

And things move both in positive and negative ways, without a whole lot of prior notice.

And so I'd say, given the environment we're in, we think it's a reasonable range.

And then you mentioned at the Analyst Day, I think you weren't expecting a major impact to industry demand from the higher gas prices.

Is that still your view, particularly among the more economically-challenged guests you've been focused on.

I think as we look at it, and you think about the way we plan our business, and we have annual plans and three-year plans, over those periods gas prices really aren't a huge factor.

Now, from quarter to quarter, they make a difference but over those periods they aren't a big factor.

There are a lot of other things that are much bigger.

Employment growth being at the top of the list.

Jeffrey Bernstein from Barclays Capital.

Two questions.

First, as it relates to Olive Garden, In the qualitative area of the press release you talk about the increase in profit margin and dollars, which we were pleased to see.

Obviously that's a net positive, especially in the face of more aggressive value promotions starting in late January.

But I'm thinking that could probably be read in two ways.

I'm just wondering whether you think it's more because the promotion was designed to still be profit accretive?

Or would you say perhaps the promotion did not drive the desired traffic, let's say, in February that you would have thought?

We were expecting more of an uptick, perhaps, in the February traffic with the very compelling, or what appeared to be compelling value promotion.

And then I had a follow-up.

We were pleased with the performance of the three-course feast at Olive Garden.

It contributed to the improvement in guest count trend that began under the prior promotion, Baked Pasta Romana.

Contributed to profitable growth in a percentage basis and absolute basis, as you said.

We saw the industry slow down a little bit in February and that probably was reflected a little bit in Olive Garden's trend in February.

But overall, we were pleased with the performance of it.

Okay.

And then in terms of the outlook, you said encouraged by strength at Olive Garden with the $12.95.

And it sounds like you have other near-term value things going.

Would you expect further sequential acceleration in the comp in fiscal 4Q at Olive Garden?

Is that your anticipation with the near-term value focus?

No, we're -- tongue-tied.

No, I think, again, we've got a range, a blended range for the three big concepts.

It reflects a lot of variables.

We think all three businesses have solid underlying business strength.

And that range reflects that.

Okay.

But for the first 20-some-odd days of March would you offer up any kind of color?

I know you don't often give by brand but perhaps as a broader portfolio what you're seeing from a comp perspective?

Just to frame the broader industry with all the choppiness we've been seeing lately.

There's nothing we would say about the current month at this point.

Got it.

Thank you very much.

John Glass from Morgan Stanley.

My questions relate to your margin targets that you outlined.

First, specifically at Olive Garden, then at the enterprise.

At Olive Garden it sounded like, despite you had profit margin growth and profit growth this quarter, it sounded, Drew, in your comments that maybe 2013, the plan is to grow EBIT profit at the enterprise level through Olive Garden growth.

But not necessarily restaurant level profit.

In other words, margin percents may decline even if margin dollars grow.

Is that your anticipated result from the promotional plan at Olive Garden in 2013?

John, this is Brad here.

Without going into great detail, I think we're going to look at balancing what I call margin per guest.

So after food and after labor.

We believe we can be very successful in balancing it, sometimes pulling it back a little bit.

But the ability to draw more guests in.

But in the end, we expect those to maintain or modestly build our restaurant level margins that we talk about.

And from that, that would obviously build the Company's EBIT margins.

And so different promotions may go different ways but in the end, restaurant and EBIT margins we would expect to be equal, if not expanding.

And then your comments about the enterprise, and you've got this $110 million cost savings, I think, through '16.

But you framed at the Analyst Day 2012 through 2016.

How much of that enterprise cost savings do you think you're going to capture this year?

And how much do you think you'll capture in 2013?

Is it ratable or is it loaded one way or the other, front or back?

No, there'll continue to be gains this year.

We haven't really gone into detail in the current year but we would expect to add to that next year.

Probably not at the same rate, though, that we added at the current year.

So it's a bigger number in '12 than '13, to answer your question.

Matthew DiFrisco from Lazard.

Just following on some questions here with respect to the margins and the trend going forward.

Red Lobster's margin, given the comp, was a little bit of a surprise that it wasn't as a percent, the margin, that it didn't increase year-over-year.

However, LongHorn, with the same margin and what I would presume would be higher headwinds from commodity costs, did get leverage.

Is there anything unique to Red Lobster or the promotional environment that's adding labor?

I'm trying to figure out is this the successful strategy and something that might be what Olive Garden looks like if you start getting up in the 6% or so comps.

Could we see this being driven by incremental labor and other initiatives in the store when you talk about, aside from just limited time offerings and changes on the promotions, but also getting into changing the image and things within the store?

I'll start by saying no, it's not structural.

So seafood inflation was pretty significant in the third quarter still.

Not nearly what it was in the first half, but we didn't price for that inflation.

I think that's what you're seeing at Red Lobster.

That's exactly it.

It's kind of blurry because you can't see brand by brand detail but that is the single factor there.

Had that been more normalized inflation rate, there would have been significant leverage on a percentage basis.

That's great.

Also, just as far as looking at the mix at Olive Garden, is it something controllable?

And do you think, is this now we're going to be able to stay around this flattish level or continue to improve on it as you did in the most recent month?

Or are you beholden to what the consumer trends are and the fickle behavior of trading up and down check?

It's never totally controllable.

We wish it were.

But it's never totally controllable.

But I think we can certainly influence that by what we advertise and what we offer on our menus.

So we're offering more affordability that's resonating with more people, that's driving the top line.

Our year-over-year featured price points were actually a little higher at the end of the quarter, as I mentioned earlier.

So we certainly can influence it and we're keenly focused on doing that.

But it's never totally controllable.

Mitch Speiser with Buckingham Research.

My question's on Red Lobster.

And I know there was a lot of noise in the quarter with holiday shifts and weather.

You think you missed the monthlies.

And it does seem like Red Lobster traffic for the quarter was up 1% to 1.5%.

But then if you take out the weather, which you told us was 200 bips, which I would think primarily hits traffic, and then the Lent shift it looks like that traffic on a normalized basis may have been down at Red Lobster.

And that's despite the Four for $15.

When you originally came out with Four for $15, it did spike traffic 10% to 20%.

So my question is, am I looking at it the right way?

It doesn't seem like you're too concerned about the Red Lobster traffic trends.

Do you have any specific focus on upticking traffic going forward?

Because it seems like, flushing out a lot of things, and even despite the Four for $15, it looked like traffic, at least through my lens, looked a little bit soft.

Thanks.

There are a lot of moving pieces, for sure, in the quarter.

And the moving pieces include some differences in check.

So I think the easiest way, and the way we're looking at it, is same-restaurant sales.

And if you adjust for what you mentioned -- weather, Lent, Lobsterfest -- growth in December and January were both around 2.5%, 3%.

Which is a number that we would be comfortable with over time in terms of profitable same-restaurant sales growth from Red Lobster.

It dropped a little bit to the high 1.6% or 1.7%, if you adjust for all those things, in February.

And as much as anything, we think that was reflective of the overall industry slowing a little bit in February, more so than anything that Red Lobster was doing.

John Ivankoe from JPMorgan.

The question is on Olive Garden.

Especially given the experience that you had in February, obviously an improvement in traffic, even on a weather-adjusted basis, and mix being stabilized, the question begs to be asked is why the $12.95 bundled meal option isn't the permanent option.

If it works, why really change it and might that just be a precursor of what's going to come?

That is the first question.

Then secondly on SG&A, should we assume that there was actually less advertising spending quarter-over-quarter?

Or were you able to manage the G&A line outside of advertising to make it be relatively flat on a year-on-year basis?

As it relates to the promotion, a three-course meal for $12.95 is a pretty modest reduction from a discount standpoint, but a pretty meaningful value from a guest standpoint.

So it was really the best of both worlds for Olive Garden.

We were pleased with it.

And while we won't comment specifically on what's going to happen in the future, either on promotions or core menus, it did what we anticipated it would do.

So we were pleased with it.

And typically when something works you think about doing it again at some point.

And there wasn't any meaningful reduction in advertising for the quarter.

I'm not sure about by month but for the quarter.

John, this is Brad.

On an absolute basis, it was up year-over-year, slightly a little bit of leveraging of the dollars, though.

And so therefore there was management in other areas of G&A and might that cost management continue in the future?

Or was that more of just a 3Q event?

We continue to look at G&As and we manage those pretty tightly.

It's going to vary some, though, quarter to quarter but we would expect for that to be leveraged, as well.

Chris O'Cull from SunTrust.

Thank you.

Drew, is the menu mix shift causing most of Olive Garden's food cost rising as a percentage of sales?

Or has the Company changed its approach to discounting and coupons and other mediums?

No, we haven't changed our accounting for coupons.

And the increase in food cost as a percent of sales probably reflects a little bit of commodities cost increase.

And the price point of $12.95 probably contributed to it a little bit, even though it was a very disciplined promotion in terms of how we thought about the promotion and the price and the food cost of the new dishes.

Because it did ultimately contribute to an increase in earnings in absolute dollars and percentage basis.

So the Company hasn't dropped any more coupons for the Olive Garden brand?

No.

Okay.

And then I missed part of the last question, and you guys may have addressed this and I apologize if you did.

Was the SG&A improvement as a percentage of sales at Olive Garden a function of the leverage or reduction in the absolute SG&A dollars at Olive Garden?

No, that would be just really more the leveraging of their additional sales.

The dollars would be relatively close to the same.

Brian Bittner from Oppenheimer & Co.

Just back to the Red Lobster and the operating margin contraction there.

Can you just give us an idea of what actual food cost inflation was in the quarter?

Because you did have 3% pricing and you had positive mix.

Just trying to get an understanding of when you think operating margins there are going to turn as seafood costs ease and potentially become a tailwind for you guys.

I'll speak to Darden, what we share there.

If you just reflect back, in both the first and the second quarter, we had about 8% year-over-year inflation.

We talked about 6% in our last call and we came in very close to that.

And we're still looking for roughly 3%, maybe slightly lower in our fourth quarter.

But again, that's for the entire Darden basket.

And the seafood component, the year-over-year mismatch between pricing at seafood and Red Lobster was substantial in the first quarter.

And it's been reduced each quarter since then.

And we would anticipate that it won't be a headwind next year.

Sara Senatore from Sanford Bernstein.

I actually did want to follow up a similar question for the overall business.

You said 6%.

When I look at the food and beverage costs, basically the headwind looks like as if you had no benefit from net pricing.

So if you just had 6% with no offset from price, I would have expected 170 basis points.

So again, is there anything there with respect to mix shift across the different brands?

And then I had a second follow-up which was just on your commentary on February.

Just trying to understand that.

Actually looking at industry data it doesn't look like February was slower overall in terms of comps.

So I'm just trying to understand that, if you're just talking about traffic or how to think about that.

This is Brad.

I'll start with your first question.

If you look at the brand mix, we do get a little bit higher food and beverage cost as LongHorn continues to grow.

And with the strong sales success at Red Lobster, that does add to food and beverage line.

But that's probably no more than 10 to 15 basis points.

But because of each of those brands business model we pretty much gain that back because both LongHorn and Red Lobster run a lower restaurant labor than Olive Garden.

So it does affect each of the lines a little bit, to your point.

But to restaurant margins it really doesn't make a significant difference there.

And then on the same restaurant sales question, I think what you see with the industry, from Malcolm's information, is his numbers include us.

So when we're talking here, we're talking about excluding Darden from that impact.

I'm suspecting that's the difference on your comment about our same-restaurant sales, talking about February versus what's been published out there.

Keith Siegner from Credit Suisse.

Brad, just a question for you high level looking at the gap between D&A and CapEx now which has gotten to be several hundred million dollars and growing.

And it gets even bigger as CapEx picks up over the next couple of years.

How should we think about D&A dollars over the next couple years, closing some of that gap as CapEx picks up?

And I ask because if those dollars grow, should we think about D&A as a line item maybe even delevering?

How do we think through D&A dollars?

I think what you're seeing right now is the differential there is the incremental amount that's going towards remodels.

And there's a lag between when you make that investment and you start to see the sales results.

So that would typically raise depreciation as a percentage of sales basis.

But what we see is that comes back down over time.

You're also seeing a mix that's going on right now because these are the accounting records and so newer units have a higher investment base, there's more depreciation dollars.

That puts upward pressure on it.

And we're also seeing the opportunity, which we're in favor of, to buy more of our new restaurant properties and those assets that go along with it.

So those put some upward pressure there but downward pressure on the interest cost.

But it's not going to vary more than 10, maybe 20 basis points on a year-to-year basis.

Sara, this is Clarence.

Back to your question.

Because we do quote data that you don't see.

So KNAPP-TRACK ex-us in February was roughly 2%.

While in January it was 3.3% and in December, 2.7%.

That February number that you see externally, the 2.8%, is because we were at 6% in February.

So when you add that, it pushes the industry number that Malcolm publishes from 2% to 2.8%.

Bryan Elliott from Raymond James.

Just real quick looking at the food cost guidance from Analyst Day, and getting some of the seafood breakout earlier this fiscal year.

It seems to imply that we should be expecting food cost to be a benefit to the P&L in the first half of the new fiscal year?

Your math is working out pretty good.

I would say somewhere around flat would be a good expectation for us.

All right.

Everything else has been asked.

Thanks.

We're going to cut it off right there.

We want to thank everybody for joining us today.

If you have any additional questions, of course, we're here in Orlando, available to answer them.

We wish everybody a nice weekend and we'll talk to you in a couple more months.

Thank you.

Thank you.

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

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