達登餐飲 (DRI) 2012 Q4 法說會逐字稿

Welcome, and thank you for standing by.

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

After today's presentation, we will conduct a question-and-answer session.

(Operator Instructions).

Today's conference is being recorded.

If you have any objections you may disconnect at this time.

I'd now like to turn the meeting over to Matthew Stroud, Vice President of Investor Relations for Darden.

Sir, you may begin.

Great.

Thank you, Tim.

Good morning everyone.

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

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

During the course of this conference call, Darden 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 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, the possible impairment of the carrying value of our goodwill or other intangible assets, a failure of our internal controls of our 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 2013 first-quarter earnings and same-restaurant sales results for fiscal June, July and August 2012 on Friday, September 21, 2012 before the market opens, with a conference call shortly after.

We released fourth-quarter earnings results this morning.

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

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

We will offer a line item summary of the P&L, discuss our financial outlook for fiscal 2013, and discuss our brand-by-brand operating performance summary.

In an effort to focus on our long-term guidance, we will not be discussing near-term results such as the month to date sales trends.

With that, let me turn it over to Clarence.

Thanks, Matthew.

And I'll start just by briefly sharing, at a very high level, our assessment of the business including performance last year, so fiscal 2012, and what we expect this year, fiscal 2013.

Then Brad, Drew and Gene are going to provide more detail on both years, and on the fourth quarter last year.

From a total sales perspective, results in 2012, excluding the Eddie V's acquisition were just over 6%, which is short of our long-term target for total sales growth of between 7% and 9%.

With respect to new restaurants, which is one of our two sales growth drivers, growth accelerated significantly in 2012, compared to the prior year, and came close to the 5% long-term target that we had for some time now.

Now, with the unit potential, new unit potential of our current portfolio, and that's been fortified by the acquisition of Eddie V's, the value-creating returns that we're getting from new restaurants, and the strength of our real estate and talent pipelines, and those are the foundations for successful unit expansion, we expect to meet our 5% target for new restaurant growth in fiscal 2013, and then meet or exceed it for at least the next four years after that.

The second sales growth driver is same-restaurant sales, and in 2012, combined same-restaurant sales growth at our three large casual dining brands was roughly 0.5 a percentage point higher than it was the prior year and 0.5 a percentage point higher than the industry average.

This growth was fueled by strong results at Red Lobster and LongHorn.

Each of those brands is benefiting from successful efforts over the past two years to refresh all of the things that drive success in this business, including their core menus, promotional strategies, advertising and facilities, among other things, and we expect continued progress in each of these areas as we go forward.

There was same-restaurant sales softness at Red Lobster in the fourth quarter, but much of that reflects our commitment to maintaining an appropriate degree of balance in our annual promotional calendar.

It's important to have both price-approachable and premium price offers, so that we don't commoditize Red Lobster or any of our other brands around price.

Lobsterfest, which runs during the Lenten season, has long been an important premium price offering in Red Lobster's promotional calendar.

This year, that timing worked against us because gasoline prices spiked during Lent.

That reduced consumers' discretionary income, and more importantly, had an adverse effect on their confidence.

Now, certainly as we look back at the full year, blended same-restaurant sales growth for the three big brands would have been even stronger, without the decline we experienced at Olive Garden.

As we have discussed with you before, we're doing a number of things to re-establish growth at Olive Garden same-restaurant sales.

One of the most important is the transition we're making from promotions built around a construct that features one or two specific dishes, which worked well for a long time, but has grown increasingly less effective over the past two years, to a promotional construct that's built around a culinary or value theme, and highlights several dishes or one or more menu categories.

As we make this transition, some of the promotions used in the new construct are going to meet or exceed expectations, and others are going to fall short, and we certainly saw that in fiscal 2012.

It's a transition that Red Lobster and LongHorn are further down the road on, and based on our experiences at those brands, we're confident that as we continue to learn with each of the new promotions that we introduce at Olive Garden, we should see less variability starting in 2013, and our confidence is bolstered by the fact that Olive Garden's promotional offers in fiscal 2013 are going to be supported by other initiatives beyond promotions, that Drew's going to touch upon in a moment.

In our Specialty Restaurant Group, same-restaurant sales growth at each brand was strong in fiscal 2012.

And that speaks to really the good competitive position that each of those brands have, and it also speaks to the fact that each has a guest base that's just better insulated from the macroeconomic sluggishness that we've seen.

And as Gene is going to outline in a moment, that group will build on these strengths in fiscal 2013.

We do expect macroeconomic sluggishness to continue in our fiscal 2013, and given this outlook, and where each of our brands is, we built our plan around the assumption that blended same-restaurant sales growth for the three large brands will be comparable in 2013 to what it was in 2012.

We've also taken a similar approach regarding same-restaurant sales growth for the Specialty Restaurant Group.

Now, with those same-restaurant sales assumptions and accelerated new restaurant growth, we expect meaningfully stronger earnings growth in fiscal 2013 than we had in fiscal 2012 and that's because we were burdened in 2012 with food cost inflation headwinds that we don't anticipate in 2013.

Our earnings outlook for 2013, though, does reflect important incremental investment in the business, on both a P&L and a capital investment basis.

And this is investment that reflects our view that we have to dedicate more people and more financial resources than we have in the past to identifying and capturing big sales building opportunities that have multi-year time horizons.

These are opportunities that generally involve technology, marketing, and other initiatives that target younger guests, multicultural guests, more financially-secure guests, and that increase the visit frequency of current guests by increasing our relevance for more occasions.

And so as we enter fiscal 2013, we're looking for accelerating new restaurant growth, same-restaurant sales growth that's similar to fiscal 2012 on an overall basis, but has a healthier mix from a brand perspective, driven by better results at Olive Garden, and we're looking for meaningfully-elevated earnings growth, even as we make important investments that we think are necessary to sustain profitable sales growth beyond 2013.

With that, let me turn it over to Brad to provide some financial detail about the fourth quarter of 2012, and about the full fiscal year.

So Brad?

Thank you, Clarence.

Darden's total sales from continuing operations increased 3.8% in the fourth quarter to $2.070 billion.

On a blended same-restaurant sales basis, the results for Olive Garden, Red Lobster, and LongHorn Steakhouse were down 1.9% in the fourth quarter, which includes the adverse effect of an earlier Lenten season and Easter that impacted blended same-restaurant sales by 40 basis points.

Olive Garden's fourth-quarter US same-restaurant sales were down 1.8%.

Red Lobster's fourth-quarter US same-restaurant sales fell 3.9%.

This includes the adverse impact of 130 basis points due to the earlier Lenten season and Easter, along with the shift of Lobsterfest LongHorn Steakhouse fourth-quarter US same-restaurant sales increased 3%.

And we saw continued strong same-restaurant sales gains in our Specialty Restaurant Group, with plus 2.7% same-restaurant sales growth on a blended basis.

For the fourth quarter, same-restaurant sales increased 2.8% at Capital Grille, 2.8% at Bahama Breeze and 1.9% at Seasons 52.

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

Food and beverage expenses were 45 basis points higher than last year on a percentage of sales basis.

The increase in food and beverage expense is attributable to year over year inflation in seafood and beef cost.

This is a sharp improvement from the 250 basis points of unfavorability we reported in the first half of the fiscal year, and approximately 175 basis points of unfavorability in the third quarter.

Fourth-quarter restaurant labor expenses were 50 basis points lower than last year, on a percentage of sales basis, due to increased productivity and lower restaurant manager incentive compensation expense.

Restaurant expenses in the quarter were essentially flat to last year on a percentage of sales basis, as lower credit card expenses were offset with increased pre-opening expense related to nine net new unit openings in the quarter and additional openings in early fiscal 2013.

Selling, general and administrative expenses were 74 basis points lower than last year as a percentage of sales, due to sales leveraging, lower incentive compensation, and a reduction in media spend at Olive Garden.

Drew will have more to say about the lower media spend there shortly.

Depreciation expense in the quarter was 27 basis points higher as a percentage of sales basis compared to last year, due to increased new units and remodels.

For the quarter, operating profit as a percentage of sales was 11%.

That's 59 basis points better than last year, and came from new restaurant growth leverage, along with the combination of restaurant labor, selling, general and administrative expense improvements.

In sum, this led to a 15% diluted net earnings per share growth in the fourth quarter.

During the fourth quarter, we also repurchased 400,000 shares of our common stock for approximately $18 million.

Now, for the full fiscal year, Darden sales increased 6.6% in fiscal 2012 to $8 billion.

This increase was driven by 100 net new restaurants, including the purchase of 11 Eddie V's restaurants, the blended same-restaurant sales increase of 1.8% at our larger brands, and a blended same-restaurant sales increase of 4.6% at the Specialty Restaurant Group.

On a brand by brand basis, Olive Garden's annual same-restaurant sales fell 1.2%, and its average unit volumes were $4.7 million, well above those of any other nationally-advertised full service restaurant brand.

Red Lobster had a 4.6% same-restaurant sales increase for the year, and its average unit volumes were $3.8 million, which is also high within the category.

LongHorn Steakhouse same-restaurant sales increased 5.3%, and its average unit volumes were $3 million.

The Capital Grille's same-restaurant sales increased 5.3%, and its average unit volumes were $6.8 million, well ahead of its nearest multi-unit competitor.

Bahama Breeze same-restaurant sales increased 3.4%, and average unit volumes were $5.6 million.

And Seasons 52 same-restaurant sales increased 3.8%, and average unit volumes were $6.4 million.

Our same-restaurant sales results and high average unit volumes support value-creating new unit growth and in fiscal 2012, Olive Garden opened 38 net new restaurants, LongHorn Steakhouse opened 32 net new restaurants, Red Lobster opened six net new restaurants, the Capital Grille opened two net new restaurants, Bahama Breeze opened four net new restaurants, and Seasons 52 opened six new restaurants.

Plus, we opened one more synergy restaurant, pairing a Red Lobster and Olive Garden for a total of 89 net new restaurants for the year, excluding the purchase of the 11 Eddie V's restaurants.

We purchased $375 million of shares for the year.

In the last five years, we've purchased $1.15 billion of our stock while maintaining a solid investment grade credit profile, which really speaks to the significant cash flow we generate on a consistent basis.

We have 16.5 million shares remaining in our current repurchase authorization.

I'll discuss our plans for repurchase in fiscal 2013, following Gene's remarks.

Given our ability to consistently generate strong cash flows, today we announced an increase in our dividend to $0.50 per share, payable on August 1, 2012, to shareholders of record July 10, 2012.

We previously paid a quarterly dividend of $0.43 per share or $1.72 per share on an annual basis.

Based on the $0.50 quarterly dividend declaration, our indicated annual dividend is $2 per share, an increase of 16%.

This equates to a payout ratio on a forward basis of approximately 50%, based on the upper end of our fiscal 2013 diluted EPS expectation.

We have increased our dividends by 100% over the last three years, which speaks to the consistent cash flow we generate, and our intent to return more capital to shareholders through dividends.

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

Thank you, Brad.

This morning, I'll discuss fiscal 2012 fourth-quarter sales performance and fiscal 2013 strategic priorities for Olive Garden, Red Lobster and LongHorn, and then Gene will do the same for the brands in our Specialty Restaurant Group.

As Brad mentioned, our three large brands had a combined same-restaurant sales decline of 1.9% during the fourth quarter.

And while some of this decline was due to holiday and promotional timing shifts at Red Lobster, and lower advertising support at Olive Garden, most of the declines was the result of disappointing promotional performance at those two brands.

Now let me comment more specifically on our fourth quarter results.

Olive Garden opened 16 new restaurants and delivered total sales growth of nearly 3%, high single-digit operating profit growth, and solid margin expansion during the fourth quarter.

However, same-restaurant sales fell 1.8%, which contrasts with the modest improvement we saw in the third quarter.

Olive Garden started the quarter with a final three weeks of their three course Italian dinner for $12.95 promotion.

This promotion featured five new entrees specifically designed for this price point from a margin perspective, and it included soup or salad, plus the choice of an individual size desert.

They followed this with Passion For Parmesan that included three new entrees, grilled chicken parmesan, parmesan crusted shrimp, and parmesan crusted steak, that leveraged the broad appeal and craveable nature of parmesan cheese.

In mid-May, Olive Garden launched the Taste of Tuscany promotion with a starting at $10.95 price point.

This promotion featured two new entrees, sauteed chicken with asiago tortellini, and grilled Italian sausage with orecchiette pasta, and allowed guests to personalize their entree choice by adding two of four new Tuscan inspired side dishes.

The majority of Olive Garden's decline in the fourth quarter versus prior year occurred during May when same-restaurant sales were down 4.6% and we believe this reflects two dynamics.

First, we decided not to advertise around Mother's Day, which resulted in two fewer weeks of television support during May this year, compared to last year.

In retrospect, this decision negatively impacted same-restaurant sales momentum, given the significant level of competitive media across the industry at that time.

Second, the Taste of Tuscany promotion that started in May and has continued into June was not as effective as we anticipated.

As we've discussed before, beginning in the third quarter this year, Olive Garden began a transition in their promotion strategy, moving away from advertising one or two new dishes, occasionally with a price point, to featuring broader platform ideas that guests find more compelling.

This approach was effective with the three course meal for $12.95 promotion during February and March.

We were also satisfied with the results for Passion For Parmesan during March and April, when same-restaurant guest count results at Olive Garden were equal to our estimate of industry performance.

But the Taste of Tuscany promotion did not work nearly as well.

Our assessment is that this promotion was too much about the brand, especially the desirability and culinary inspiration of Tuscany, and not enough about the $10.95 price point and affordability of the new dishes.

So with this learning, going forward, when Olive Garden chooses to feature an approachable price point in their promotion, the broader platform idea that we will communicate to guests will focus more single-mindedly on affordability.

As an example, Olive Garden's next promotion is two for $25.

It offers guests the opportunity to enjoy unlimited soup or salad, their choice of entree, plus a sharable appetizer or desert, all for just $25.

It starts next week, and is a good example of using the new promotion platform in a way that has a more single-minded focus on affordability.

At Red Lobster, total sales declined 2.8% during the fourth quarter, despite continued improvement in most business fundamentals, and in most brand equity measures.

So we believe the results were primarily because our promotional offerings fell short of expectations.

Same-restaurant sales declined 3.9%, although adjusting for the impact of an earlier Lenten season and Easter, same-restaurant sales fell 2.6% during the quarter.

Red Lobster advertised Lobsterfest in March and part of April.

Lobsterfest featured a variety of classic and new entrees this year, including new Maine Lobster and Shrimp Trio, and new Bar Harbor Lobster Bake.

They finished the quarter with Festival of Shrimp, which offered guests the opportunity to create their own experience by selecting any two shrimp options for $12.99.

As Clarence mentioned, we believe it is important to keep a balance of approachably-priced and premium priced offers in our promotions because that helps us stay relevant to guests who are more economically constrained, as well as guests looking for a more distinctive experience.

Lobsterfest is a signature promotion for Red Lobster, and it obviously has a premium price.

Given the challenging economic environment and sharp increase in gasoline prices that coincided with this promotion, a premium price offer like Lobsterfest was less well-suited for the period.

Lobsterfest is best done during the Lenten season, and we believe the promotion continues to be an important way to differentiate Red Lobster from the competition generally, and more specifically, helps us keep the brand connected to guests who can afford to spend a little more, and as a result, keep them coming back.

Festival of Shrimp began in late April and continued through May.

This was an effective promotion for Red Lobster during May last year, helping drive same-restaurant sales growth of 5%.

This year, they added several new dishes like Tequila Lime Grilled Shrimp Tacos.

They also decided to raise the price by $1 from $11.99 to $12.99, based on its success last year, and on research that suggested consumers were largely indifferent between $11.99 and $12.99.

The price increase was also driven by the reality that seafood inflation, although moderated from where it was at the beginning of the year, was still elevated.

The same-restaurant sales decline this May shows, however, that the price increase for this promotion turned out to be too aggressive.

Red Lobster also completed 66 remodels during the fourth quarter, and 148 for the fiscal year.

The remodeled restaurants continue to generate same-restaurant sales growth of 5% to 6%, and generate returns in excess of the financial hurdle.

We still anticipate completing the remodel program by the end of fiscal 2014.

LongHorn opened 12 new restaurants, delivered total sales growth of nearly 12%, high double-digit operating profit growth, and solid margin expansion during the fourth quarter and same-restaurant sales increased 3% during the quarter.

LongHorn began the quarter with their Five Great Steaks, One Great Price, just $11.99 promotion that featured a bacon-wrapped bourbon sirloin and a garlic herb-crusted sirloin.

This was followed by their Steak and Seafood promotion, that featured a sirloin and crab stuffed mushroom, plus a sirloin and lobster baked potato.

Both promotions were supported by national cable television advertising.

However, LongHorn had extra media in April this year, compared to last year, and less media in May this year compared to last year, which contributed to stronger same-restaurant sales growth in April, and less robust growth in May.

LongHorn also completed the roll-out of its meal pacing system during the fourth quarter, complementing the table management system implemented during the third quarter.

Both tools will help LongHorn further elevate their in-restaurant execution and operations excellence.

Now, before reviewing our fiscal 2013 strategic priorities, it's worth noting that each brand has developed plans to address the elevated need for affordability that our guests still have, while also investing behind initiatives that will help build brand equity, ensure differentiated guest experiences, and support longer-term growth.

As we discussed last quarter, 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 their same-restaurant sales softness during the past year or so has been a narrowing in their value leadership advantage that Olive Garden has enjoyed, versus other large brands in the industry.

And this was driven by a menu that got a little expensive after the financial crisis relative to competitive alternatives, and a broader guest experience that became a little expected, and failed to keep pace with guest expectations that started to evolve much faster than they had in the past, and with an improving competitive set, including Red Lobster and LongHorn.

For the past year, Olive Garden has been working on strengthening their value leadership competitive advantage by improving affordability for their more economically-challenged guests, and on updating and evolving key elements of the guest experience to meet the increasing quality expectations of all guests, especially more economically-stable guests.

In fiscal 2013, their guests will be exposed to more and more of the results of that work.

More specifically, a majority of promotions at Olive Garden will feature approachable price points.

In addition, when Olive Garden chooses to feature a price point in their promotion, the platform idea that the promotion is based on will be more single-mindedly focused on affordability than they were in fiscal 2012.

As I said earlier, the next promotion at Olive Garden will be a Two for $25 offer that leverages the unlimited soup or salad course already included with every entree.

Beyond promotions, Olive Garden will introduce a new advertising campaign in the second quarter that puts a fresh face on the brand and more effectively ignites reconsideration from lapsed users.

Importantly, this new campaign is still anchored in the brand DNA of family, value, and Italian inspiration.

However, the campaign will extend the definition of family to encompass the broader community, and replace the current warm and emotionally nurturing tonality with more energy and passion for life.

Following the new advertising campaign, Olive Garden will introduce a new core menu in the third quarter, that will help increase everyday affordability and strengthen value perceptions.

This menu introduction will be supported with national advertising to make sure that our guests are aware that there's a new menu with enhanced affordability available at Olive Garden.

We will also add new items throughout the year that help address gaps in the current menu, and support guest count growth over time, including lighter and fresher entrees.

Lunch is another growth opportunity for Olive Garden.

In the third quarter, they'll refresh their signature unlimited soup, salad and breadsticks offer and in the fourth quarter, they will introduce a new value-oriented lunch offer.

Olive Garden has begun the final phase of testing their Via Tuscany remodel program for the 430 non-Tuscan farmhouse restaurants in their system.

This remodel incorporates interior and exterior design elements from the Tuscan farmhouse prototype, and provides an updated and more unified look and feel for their family of local restaurants.

They plan to complete 20 to 25 remodels in the first quarter, after which we will read the results, and assuming the same restaurant guest count growth target of 3% to 4% is achieved, then we'll begin an aggressive roll-out in the second half of fiscal 2013, with plans to complete this system by the end of fiscal 2015.

Finally, Olive Garden will maintain strong new unit growth in fiscal 2013, with plans to open 35 to 40 net new restaurants.

Red Lobster business fundamentals continue to improve.

They delivered same-restaurant sales growth of 4.6% last year, exceeding our estimate for the industry by nearly 340 basis points.

Same-restaurant guest counts increased 2.2%, also exceeding our estimate for the industry by 340 basis points.

Brand perception also improved, with future visit intent, the most important overall measure of brand perception, and several individual brand health attributes showing significant improvement versus last year.

Red Lobster's biggest opportunity going forward is to continue building same restaurant guest counts, which are still roughly 15% below where they were 10 years ago.

The biggest near-term priority for profitable guest count growth is to improve affordability.

To help improve affordability for their current core guest base, Red Lobster will continue the emphasis on price certainty and competitively differentiated offers in a majority of their promotions this year.

Red Lobster is currently promoting a $14.99 Four Course Seafood Feast.

This promotion was specifically designed to attract price-conscious guests with a very accessible $14.99 price point and do so at a margin that contributes to profit growth in absolute and percent terms, with appropriate guest count growth.

This is the same promotion we featured last year, that was enormously successful.

While we don't expect to grow same restaurant guest counts versus last year, since we are up against the very significant increase we achieved last year, we do expect this promotion to be more profitable per guest this year because of lower seafood costs.

During the second quarter, Red Lobster will introduce the most comprehensive core menu change at the brand in the last decade.

They've been working on this menu transformation for nearly two years, to ensure that it's compelling for their guests, can be executed at a high level consistently by operations, and contributes to profitable guest count growth.

This menu will offer significantly more items with price points below $15.

The menu will also help eliminate the veto vote by significantly increasing the number of non-seafood selections.

Similar to Olive Garden, Red Lobster plans to support this menu introduction with national media that will help build awareness and generate incremental visits, especially from guests who have stopped coming to Red Lobster.

Red Lobster also plans to further leverage their real people advertising campaign, which was introduced last year, and designed to complement promotional messaging with specific examples of how the Red Lobster experience has improved.

Especially around affordability, freshness and wood fire grilling, to help eliminate perceived visit barriers, and make the brand relevant for new guests and new occasions over time.

The successful Bar Harbor remodel program will continue, with plans to remodel approximately 175 restaurants this year.

We anticipate 75% of the chain will be remodeled by the end of fiscal 2013, and the entire program will be complete by the end of fiscal 2014.

In addition, Red Lobster plans to invest incremental media support behind new Spanish language advertising, starting in the third quarter, to build their business with bi-cultural Hispanics on a national scale.

Red Lobster will maintain modest new unit growth in fiscal 2013, with plans to open one to three net new restaurants.

LongHorn Steakhouse performance remained strong.

In particular, same-restaurant sales have now exceeded our estimate of industry performance for 14 consecutive quarters, and new units continue to significantly exceed their value creation hurdle.

As a result, LongHorn plans to accelerate new unit growth in fiscal 2013, opening 44 to 48 net new restaurants.

Approximately 50% of these openings will be in new markets.

In addition, LongHorn has strengthened their leadership development efforts to ensure a strong talent pipeline is available to support elevated new unit growth.

They're also implementing new systems to ensure their operational performance in existing restaurants remains strong.

Given elevated guest demand for affordability, LongHorn will feature attractive price points in a majority of their promotions this year.

LongHorn is currently promoting their fire-grilled steaks promotion which features a bacon wrapped sirloin for $11.99, and a new fire-grilled flat iron steak for $12.99.

This promotion is also supported with an additional flight of national cable media compared to last year.

To help further strengthen brand equity and differentiation within the category, during the second quarter, LongHorn will introduce a new menu design, distinctive new steak offerings, and a new advertising campaign that more effectively communicates their passion for delivering a great steakhouse experience, with a little more attitude than the current campaign, which we believe will help further differentiate the brand.

Before Gene reviews the Specialty Restaurant Group, I also wanted to mention that pricing during fiscal 2013 at all three of our large casual dining brands will be slightly below 2%, to help strengthen affordability and protect a strong value proposition we offer our guests.

We anticipate total check growth will be slightly above 2%.

And to help maintain our strong business models, we have plans in place to eliminate an additional $25 million in cost during fiscal 2013.

This will be accomplished through a combination of ongoing incremental cost reduction efforts, driven by running the business closer to current standards, and transformative cost reduction efforts that fundamentally change how we support our restaurants and operate the business going forward.

Gene?

Thanks, Drew.

Specialty Restaurant Group delivered strong performance in the fourth quarter, growing sales 26.9%.

This growth was a result of the strong performance at our 23 net new restaurants across the group, which includes the 11 Eddie V's restaurants we acquired last November, and blended same-restaurant sales growth of 2.7%.

Our sales growth resulted in significant operating margin expansion during the quarter.

In fact, restaurant-level margins improved significantly for the group throughout fiscal 2012, and we continued to leverage our support platform to reduce G&A as a percentage of sales.

Total annual sales for the group exceeded $620 million.

That's an increase of more than 24% over prior year, and contributed to 24% of Darden's total annual sales growth for the year.

This robust sales growth was driven by annual blended same-restaurant sales growth of 4.6%, building on our already competitively superior average unit volumes of $6.4 million for the group.

We believe the Specialty Restaurant Group is well-positioned to continue building on this momentum in fiscal 2013.

Our key priority remains effectively managing accelerated new restaurant growth, while maintaining operational excellence, ensuring our brands and business models continue to improve and remain vibrant.

In fiscal 2013, we plan to open 14 to 16 net new restaurants, including seven to eight Seasons 52s, three to four Bahama Breezes, three Capital Grilles, and one Eddie V's.

At the same time, we are continuing to build the real estate pipeline for each of our brands, including making significant progress on identifying potential sites for Eddie V's future expansion.

As we accelerate growth, maintaining this sufficient talent pipeline will also be critically important, and our operations and human resources teams will be intently focused on that this year.

In addition, to continue our same-restaurant sales momentum in fiscal 2013, we will focus on further elevating the guest experience, along with growing all sales channels, including group and event dining, as well as national account relationships and continue to broaden the appeal of our menus.

We will also leverage our culinary expertise and strong seasonal and regional culinary platform to drive food and beverage innovation that help offset the higher beef costs.

We are confident the Specialty Restaurant Group has what it takes and is working on the right things to achieve the high end of our long range growth targets of 17% to 20%, and continue to add more economically resilient guests to the Darden portfolio.

Now, I'll hand it back to Brad for the fiscal 2013 financial outlook.

Thanks, Gene.

Our outlook for fiscal 2013 reflects our very strong business model in the face of what we expect to be at below-normal economic growth levels.

In fiscal 2012, we generated $762 million in cash flow from operations, in what was a challenging economic environment and we anticipate generating even stronger cash flows from operations in fiscal 2013, driven by the combination of continuing same-restaurant sales growth, accelerating new unit growth, and an improvement in our operating margins.

And, after investing in our business, we plan to return a meaningful amount of capital to our shareholders through the increase in our dividends, which we announced today, and by continuing share repurchases.

In fiscal 2013, our outlook is based on combined same-restaurant sales growth for Red Lobster, Olive Garden and LongHorn Steakhouse of between plus 1% and plus 2%.

This includes pricing that is estimated to be slightly below 2% for fiscal 2013, and our assumption that together traffic and mix changes will be flat to slightly negative.

Of course, we will be both above and below this assumed range from month-to-month and quarter-to-quarter, depending an promotional calendar, holiday shifts and changing consumer sentiment.

Looking ahead to unit growth, new restaurant plans that Drew outlined, plus four additional synergy restaurants, means that we expect a net new restaurant increase of approximately 100 to 110 restaurants, which is between 5% and 5.5% unit growth on our current base.

Given our same restaurant assumptions and new restaurant plans, we anticipate that the total sales increase for the year will range from plus 6% to plus 7%.

With more unit development in fiscal 2013, and our accelerating remodel program at Red Lobster and Olive Garden, we expect capital spending to be somewhat higher than fiscal 2012 levels.

We anticipate it will be approximately $750 million, which compares to $640 million in fiscal 2012.

Included in this capital spending estimate is an incremental $15 million to $20 million, dedicated to information technology platform enhancements, that will increase sales in coming years.

Looking at operating profit margins from continuing operations, we expect margin expansion of approximately 20 to 40 basis points on a full-year basis compared to fiscal 2012 results.

On a percentage of sales basis, we expect to see favorability from food and beverage expenses in the first half of the fiscal year, as we lap on elevated inflation that we experienced in the first half of fiscal 2012, but this will begin to level out in the second half of the fiscal year.

We anticipate lower restaurant labor expense and restaurant expenses as a percentage of sales this fiscal year from same-restaurant sales leverage, and our transformational cost savings initiatives.

Selling, general and administrative expenses and depreciation expense are expected to be higher on a percentage of sales basis, due to increases in media expense associated with media inflation and an increase in TRPs, particularly at LongHorn Steakhouse, and the increase in total units and remodels.

Looking at food costs more specifically, with decreasing commodity prices and our supply chain related cost savings initiatives, we expect food and beverage expenses to be lower as a percentage of sales in fiscal 2013.

We anticipate food cost inflation to be in the lower half of the plus 0.5% to plus 1.5% range that we disclosed at our analyst meeting in February.

We have many of our products, approximately 67% of our total spend, contracted to the end of calendar 2012, which I will discuss in more detail shortly.

We also have about six months of full visibility on our costs.

There's limited coverage beyond calendar 2012, in part because we believe some commodities will experience cost declines from the current levels, and we want to be in a position to benefit from that decline, or because the premiums for future contracts are something too great compared to what we expect prices will be in the cash markets several months from now.

In terms of specific food items, total seafood prices for fiscal 2013 are expected to be lower than fiscal 2012, because of additional supply, particularly shrimp and crab, and weaker global demand, in particular for lobster.

Seafood accounts for approximately 30% of our total cost of goods sold.

Category by category, shrimp is our highest-volume protein and we have coverage through the second fiscal quarter of 2013, at prices lower than fiscal 2012.

Crab is contracted or purchased at prices lower than fiscal 2012, with the coverage through the fourth quarter of fiscal 2013.

And we currently have lobster usage contracted or purchased through the second quarter of fiscal 2013, at prices that are also lower than the prior year.

Beef prices are higher on a year over year basis, and we have approximately 70% of our usage covered through the calendar year 2012.

Chicken, poultry market prices are slightly higher on a year over year basis, but we have contracted our usage through December of 2012, at prices slightly elevated to our fiscal 2012 cost levels.

Wheat prices are lower on a year over year basis.

We have contracts that take us through December for our bread products, and contracts on our pasta products that expire this fall.

We expect that bread and pasta contracts will be renewed at prices slightly better than what we are experiencing, as we begin the North American harvest in August and September.

Dairy prices are lower on a year over year basis, driven by the higher production and weak export markets.

For dairy products, more than 50% of our usage for the calendar year is contracted at prices lower than fiscal 2012 costs.

Energy costs are expected to be favorable on a year over year basis.

We have contracted nearly 50% of our natural gas and electricity usage through the fall in the deregulated markets, in which we operate at prices favorable to calendar 2011.

And we are optimistic about adding additional coverage.

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

This is because of increased media, as Drew previously discussed, and media inflation in the upper single digit range, along with normalized incentive compensation levels.

Incentive compensation, which is located in both the restaurant labor line and the SG&A line of the P&L, was below normalized levels throughout fiscal 2012, with reduced and in some cases zero bonus payouts based on performance.

In fiscal 2013, incentive compensation is reset to targeted levels, limiting our EPS growth by $0.14 per diluted share.

Finally, for fiscal 2013, we expect our tax rate to be approximately 26%.

Although this will vary by quarter, depending on the timing of certain tax events.

Again, we expect to generate solid cash flow in fiscal 2013, which we've done consistently since we became a public Company in 1995.

And to use this to pay our increased dividend and to repurchase shares.

We expect to pay out approximately $255 million in dividends to our shareholders, an increase of approximately $30 million from fiscal 2012.

We also expect to repurchase approximately $200 million to $250 million of our stock in fiscal 2013, while maintaining the debt leverage ratio in the middle of our targeted range.

With our same-restaurant sales assumptions, new restaurant growth plans and cost expectations, we anticipate that reported diluted net earnings per share growth from continuing operations for fiscal 2013 will be between 8% and 12%, compared to our reported diluted net earnings per share from continuing operations of $3.58 in fiscal 2012.

Overall, we remain confident that this year we'll deliver strong results in what's likely to be a sluggish growth economic environment.

Now Clarence has some final words.

To wrap up, as you all know, the competitive environment's been tough, with a frustratingly slow economic recovery that's constrained consumers.

Like other leaders in our industry, we're responding to this reality with significant changes in what we offer our guests, and how we communicate what we offer.

Within our portfolio, Olive Garden got off to a later start making these changes, but still our double-digit growth in earnings per share in the fourth quarter and second half, once an unusual food cost spike was behind us, indicates that we can deliver strong financial performance, even when part of our portfolio is not where we'd like it to be.

As discussed, material changes are under way at Olive Garden that will strengthen its guest experience and promotional offerings, and we're working on the right things to sustain momentum at the rest of our brands.

We continue to believe that we've got an opportunity to deliver compelling financial value the next five years, beginning with solid sales and earnings growth in fiscal 2013.

It's a year in which we do expect continued recovery, though the improvement in economic and industry conditions is likely to be a lot slower than any of us would like.

We're confident though that with a relentless focus on building guest loyalty and on leveraging and enhancing both our expertise and our increasingly cost-effective support platform, that we'll navigate that environment well.

With that, we've got about 30 minutes to take your questions.

We know we've run a little longer, given that it's a fiscal year end.

So let's get started.

(Operator Instructions).

We do have some questions.

The first question will come from David Palmer from UBS.

Your line is open.

I think investors will want color on your targets, given the growth rates as you exited fiscal 2012.

So just a series of small little questions, asking that color on the sales.

For instance, what sort of industry-wide casual dining chain same-store sales performance do you think is consistent with your 1% to 2% guidance?

Also on sales, could you provide a little color about Olive Garden versus the other chains?

Is your belief that Olive Garden will be in line with the 1% to 2% target for fiscal 2012?

And lastly, first half versus second half, it feels like the first-half sales, from some of the comments you are making even though you have some bridge-type marketing with Olive Garden, the first half might be weaker than your target, particularly with the industry environment we saw through May, but the margins may be better than you might have in the second half, perhaps making the EPS growth at or above your targets in the first half, with a below-average or below-targeted same store sales?

Thanks for any color.

I'll start.

Just on the industry, we think the industry conditions are going to look a like they were in fiscal 2012.

We think the overall economic environment's going to look a lot like that.

So in 2012 with an industry that grew at about 1.2% on a same-restaurant sales basis, we think about 1% is the right number.

It could be a little bit below that, but that's where we are.

In terms of Olive Garden, in our mix, as we think about that 1% to 2%, we do expect growth at Olive Garden.

And so move it from a decline in fiscal 2012 to growth in fiscal 2013.

The other questions?

A little more color on Olive Garden.

We're not anticipating any sort of first half to second half hockey stick for Olive Garden.

We think in the first half the promotions are going to be meaningfully stronger than they were last year in first half of fiscal 2012, same-restaurant sales were minus 2.5% to minus 3%.

For instance, we think more single-minded focus on affordability in the promotion that starts Monday, the Two for $25, is going to be much stronger than the Carbonara Ravioli promotion last year that it's lapping.

And by the same token, we think the new menu that's going to be introduced in the third quarter, with more elevated focus on everyday affordability and the advertising behind that will help maintain momentum throughout the year.

Our next question comes from Michael Kelter from Goldman Sachs.

Your line is open.

I wanted to ask about Red Lobster, which was meaningfully below its prior run rate.

With traffic down 7% to 10% every month for the full quarter, I know you guys explained some of your thoughts as to why, but that's a really big decline.

And I guess help us understand why we shouldn't be a little bit more worried about that.

I think we talked about it.

Really, March is when we saw the spike in gasoline prices.

As we talked about before, that initial spike is something that matters.

It does affect behavior.

That starts to dissipate over time.

And so we've got a premium price promotion that's timed to Lent.

March was the right time.

It actually began at the very end of February, and so it's just -- it was not well-suited for that environment.

In April is where we had some fairly significant year-over-year calendar sort of shifts and so you have to adjust April for that.

But April was a better month, as some of that consumer concern dissipated, and then we saw the consumer get a lot more cautious in May, and that was not just at Red Lobster but across the restaurant industry, and as we look out at the data that we get generally across the overall of consumer environment beyond restaurants.

Certainly, the industry softened in May as Clarence just talked about.

But stepping back from that and thinking about Red Lobster specifically, we think the results in the fourth quarter demonstrate really the heightened need for affordability that most consumers have in casual dining, particularly the Red Lobster core guest, and that is why we've been working so hard over the last year, not just on promotions, but on a core menu that we think makes a meaningful difference in price point accessibility every day for guests.

And without dimensionalizing that too much, it's a substantial change in terms of the balance of items on the menu that are at $15 or below, which we have determined to be sort of a threshold point for affordability for high-quality seafood in casual dining.

And that's why we're adding media support starting in the second quarter to tell people about this new menu.

So promotions can help address that to a degree, but this core menu transformation we think will also help it.

In addition to the other things we're doing to maintain sales momentum -- remodels, new advertising campaigns, service improvements, et cetera.

Then the final thought would just be, as Drew said, we look at a lot of different measures of brand strength and Red Lobster has been improving on all of those.

That improvement drove significant success in the first three quarters of the year.

So as we look back on the first quarter, same-restaurant sales growth of nearly 11%, almost 7% in the second quarter, a third quarter that had some favorable weather, but was still 6%, and so we do think that as we look at the fourth quarter, it's attributable to some very specific promotional dynamics.

And then on Olive Garden, where traffic was down quite a bit in May, decelerated a whole lot, you mentioned the promotions, but also mentioned that part of it was your decision not to advertise for two weeks during Mother's Day.

Can you help us understand why you made that decision, why you didn't advertise during that period and what your plans are in terms of ad spending for Olive Garden in fiscal 2013?

Are you going to be maintaining or increasing TRPs?

Is there going to be any sort of phasing shift we should be aware of in terms of the timing where advertising won't come until the back half to coincide with initiatives that are coming?

How do we think about the ad spending behind the brand?

Historically, Olive Garden hasn't advertised around Mother's Day.

They did last year, but historically they typically don't.

The thought is, it's so busy around Mother's Day that we'll target our advertising support for other periods during the year.

And as I talked about, in the current environment, with the competitive challenges, that probably wasn't the right decision.

For fiscal 2013, Olive Garden is going to continue to have one of the strongest media budgets in casual dining and it's going to be -- it's comparable in terms of absolute weight to what it was in fiscal 2012.

It will be up a little bit in dollars because of media inflation is going to be up, and we're going to get, we think, more impact from that media investment because we're going to be in the near term more single-minded on affordability in several promotions.

We're going to have a new campaign starting in the second quarter that we think is going to be a little less expected, and is going to break through a little more effectively.

And then starting in the third quarter, we're going to have some advertising support behind a new menu, with more everyday affordability, that we think is going to resonate with Olive Garden guests as well.

I think as Brad mentioned, when you look at Red Lobster and LongHorn we do expect increasing weight.

Increased number of TRPs at LongHorn, increased weight at Red Lobster.

As Drew said, they've been working for a couple of years now to very significantly transform their core menu with a focus on affordability and introducing more price-accessible offerings.

And so to drive awareness of that menu, they're going to launch with fairly significant weight behind it.

Our next question comes from Brian Bittner from Oppenheimer.

Your line is open.

So the question is, is what really is giving you this high confidence level in the future the success of future promotions at Olive Garden, just given the weakness of the most recent ones?

I mean, have the upcoming promotions tested better than Tuscany did, or if you could just please help investors understand the reason for the high confidence, just related to the future success of these Olive Garden promotions?

And then I have a quick follow-up.

Yes, I would say a lot of the confidence is driven by a couple of things.

One is that, as we made this transition, Olive Garden has had promotions that have worked really well.

And so in the second quarter for example, we had a promotion that worked quite well for us, and even in the fourth quarter we had some success with one of the promotions, not as much with one of the others.

We think that there will be variability, as we make the transition.

As I said, there will be less variability as we continue to learn.

The second reason for our confidence level is that we've made this transition before with Red Lobster, and with LongHorn Steakhouse.

And again, the results in fiscal 2012 for Red Lobster on a same-restaurant sales basis, with fairly significant increases through the first three quarters, a 4.5% increase for the entire year, this transition was certainly contributed to that.

The only other thing I'd add is that we're adjusting the balance in our promotions as I said to be more singlemindedly focused on affordability at Olive Garden.

Starting this year, just like we did a year ago, little more than a year ago at Red Lobster, which we think is going to resonate very strongly in the current environment.

And the testing that we've done on the Two for $25 offer that starts next week is substantially stronger than the Carbonara Ravioli promotion that it's going to be lapping from a year ago in the first quarter.

But what really went wrong with the Taste of Tuscany?

I think we were emphasizing the interest and excitement and imagery of Tuscany more than we were emphasizing the affordability of the new dishes.

And that balance, while it might help build the brand over the long term, is less impactful in the near term when more guests are looking for affordability.

So a Two for $25 promotion is a very different message than Taste of Tuscany.

Our next question comes from Joe Buckley, Bank of America-Merrill Lynch.

Your line is open.

I have a couple of questions as well.

Can you talk about the wisdom of proceeding with the Olive Garden expansion, as you're making these major adjustments to the brand?

Yes.

I would say as we look at new restaurant performance, so we've got a hurdle that those new restaurants have to achieve in order to deliver an appropriate return on capital.

A value-creating return.

Olive Garden, from an earnings perspective, its new restaurants are delivering earnings at 150% of our hurdle rate, and so new restaurants are performing at a pretty high level.

So we feel good about continuing to expand.

Just a question also just on kind of the progression of your expectations for the quarter.

You've had a pretty typical first-quarter track record in recent years, and this one looks a little trickier than most.

You've got a July 4 shift from Monday to Wednesday, you've got the Olympics.

This is a time I would suggest to be as transparent as possible about the first quarter.

Sounds like Red Lobster and Olive Garden are both off to a bad start in June, based on your comments.

Just talk us through the first quarter versus the full-year guidance.

I think we, Joe will stick with the full year.

What we learned over the last several years is that there's tremendous variability across the year.

And so you had really strong sales results at Red Lobster first quarter last year, weak earnings results, because of the variability in food costs.

You've got variability in food costs.

You've got variability in consumer sentiment.

And so we think we're pretty comfortable with the annual outlook.

Calling that from quarter to quarter gets more difficult and we think it's probably not helpful.

Could I just ask, maybe just a broad sense, do you think that July 4 shift was positive or negative and do you think the Olympics matter?

Well, the Olympics matter from a media planning perspective.

Little expensive.

Holiday shifts, it depends on consumer sentiment as much as anything else, as to whether they matter or not.

That one's a little more difficult to project.

Jeff Bernstein from Barclays, you may ask your question.

Just two questions, actually.

First, broadly on the Olive Garden turnaround, I'm just wondering if you could characterize maybe how you feel about the progress, putting May aside, which seemed like it was disappointing.

But the recent initiatives, the new product news and greater value offerings, would you say they're gaining the desired traction?

Or perhaps would you say the challenges are more or less severe at the brand than you believed just a few quarters ago?

And then separately on Red Lobster, you talk about I think in the press release you say competitively strong comps in fiscal 2013.

Obviously the brand has been volatile in the past.

Just wondering how we should think about the comps.

You talk about the first quarter being extremely difficult from a comparison standpoint.

I think you mentioned you weren't expecting any traffic growth, but even in the fiscal second and third quarter you're lapping very strong mid single digits.

Just wondering how you think about Red Lobster through the year relative to that 1% to 2% for the portfolio?

Thanks.

Starting with the Olive Garden question, I guess I would ground our response in saying we believe the fundamentals in the business are still very strong.

So whether that's average unit volume or restaurant-level returns, the way new units are performing, it's obviously -- the opportunity that we're focused on is more consistent same-restaurant sales growth, and the work we need to do to generate consistent same-restaurant sales growth takes some time.

And we've been working on that for much of the past year, changing promotion strategy which has had a very strong impact when we did the three course meal for $12.95, not as strong in Taste of Tuscany.

That has led us to say we need to continue on this new approach of having a different type of platform, but that platform idea needs to be more around affordability, and we think that will help us next year.

We've also been working on a new ad campaign that we think will break through more effectively, get noticed more readily, won't feel as expected.

That's not in the market now.

It will be in the market in the second quarter.

We think we need to continue to evolve the menu, so beyond promotions, we need new advertising, new menu.

We've been working on that core menu.

We'll be taking a big step towards the future menu in the third quarter, but we'll have more to do following that.

And remodel is important.

So we think we're in a position to confirm that we've got the right design, the right investment level, and to start accelerating remodels of roughly 430 Olive Garden restaurants starting in the second half.

So we think we've identified what we need to do.

We're confident in the initiatives that we're preparing to implement next year, and guests will start seeing more and more of it as the year unfolds.

I would say at Red Lobster we think Red Lobster will have growth in same-restaurant sales in fiscal 2013 on top of the strong growth that they had in fiscal 2012.

Certainly 2012, a lot of it was driven by much better promotional effectiveness which reflect several years of work prior to that.

As Drew mentioned, this year Olive Garden -- I'm sorry, Red Lobster is rolling out one of the biggest changes in core menu that they've done in at least a decade.

80% of our guests are ordering off the core menu, so that's very important.

It is a slower build than a promotion might be but that is part of the reason why we would expect growth at Red Lobster.

We have confidence that the core menu is moving in the right direction.

And as Drew just reminded me, there is extra media behind that core menu, so we hope to get that build a little faster than we might without that.

Next, we have Jason West from Deutsche Bank.

Your line is open.

Just want to follow up on one of the comments you made, that you expect the check average to be a little bit better than the pricing.

And just want to understand how that takes place, given you are running more value at Olive Garden and a new menu at Red Lobster that has price points that are more in the $15 and below emphasis.

I would think that would put some downward pressure on check.

Just want to understand that comment, and how you are able to measure the impact as these things roll out?

I think the biggest dynamic is that we experienced at all of our large casual dining brands during 2012, we experienced a meaningful amount of menu mix, negative menu mix, so guests trading down to lower priced items, ordering fewer appetizers, fewer desserts and we think that step-down is going to moderate during fiscal 2013.

So we wouldn't expect that negative trend in guest behavior to continue.

And second, internally, we think we've gotten a little smarter in the way we merchandise items, and in the way we bring news to the market that can help moderate that as well.

I would say as you look back at fiscal 2012, that smarter that Drew talked about really starts to show up in the second half, and so that trading that he talked about was much more pronounced in the first half than it was in the second half as we took steps to address it.

And the lower price point items, are those, as in the past, engineered to protect margins or do you feel like you need to offer a little more to the guest in terms of portion size or quality elements, that you're not able to trim back some on those areas to protect margins?

No, we're not making a tradeoff in quality at all.

In the new dishes our guests are finding very compelling, so it's a combination of having new dishes that are a little more accessible from a price point standpoint, additional media and incremental traffic, all of which is going to help maintain.

The dishes, from a culinary development perspective, are constructed so that they have margin that we feel pretty comfortable with.

Next, we have John Ivankoe from JPMorgan.

Your line is open.

Again, getting back to Olive Garden, I mean obviously, it's been discussed just the absolute average check of the brand, the increases that have been taken in pricing over the past decade, even to your own admission, that begin to make you expensive relative to what customers wanted to pay relative to the peers, so a couple things.

Maybe a follow-up on a previous question is, how can you defend that average ticket?

There seems to be a little bit of a disconnect between your prepared remarks and what you talked about doing with the brand, and focusing more on value including dinner for Two for $25 with the idea that the average ticket increases more than the modest amount of price, the 1% to 2% price that you're taking in the quarter.

So just give us a sense, if you don't mind revisiting it specifically on this promotion, of how that average ticket at Olive Garden can go up, given the fact that you and the customers seem to both agree that it has gotten a little bit expensive.

And secondly, whether that increase in the average check can be accomplished permanently through something like Dinner for Two for $25, if that's going to be your permanent option?

I think our prepared comments may have given you the impression that the difference between pricing and check is significantly greater than it really is.

Our pricing is very modestly below 2% and our check growth is very modestly above 2%, so essentially we're expecting our check growth to equal pricing this year and when you think about a Two for $25 offer, that's $12.50 per guest.

By the time you add a beverage, you're at $15.50, you're very close to Olive Garden's roughly $16 menu average, so it's really a very modest investment in check.

I would say on the core menu, in addition to making changes that really add compelling price-approachable offers, Olive Garden's also working to make sure it adds items that really are seen as extremely high quality at a reasonable price, to really continue to resonate with that guest who has the willingness and ability to pay more.

So that dynamic is going on as well inside the core menu.

Understood.

If you don't mind me pushing this a little bit.

Have you actually tested this in market?

Do you have the data that supports that you'll be able to support average check, or are we still kind of in the theoretical and doing things in headquarters in a more closed environment?

No, the Red Lobster menu has been in the market for several months.

The Olive Garden menu is in the market now, and we've got plenty of experience with a promotion like Two for $25 that would support what I was suggesting before, that by the time people add a beverage, you're very close to our average ticket.

I do think, John, you point to a factor here, which is, we talk about and we've been talking about for a year, for example, the direction we want to go in, but the development times, the development cycles are fairly extended, because we have to develop dishes, we have to test those dishes, we've got to run in market tests to get a confidence level and so a significant change like Red Lobster's making has taken two years.

Will have taken two years by the time they introduce their major core menu change.

Olive Garden has been working on an even more accelerated basis, and so will have taken about a year.

So these take time because we feel that time's required to really do it right.

Our next question, and forgive me if I mispronounce the name, Keith Siegner from Credit Suisse, your line is open.

That was perfect, actually.

I want to ask kind of a follow-up to one of John's questions here, just to make sure I understood it too.

It does sound like there's a lot riding on the Olive Garden menu coming in third quarter, and I think you just said something about the market, the menu being in market.

So just to clarify, have you tested, in maybe a little more granular detail, how many stores, how long has the third quarter menu been in test, what have maybe you learned from this, in terms of like actual impact on sales, sort of more details around this test?

Anything you're willing to give would be really helpful.

Thank you.

Well, first of all I'd say that our confidence in Olive Garden improving same-restaurant sales next year is really driven by several initiatives that will be hitting the market.

So it's important to think about a very different promotion strategy, with a more single-minded focus on affordability in the platforms that we advertise.

A new advertising campaign, and a new menu.

In terms of a new menu, we've done extensive testing on what sort of dishes consumers are interested in conceptually, both more approachable dishes, with more approachable price points, and more distinctive dishes for a different consumer audience.

We've developed and tested those dishes to make sure that people are satisfied when they order them, and now we're testing the combined impact of those new dishes on the menu in the market now.

That's why we're introducing it in the third quarter, not in the first quarter this fiscal year, because we want to make sure that guests find it compelling, our operators can execute it at a high level, and that combined with the new ad campaign and the promotions that we're talking about it does contribute to consistent profitable same-restaurant sales growth.

Thank you.

Couple markets in 40 or 50 restaurants.

Thank you.

Our next question comes from Will Slabaugh from Stephens.

Your line is open.

Curious if there's anywhere else outside of that Red Lobster promotion that you mentioned, where you feel like the price increase was too aggressive.

And I guess on the back of that, if you actually plan on peeling that back a little bit, and again, if that would apply anywhere else?

We had two promotions in the fourth quarter at Red Lobster that we think weren't as powerful as they could have been, because of affordability.

Lobsterfest is just by nature, a more premium-price promotion and then the Festival of Shrimp is the promotion you're referring to.

And it demonstrates the need for balance in our promotions, which we're going to continue to have next year.

Also emphasizes the need for more approachability in prices on our core menu.

I think Clarence mentioned this earlier, but if we're doing at Red Lobster $3.6 million or $3.7 million a unit, 85% plus of that is coming from the base menu, so we need to make sure if we're addressing affordability, that the everyday affordability is available which is what the second quarter menu introduction is designed to complement in addition to promotion.

Just a clarification question, quickly, on the incentive comp that you mentioned.

If I heard you correctly, that will be increased in fiscal 2013, costs around $0.14.

Curious on the dynamics there considering it looks like you had better control over performance at least in the fiscal 2012 year than you're guiding for in fiscal 2013.

Just any color on that would be appreciated.

Sure.

I would say in fiscal 2012 we had a very significant cost reduction initiative on top of some of the transformative cost reduction initiatives that we've had going multi-year now.

That is indeed the fact.

And the compensation swings reflect people's performance.

We missed our initial targets for the year fairly significantly, and that's reflected in incentives from the top all the way down through the restaurants.

As we reset to normalized levels with an expectation that we will hit our plan and pay out at normalized levels, as you said, as Brad said, that's worth about $0.15 a share.

So a fairly significant swing.

Our next question comes from Matthew DiFrisco from Lazard.

Your line is open.

Actually I've got a follow-up on that.

I was wondering when you referenced G&A and that normalized, is fiscal year 2011 -- sort of the growth rate in G&A -- is that a normalized period around that 7% or so or 8% growth rate on the G&A line?

And then I have a follow-up.

I'll let Brad answer that.

I would just say incentive compensation shows up on a number of different line items, and so it's not just in G&A.

The in restaurant, restaurant manager incentive shows up on a different line.

The additional color I would say is what's going with the media piece of that, in terms of our support cost structure.

We continue to get more efficient there, we continue to leverage new unit growth, so that puts downward pressure on that as a percentage of sales.

There will be that lift going into 2013 with incentive fees and then media.

We talked about a little bit more media going in place to support the new menu at Red Lobster, and then we talked about elevated media inflation is our expectation right now.

So those are the real drivers that we see of that.

When you net all those together, consistent a year-over-year basis, though.

I would also add, just that a lot of the cost reduction that we did in the fourth quarter is sustaining, ongoing, and as Brad said, contributes to that continuously cost effective support platform.

Okay.

Then if I --

We have time for one more question.

I had a follow-up.

Sure.

With respect to sort of your guidance, I guess your top line hasn't changed from historical pace, commodity costs are coming down, yet the earnings growth of 8% to 12% is below your goal.

I guess is that to then read through that even if top line growth is sort of in line with overall historical pace, the substitution of expansion in place of same-store sales, if this is a pattern, would relegate you to sort of the 8% to 12%.

I'm wondering if there's something unique to --

Not at all.

In fact, if you just take the incentive reset alone that's worth 4 points of EPS growth.

So that alone takes it to 8% to 12% instead of 12% to 16%.

Perfect.

So that is probably the biggest factor.

We do have, as we said, some investments in some initiatives to drive growth beyond 2013 and that has an effect as well, but not nearly as significant as the incentive reset.

Excellent.

That's good to know.

Thank you very much.

Our final question will come from Mitch Speiser from Buckingham Research.

I'll open your line now.

My question's on Olive Garden and the Two for $25 promotion.

Of course we all know there's a lot of Two for $20 type promotions from competitors out there.

When we think about affordability can you maybe describe to us if you are -- if and when you're advertising Two for $25 what is going to be the value, incremental value component to cut through the clutter to make people think that's value versus your peers, probably going to continue to advertise Two for $20.

I would say Olive Garden offers unlimited soup, salad and breadsticks with their entrees, and so that will be clear to guests.

They know it.

And we will reinforce that the first course is on us.

That's the fundamental difference.

The Two for $20 offers that are out there it's two entrees and an appetizer, typically.

This is two entrees, an appetizer or a dessert plus unlimited soup or salad and breadsticks at the start of the meal.

We changed our testing methodology conceptually to reflect the fact that it's just a much more promotional environment.

So in addition to getting a sense for how these concepts and promotion platforms rank against what we've done historically, we've also added a number of competitive benchmarks into our testing and the Two for $25 that includes unlimited soup and salad in addition to an appetizer or dessert and two entrees is statistically more compelling that the competitive options out there.

Thanks.

My one follow-up is just on the new core menu at Olive Garden.

I thought it was coming out in the fiscal second quarter.

Just want to make sure it's now the fiscal third quarter.

If it was a delay, can you discuss why it was pushed back a bit?

It's not really pushed back.

We've been thinking about introducing it in the second or third quarter for some time, and so now with where we stand in development and getting our read in market, we're more comfortable with the third quarter.

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

We know there's several of you still left in the queue.

We certainly are here in Orlando to answer your questions.

We appreciate your interest in the story.

We look forward to talking to you again in September.

Thank you.

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