Darden Restaurants, Inc. (DRI) Q3 2006 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by and welcome to the Darden Restaurants Third Quarter Earnings Release Conference Call. At this time all lines are in the listen-only mode. Later there will be a question and answer session and instructions will be given at that time. If you do need assistance during the call today please press the “*” followed by the “0” and an operator will help you offline. As a reminder today’s call is being recorded. At this time I would like turn the conference over to the Vice President of Investor Relations, Mr. Matthew Stroud. Please go ahead sir.

Thank you Kent. Good morning everyone. With me today are Clarence Otis, Darden’s Chairman and CEO; Andrew Madsen, Darden’s President and COO; and Linda Dimopoulos, Darden’s CFO. We welcome those who are joining us by telephone or the Internet. During the course of this conference call Darden Restaurant’s officers and employees may make forward-looking statements concerning the company’s “expectations”, “goals”, or “objectives”. These forward-looking statements could address future economic performance, restaurant openings, various financial parameters or similar matters. By their nature forward-looking statements involve risks and uncertainties that could cause actual results to materially differ from those anticipated in the statements. These risks and uncertainties include the impact of intense competition, changing economic or business conditions, the price and availability of food, ingredients and utilities, labor and insurance cost, increased advertising and marketing cost, higher than anticipated cost to open or close restaurants, litigation and favorable publicity, a lack of suitable locations, government regulation, our failure to achieve growth objectives, weather conditions and other risks and uncertainties discussed in the company’s SEC fillings. Because of these numerous variables, you are cautioned against placing undue reliance on any forward-looking statements made by or on behalf of the company. A copy of our press release announcing our earnings, the Form 8-K with the Securities and Exchange Commission and any other financial and fiscal 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 the same-restaurant sale results for fiscal March 2006 during the week beginning April 3rd. And we plan to release same-restaurant sales results for fiscal April 2006 during the week beginning May 1st. Finally we plan to release fiscal 2006 fourth quarter and annual earnings and same-restaurant sales results for fiscal May 2006 during the week beginning June 19th. We released third quarter earnings yesterday afternoon; results were available on FirstCall PRNewswire and other new sources. Let’s begin with some highlights from the quarter. Third quarter net earnings were $105.3 million and diluted net EPS was $0.67. This represents a 20% increase in diluted net earnings per share compared to last year. Olive Garden and Red Lobster had an outstanding quarter with strong operating profit growth at both companies led by industry-leading same-restaurant sales growth at Olive Garden. Bahama Breeze made good progress as well, once again posting solid same-restaurant sales growth. Smokey Bones is strengthening its foundation for future growth. Also, yesterday we revised upward our sales and earnings guidance for fiscal 2006. We now expect diluted net earnings per share growth for fiscal 2006 to be at the top of our previously announced 15% to 20% growth range based on our expectation of combined US same-restaurant sales growth of approximately 5% for Red Lobster and Olive Garden, and new unit growth of approximately 4%. Linda will now provide detail about our financial results for the quarter, Drew will discuss the operating company’s business performance, and then Clarence will offer some final comments, will then respond to your questions.

Thanks Matthew. Darden’s total sales increased 7.1% in the third quarter as a result of same-restaurant sales growth at Olive Garden and Red Lobster, and our operation of 48 more restaurants than the third quarter of the prior year. Olive Garden’s same-restaurant sales growth for the quarter was 5.7% and this was its 46th consecutive quarter of increasing same-restaurant sales. This is well above the third quarter Knapp-Track estimate of plus 2.3% excluding Garden concept. Olive Garden’s total sales increased 9.8% in the third quarter, and as a result of strong sales leverage and cost management, Olive Garden had a record third quarter operating profit representing a double-digit percentage increase over last year. Red Lobster had a same-restaurant sales increase of 1.6% for the quarter and total sales increased 2.5%. Red Lobster also had strong sales leverage and cost management, which drove a solid increase and operating profits over last year and represents record third quarter operating profit. The holiday shift of Lent from fiscal February last year to fiscal March this year, and the resulting shift of our Lobsterfest promotion diversely affected February same restaurant sales by approximately 6 percentage points. March is off to a strong start at Red Lobster and as the holiday and promotional shift benefit takes effect, and we are on track to at least high single digit same restaurant sales for the month. Bahama Breeze reported a same restaurant sales increase of plus 1.7%, their second consecutive quarter of growth and we continue to expect Bahama Breeze to roughly break even into earnings in fiscal ’06 as they continue to strengthen the business for a successful renewed growth. Smokey Bones opened nine restaurants during the quarter and we expect to open 23 net new restaurants in fiscal ’06. Smokey Bones had modestly higher restaurant level earnings compared to the prior year restaurant level earnings increased 34% excluding the SG&A and the depreciation and amortization, its 5% decline and same restaurant sales continues to reflect the issues we have discussed before. In terms of margin analysis in the third quarter, food and beverage expenses were 77 basis points better than last year on a percentage of sales basis. Cost savings on various products and better waste management contributed to the savings. In fiscal 2006, food and beverage costs as a percent of sales will be favorable to fiscal 2005. Third quarter restaurant labor expenses were 40 basis points higher than last year on a percentage of sales basis with sales leverage at Olive Garden and Red Lobster offset by wage rate inflation. This reflects our pricing strategy, which was to maintain dollar margins for the various state minimum wage increases rather than percent margins. We could pursue this strategy because of our favorablity in cost of sales and cost of goods sold and our desire to drive more traffic at our restaurants. We also experienced additional FICA taxes on higher reported tips. This additional FICA experience is fully offset as a credit to income taxes. Restaurant expenses in the third quarter were 29 basis points unfavorable to last year on a percentage of sales basis. Higher utility expenses and higher credit card fees will be partly offset by sales leverage at a favorable workers comp and general liability cost, and decrease pre-opening expenses at Olive Garden and Red Lobster. Selling, general and administrative expenses were higher as a percentage of sales by 23 basis points, due primarily to costs incurred to resolve legal disputes in California related to the exempt classification of certain managerial employees was about 9 million pre-tax and an impairment of assets assets at Smokey Bones, which was about 8.4 million pre-tax. These expenses were partly offset by reduced marketing spend in our Red Lobster as they shifted some expenditures into the fourth quarter to coincide with the launch of Lobsterfest. The effective tax rate for the third quarter of 24.3% was below our previous annual guidance of approximately 32%, primarily due to the favorable resolution of prior year tax matters, and increased FICA tax credits or reported tips that I previously mentioned. For fiscal 2006, we are now estimating an effective tax rate of approximately 30%. During the quarter, we repurchased over 3.7 million shares of our common stock, and leaving approximately 7.2 million shares in our current repurchase authorization. We recognize that this quarters results contain more noise than usual with the litigation cost and impairment expenses, that caused the company approximately $0.07 in net earnings per share and partially offset by the lower tax rate that benefited the company approximately $0.06 in net earnings per share. The net of this is that Darden still generated 20% diluted net earnings per share growth year-over-year and on top of a very strong prior year quarter and despite the favorable net, unfavorable expenses and Red Lobster’s holiday and promotional shift. As Matthew mentioned, for fiscal 2006, we now expect combined same-restaurant sales growth for Red Lobster and Olive Garden of approximately 5%, inclusive of holiday and promotional shift at Red Lobster in March and April. And we are targeting a net new restaurant increase of approximately 4%. With these same-restaurant sales and new restaurant growth expectations, we expect our diluted net EPS growth to be at the top of our previously announced 15% to 20% growth range for fiscal 2006. Now I will turn it over to Drew to comment on the operating company.

Well we are very pleased with our performance during the third quarter, our financial results were strong, key operating fundamentals improved across all of our businesses and we made progress, strengthening our foundation for future growth. Olive Garden in particular had another tremendous quarter with very strong growth in sales and operating profit as Linda has already described. More importantly, as we think about the business more broadly, we believe Olive Garden is also very well positioned to maintain solid growth into the future. The key business fundamentals, especially brand relevance, guest satisfaction and economics remained very strong. We have a pipeline of successfully tested advertising and promotions and we’re in the process of accelerating new unit growth. During the fourth quarter, Olive Garden will open nine new Tuscan Farmhouse restaurants, including two new optimized prototypes, and these prototypes are brand appropriate, and deliver the same great guest experience, while also reducing the required capital investment and improving operating efficiencies. One prototype reduces the investment by $250,000 versus what our current prototype would cost going forward, while our second prototype reduces the investment by $400,000. The second prototype has few receipts and will be utilized in smaller markets or to further penetrate existing markets. Olive Garden has identified and approved the strong pipeline of quality sites it expects to open 30 to 35 new restaurants next year, which is an increase of approximately 10 new restaurants versus the current year. Red Lobster delivered another quarter of solid growth in same restaurant sales and operating profits, guest satisfaction set the new third quarter record, and total sales, total profit in restaurant level profit margins with new records for any quarter at Red Lobster. Now stepping back from the current quarter results it’s important to note that the Red Lobster team has achieved consistently strong guest satisfaction and restaurant level returns this year. And this reflects accelerated progress strengthening restaurant operation and growing momentum tilting our brands. We have done this through their simply great operating discipline and by focusing on what guests wanted most on the seafood restaurant. (Technical difficulty) Alright let me step back from what I was stepping back on, a few seconds ago. The current quarter results were strong but stepping back from the current quarter, it is important to note as I was saying that the Red Lobster team has achieved consistently strong guest satisfaction in restaurant level returns this year. That now reflects a couple of things: accelerated progress, strengthening restaurant operations and growing momentum both in the brand. They have done this through their simply great operating discipline and by focusing on what guests wanted most from the seafood restaurant, which is fresh delicious seafood, exceptionally clean restaurants and friendly welcoming service. Their restaurant teams are performing at a high level and we are confident that their momentum will continue in the next fiscal year and beyond. More importantly Red Lobster has built an excellent foundation to support continued evolution of their brand, their goal of this evolution is to broaden appeal of Red Lobster in order to drive further guest count growth. A sharper brand positioning that balances the unique physical and emotional reason to visit Red Lobster has been developed and tested. New advertising and the new menu that better delivers this brand positioning are being finalized and will be market tested in the coming months. As we discussed in the past, this is a discipline testing process that typically lasts six to twelve months, and given with their current menu and ad campaign are performing well, we are not going to rush this process. We will provide greater insight regarding next steps as new learning becomes available. Smokey Bones same restaurant sales remained soft this quarter, and as we’ve discussed last quarter Smokey Bones needs to build sales by becoming more relevant for a broader variety of occasions. As the result, their leadership team has evaluated fundamental changes to their brand positioning and related guest touch points, from main and menu to what the role of televisions and the restaurant should be. And we are very focused on ensuring that the new brand positioning build on their current business strengths and is also competitively differentiated, in particular we have no interest in making Smokey Bones another varied menu Bar & Grill concept. To help strengthen the foundation for future growth, Smokey Bones compared five restaurants this quarter and three of those restaurants have been closed. We are confident that Smokey Bones has taken the appropriate action to capture their full potential. Finally Bahama Breeze delivered same restaurant sales growth of 1.7% during the third quarter. Key business fundamentals including guest satisfaction and same restaurant guest count growth have shown consistent improvement over the last several months as Bahama Breeze focuses on delighting guests with a distinctive and more approachable Caribbean Escape. Substantial menu improvements combined with our focus on improving attendent service had been a key driver of this growth. Going forward Bahama Breeze continues to focus on strengthening their business model by eliminating cost and complexity that does not add value to their guest. While more sustained progress is required before we are prepare to restore growth; we believe Bahama Breeze is on the right path. Clarence.

Thanks Drew. Drew talked about stepping back, and as we step back and look at it, we think we got a business that’s really in great shape. We had a terrific quarter, we know there are number of special items in it, but when you net all of those out, they really cost us a hit on the quarter, and despite that we have 20% earnings growth that comes on top of 24% third quarter last year, and we did that even with a pretty significant change in our calendar as Linda mentioned, regarding the kick-off of Lobsterfest. And that is all driven by just terrific momentum at Red Lobster and Olive Garden, we expect that momentum to continue into the fourth quarter, in fact we are seeing a great start to March from the same restaurant perspective at Red Lobster that benefits from that calendar shift. And I think as we think about it the Red Lobster and Oliver Garden are proven brands, they got high levels of consumer trust and loyalty, and that has been earned over decades, and its getting stronger, so we feel good about it. That said, we do recognize that Bahama Breeze and Smokey Bones both have no work to do to get where they need to be, both of those concepts are strengthening operationally, and they are also strengthening their positioning and the business model, and the goal there is really for them to become brands that are just as compelling and just as durable as Oliver Garden and Red Lobster. And final comment is we believe very strongly in our approach to the business we’ve talked you about that before that approach is all about combining great people, great brands, great operations, its an approach that served us well in the third quarter, and really from the entire fiscal year, it serviced well in any environment really and we are committed to it. We think we were working on the right things with the right people, we expect again good momentum into the fourth quarter and in the next fiscal year and with that we will take your questions, thank you.

Thanks very much, follow-up on something you said about Smokey Bones and broadening the concept of reevaluating some of the marketing and the TV and the name even, I know you have been working on broadening the menu, can you give some update on how that’s being received by the consumer?

Smokey Bones team has introduced several menu items over the last couple of months which have been well received by guests but more fundamental change is going to be required going forward, and its also centered around making Smokey Bones less barbeque centered than that it is today. And we need to think holistically about how we present that brand and that experienced to the market. So we are thinking about the name Smokey Bones, we are thinking about our menu today that is centered on barbeque. We are thinking about our style of service in the restaurants and the atmosphere we want to have. So all of those things have been evaluated and will be adjusted while building on the strength that Smokey Bones has today, around friendly service, the distinctive large atmosphere and barbeque that is tremendous that will continue to be a signature part of the menu, just won’t define the menu and the experience.

Is it fair to say when you say that its not going to be just paraphrasing what you are saying, a very menu concept you are not going to the Bar & Grill category, you are keeping that Barbeque flavor to that, is that where you think you are headed with that brand?

Yes in becoming less barbeque centered, will not mean becoming a Bar & Grill concept.

Thank you very much, and you have a question now from the line of John Glass with CIBC, please go ahead.

Thanks, good morning. On Olive Garden, as we look into the fiscal ’07 and ramping up the unit growth, what’s the reason well expectation for the overall brand’s performance in terms of same-store sales and margins, are the unit openings enough to pressure you on either one of those metrics in your mind?

Well, going forward, as I said, we are looking at 30 to 35 new restaurants next year and same restaurant sales growth in the 2% to 4% range, as we’ve said before, and we don’t think either those things are going to unduly impact restaurant margins. Q – John Glass: Okay, and then, a follow-up on the SG&A, if you exclude the one-time charges it looks like that came in just over 8% which would be extraordinarily low for the third quarter, how much of that was a shift in the advertising shift and as Lobsterfest, or was there something else that may have impacted the line?

There was a pretty meaningful piece of that, that was part of the shift, I would say about 34 basis points about 5 million of that was media, that from Red Lobster that is, you know basic we are going to be shifting for the most part into the fourth quarter for the launch of Lobsterfest, so that’s probably the biggest thing, there were some favorable items in the prior year but that was probably the biggest, the biggest piece besides the sales leverage.

Thank you, we have a question now from the line of Jason Whitmer with FTN Midwest, please go ahead.

Thanks good morning, I wanted to go back to the Red Lobster typically in sounds like there is some interesting things in development there, could you review the grand plan as we try to push this into the next phase and to get that brand in step again as you try to grow it again, typically as it relates to maybe exterior remodels and even the overall pricing position, that you got a big theme that you would like to address?

Well I think it’s important to start with reemphasizing the notion that the fundamental business is strong and has made substantial improvement and the things that have driven that improvement are going to continue into the future, the operating fundamentals are better, the restaurants are cleaner, the guest experience is better, the advertising is resonating with current guests in particular, its more effectively tested, it more typically features compelling news that it has in the past, and we are going to continue to do all those things. I think we can add on that foundation to broaden the appeal of the brand by going beyond an emphasis on today what is little more focused on the physical nature of the brand, you know delicious seafood and broaden that to talk about the total experience and if you will, Red Lobster is on the journey from being a good casual dining restaurant that serves a lot of delicious seafood to be a terrific seafood restaurant for the right guest with an ideal seafood experience and so its just broadening as we go forward, we are broadening the way we talk about the brand and then paying that off in restaurant, particularly with some new advertising and new menu in the future, remodels will probably be part of that but that can be farther down the road.

And I think as you think about how that manifest itself, let me Drew touched upon it, you talked about consumer touch points, so clearly the menu itself is one of those most important touch point with on it, how it looks and feels, on the table top and the look and feel of that and all those things, and then ultimately the service style, and how people make guests in the restaurants feel and so all of those things will come in parts and pieces and continue to build on the momentum that Red Lobster is clearly established with stronger operations, ultimately the big payoff will come with all of that coming together, and remodels maybe part of the picture but they need to come in probably towards the backend of everything else.

How about the food and quality itself, it certainly seems like that might actually need some investment and would bring up the food quality to which more towards fresh, is that something that would take some reinvestment back under the menu?

I don’t think if you can take investment in food I think its going to take some innovation to broaden the appeal but current guests love the lobster food and it gives very high food satisfaction more to say, I think the opportunity as Clarence mentioned is more in the innovation area around fresh seafood and more on the innovation area around flavors that complement what’s already on the menu, but turning away that does in that complexity, so we are going to have to note it down the menu how we present it and how we feature it, but it’s not going to require investing more in the physical product.

And I would just reemphasize reiterate that point, the food that Red Lobster has is very high quality, with a extraordinarily strong supply chain and so its less about we need to pay more for higher quality seafood, its more about innovation as Drew said including profiles and all of those sorts of things and Kim and the team are working very hard on those elements of the brand.

Thank you and we have a question then from the line of Mark Wiltamuth with Morgan Stanley, please go ahead.

Good morning, I would like to ask Drew some questions on the new smaller prototypes that Olive Garden, obviously with the smaller prototype and the lower capital cost you have a little lower hurdle that you have to clear for revenues per store, if you can just talk to us about how the cash-on-cash returns look on these new smaller restaurants relative to the previous model that you are using?

We did the first one last week and so little early to talk about actual results, but we all expecting on the first one that I said would be about $250,000 lower investment versus our current prototype that you know that actually has more seats than the current prototype. And we have been averaging in the low $4 million range on new unit openings with that, the current prototype with capital investment of a couple of $100,000 below that so we expect that equation to strengthen with these new prototypes to continue to capture the sales potential that’s there with a lower investment and just strengthen the return we are getting on new units. The second prototype which we haven’t opened yet but will in a few months, its going to help us penetrate the brand further in exiting markets and smaller markets we aren't at, and we haven’t opened one yet but our belief is that we have got everything else the Olive Garden brand and business model stands for. So, and we expect it to be very strong.

The second prototype is more focused at broadening penetration more so than really driving up returns, is that fair?

Broadening penetration, absolute sales growth, absolute profit growth, but a return that fully justifies the investment.

Thank you, and we have a question then from the line of Joseph Buckley with Bear Stearns, please go ahead.

Thank you, well I like to go back to the SG&A line again, you know we back out the 70 million plus for the one-time items and even add back 5 million for the advertising shift that Red Lobster, you think the rates flat in dollars, and the second quarter in a row that SG&A is coming for less than we would have expected, is there anything else going on there that will help us understand, any shifts in expense allocation between SG&A in a waiver line for example or things of that sort?

No, I mean we have been obviously working with you know all of our businesses to be more efficient with SG&A and leverage more of our marketing as we see particularly our larger businesses were Red Lobster and Olive Garden when they really deliver strong sales performance, that really does leverage that’s the marketing dollars so I think that’s probably the biggest thing, we will see as I said some movement into the fourth quarter with Red Lobster moving their Lobsterfest and also some of their testing and that sort of thing into the fourth quarter, so some of it does move around depending on our promotional strategy but for the most part its really this ongoing leverage that we would expect to continue at the end of the future around both marketing and SG&A.

I think just if you go back to our analyst conference beginning at the fiscal year, one of the things we talked about is a clear strategic goal of getting more leverage out of our support platform and that’s one of the things that we were looking to do with the new leadership structure and our Chief Operating Officer and Drew is making that happen, so that some thing that we clearly are counting on as we think about fully capturing, the return and profit growth opportunity for the in price.

And I care to follow up just related to the marketing steps that Red Lobster, you mentioned March being very strong, how would you expect March and April to play out, we would have expected April to be stronger than March you know because, you know Easter is later this year, or do you just kind of big bump when you begin advertising Lobsterfest and that’s why March would be, you know might be up more significantly?

Yeah we expect to see that benefit Joe in both months because of the extra weeks in April but the weeks in March - the initial launch weeks are most powerful for any promotion and so certainly we get some benefits from having those weeks in March as opposed to February and as Lobsterfest coupon was pushed back in the month also into March, that’s going to benefit April as well.

Thank you, we have a question from in the line Jeffrey Omohundro with Wachovia, please go ahead

Thanks, I wonder if you could comment on this FICA tax, on the top shift and that’s likely to continue into ‘07 and then also with the ramp up in Olive Garden's development. Maybe you could just comment on where you stand in terms of infrastructure development to support that particularly in terms of new store openings, thanks. A – Linda Dimopoulos: Okay, let me take the FICA tax one. We would expect that to continue to drift up a bit, the nature of that is the reporting of tips and we are continued to work with our tipped employees to report all of their tips and as they do there is a FICA tax that is wrote on that, and that’s shows up in the labor line but then when we actually get a tax credit in the tax line for that amount so that’s why it does put pressure on that labor line but we get it back in the after tax or in the tax rate and that we will continue to drift up slightly overtime but we have been moving up in our tip reporting throughout the year. A – Clarence Otis: And in the Olive Garden new opening side we have been preparing, Dave and his team have been preparing for accelerated rate of new openings for several months the two prototypes we talked about are part of that but in addition they have been working very closely with our real estate and development team in identifying and creating a pipeline of sites that’s ready go for the entire year, they have been working with our training team on how to open restaurants as efficiently as possible in a way that actually takes less time that delivers the same great employee experience and such people opt for success and (indiscernible) they are ready to go.

Great thanks.

Thank you and we have a question then from the line of David Palmer with UBS. Please go ahead.

I have a multi-part question here on the Red Lobster brand strategy, you mentioned that advertising in the new menu will be cut in the coming months and you also mentioned the testing takes about 6 to 12 months. Does that suggest that the benefit of this, I guess is menu and advertising, part of the brand strategy will hit in the second half of fiscal ’07. Kind of the second part to this, do you think you might start phasing in different limited times offers or promotion in the meantime and lastly are you considering re-imaging of restaurants to coincide with the sharper brand positioning you mentioned? Thanks. A – Clarence Otis: David the brand positioning work at Red Lobster, it is going to unfold over several quarters as Clarence already talked about. The advertising and menu testing that I was talking about goes in several stages, there’s a phase where we test the creative communication, clarity of communication. Then there's the phase where we test it in markets, and then there is ultimately the phase where we expand it. Same thing with the menu. We test the new items conceptually, we test the new items individually. Then we test them together in the restaurant and then ultimately we put the entire package together. Between now and then Red Lobster continue doing the things it has driven profitable same restaurant guest count growth and profitable same restaurant sales growth for the last six quarters, which is improving the guest experience and delivering news to the market and their advertising and the campaign they currently call “Ignite the Craving”. So all of that is going to continue and we’ve got confidence so that it will maintain momentum that we have seen today at Red Lobster. The things I am talking about really go beyond that, and they broadly talk about the entire experience, not just the food portion. Though we had the other changes to the experience that I guess Otis Clarence talked about some of the other touch points like same as Olive Garden did several years ago and we are re-imaging our restaurants is partly part of something that we are going to look at, but not in the near-term, that’s going to be down the road.

And do you think that some of these promotional items we perhaps phasing changes in the schedule they are or even in the frequency of those? A – Clarence Otis: Yeah and I think the promotional schedule is going to move more and more to look like what Olive Garden does compared to what they've done in the past. But I don’t know that the frequency is going to change, I mean we are pretty comfortable with the number of promotions per year at both Red Lobster and Olive Garden. It's about how compelling. We are working to make them increasingly compelling.

Thank you, and we have a question then from the line of Andrew Barish with Banc of America, please go ahead.

Hi guys, just a couple more on Red Lobster. Can you give us a sense on some of the value scores as a part of your guest satisfaction if those numbers improve pretty significantly in terms of what you done with the mid price point items on the menu, and then on the cost side for Red Lobster, can you give us an update as where you stand looking out on shrimp and your costs there? A – Clarence Otis: Value scores are also at an all-time record high and its totally because of more affordable price points and the menu but I think more importantly its because the entire experience has improved, so that what you get for what you pay play the equation, it has really strengthened, so value is part of what’s driving this.

And on the cost side we have continued to have a very good stability in shrimp, and in some of the other seafood items, still a bit of pressure in lobster but the other ones have really continue to be very approachable and do not really counts that business at the current time and what we see in foreseeable year or so. A – Clarence Otis: And we have been, as we have talked to you in the past, we have been very attentive to price points of Red Lobster, and we worked very hard to contain those and think we have been pretty successful there and that’s part of the equation and we will continue to do that, we will continue to do that, we have done it, at Olive Garden, different reason we think that is a comparative advantage that we have been able to leverage in terms of guest counts.

And I take it this month final on the food cost, that shift of Lobsterfest will sequentially make that food cost number look higher I would imagine the fourth quarter versus the very favorable third quarter?

Marginally, not significantly.

Great, thank you very much and we do have a question from the line of Steven Kron with Goldman Sachs, please go ahead.

Thanks, good morning. I have a question and a follow-up, the first question is on your full year guidance and as I think about the growth algorithm, you have indicated 5% same-store sales and 4% unit growth for fiscal ’06, you have been doing that actually for the first three quarters and you have been able to drive phenomenal bottom line growth north of 20% from just great leverage and great cost controls, I guess my question is for the full year and just looking at the fourth quarter, with no expected change in the top line and you have answered some questions essentially saying you expect the same type of leverage on a go forward basis, the input the implied guidance for suggested deceleration in growth and I am just wondering if there is anything in the cost structure on the margin side that there maybe that we are not anticipating that would cause that growth to kind of trend down a little bit.

No, there isn’t, of course there is the movement as we said, the marketing and to the fourth quarter we do, we are, I often mentioned doing some additional testing in the fourth quarter and Red Lobster as they work on some of these opportunities as they are going to fully test them and so there is some of those dollars that do move in and suppress the margins a little bit. We also had some one-time favorability in worker’s comp and public liability in the prior year, that benefited some of that, and that had been more ratably experienced throughout this year, and a few other items that within that were more favorable last year but, for the most part we expect, our continued strong margins and some of these one-time things and investments moving around a bit. A – Clarence Otis: I would say the other thing Steve is it is the fourth quarter. And we got a lot of items throughout the P&L that we’re estimating throughout the year and approving throughout the year, and the fourth quarter of the year where we true-up to actuals, and so we always need to make sure that we account for that possibility.

Okay, fair enough, and my follow-up is on my Smokey Bones. On the last call and I think in prior calls, you talked about the improvement or the recovery in Smokey Bones largely coming from topline, I guess its experience driven, and less about kind of cost structured changes. I guess I was surprised that despite a negative comp in the quarter, your restaurant expenses as a percentage of sales declined. And I would have thought you would have seen de-leverage on that line, can you maybe put a little bit of color on that, are you doing anything different on the cost side with that? A – Clarence Otis: I don’t think so, I think what, maybe thing is that we’ve talked about the growth overhead at Smokey Bones and the fact that you get to a critical mass where that starts to flatten out, and I think some of that’s going on for sure. A – Linda Dimopoulos: Well, the real pressure we see in restaurant expenses is clearly as I mentioned continued around utilities, where that pretty much mask that in credit card fees, pretty much mask much of the sales leverage of some of the other favorablity that is going on in that category. A – Clarence Otis: I think the gist of your comment is appropriate to say our focus is on building sales, not reengineering the business model of Smokey Bones, because in the existing nearly 125 restaurants we had today, when we get to sales, we see that we get the appropriate restaurant level profitability, so its really more about broadening appeal for more occasions to include the topline in the business model that we have been: work.

Thank you, and then we have a question then from the line of Bryan Elliott with Raymond James, please go ahead.

Actually most of them been asked but I wanted to circle back to the G&A question that Joe had, you know given sort of a flat nominal spending over the last few quarters with fair amount of activity and giving out for outrun expansion etc., it would appear that some resources in some areas had been cut back and transferred to those activities, is that the right read, and if so what have you found that you could do back?

Nothing really comes to mind, Bryan on that, I mean we really have tried to be very focused on the work that we do, some of what may not be as apparent is as we – the Smokey Bones fees that overhead does get more leveraged, so we are really honestly not adding the kind of growth investment there for the infrastructure as we had in the past, so that kind of normalizing does not put as much pressure on that line, so that’s maybe part of what we are not – that’s part of what we are seeing here.

Alright, fair enough, on the Olive Garden, pre-opening themes etc., you mentioned that, Andrew I think that you think you can open these increased number of units but sort of have fewer pre-opening dollars and man-hours etc. per opening? A – Andrew Madsen: Directionally yes, what Dave has been looking at is, how do we make sure that as we have new prototypes and a stronger pipeline that we can open the restaurants as effectively and as efficiently as possible, so without divulging exactly how we do it, Dave found a way to allocate less management time to open them and shorten the training period, I really bet, but I wouldn’t take that to say there’s going to be a material savings in pre-opening expenses, more to say that the people who got today are going to be fully up to the challenge of opening more restaurants at a high level.

Thank you, we have a question then from the line of Tom Thomson with TSW, please go ahead. Q – Tom Thomson: Thank you, on new openings, could you give us your current thinking on fourth quarter and ’07 openings for Red Lobster, Smokey Bones, Bahama Breeze and Seasons? A – Andrew Madsen: Well that would be nine new Olive Gardens in the fourth quarter. Smokey Bones I believe is well over ten, and Red Lobster is just a couple, and Seasons we continually do not forecast. Q – Tom Thomson: Okay, and how about ’07 for Smokey Bones and Red Lobster? A – Andrew Madsen: For Olive Garden 30 or 35 as I said, for Smokey Bones, it’s probably going to be in the around ten, and we are really focusing on the areas that we have the most confidence in, and that being Florida and New England and, those are going to be proper locations to find, so in that range of around ten. Red Lobster is only going to have a handful of net new openings next year on – and Bahama Breeze doesn’t have any new opening scheduled. A – Linda Dimopoulos: Right, we are just working to finalize up our plans for an exit for the year and we will be certainly more specific in our next June conference call about those figures?

Great thank you, and we do have a question now from the line of Mike Smith with Oppenheimer, please go ahead. Q – Michael Smith: Well, my question was just to ask to Madsen, but I guess what I would like to ask is Bahama Breeze you had the – they are just right open for over a year now. And I wonder what kind of hopes if they might have to jump through to get you to open more of those units? A – Clarence Otis: Well, first of all we are very encouraged with the improvement I guess satisfaction in increasing sales per unit at Bahama Breeze and we want to see that continue into the future, and in terms of cost component type, the Robinson township prototype that you are referring to would be more expensive obviously better now than it was a couple of years ago so there was some refinements, that Larry and her team were working on to make sure we deliver the same experience that our cost goods in current dollars is more inline with the average unit volumes that would expect to get opening in the future. A – Andrew Madsen: And I will tell you Mike that the Bahama Breeze team appreciates your support, I think they recall your comment about the penalty box and the jumping through hoops so probably we are going to see there.

Thank you, and we have a question then from the line of Peter Oakes with Piper Jaffray, please go ahead. Q – Peter Oakes: Hi, I was just hoping to get a clarification on couple of expense lines, specifically food and beverage. For all three reporting brands, all three quarters thus far this year, you have seen lower food and beverage costs, and I was hoping you could I wonder maybe dwell in a little bit, how much that’s commodity costs and how much is price mix, I know you mentioned here this quarter you benefited from waste, and I am just trying to get a pulse as to what your mindset is to how that possibly looks for ’07 also? A – Linda Dimopoulos: Okay, well I am just looking to get some of the dissection here, there is roughly half of it is coming from cost savings. And half of the favorability and I am talking specifically on the third quarter, it is directional for what we are seeing for the year, and so what we could compared to cost savings, our cost avoidance, I think we’ve talked in the past with how what a strong supply chain team we have that really helps us manage this over the last several years, and we see this continuing into ’07, and so we’ll certainly give more guidance at our next meeting, I mean our next conference call on June, but there really is nothing really concerning in the near-term on food costs. We obviously in these businesses continue to work on the menu mix, and their promotional strategies to continue to make sure we stay in the good range here and that contributes as well but, well over half of – I mean the other piece is obviously parting and sales leverage, but the biggest important factor that helps us keep it down is really the cost avoiding forth. Q – Peter Oakes: Okay, then the one of the line item restaurant expense, and I want to do a more compare traffic with Olive Garden and Smokey Bones here, where Olive Garden you said actually quite healthy comps last couple of quarters, you have seen that number go up, obviously you killed these part of the pressure, but I guess it implies that you weren’t able to get leverage elsewhere in that line item, we’ve got Smokey Bones with comps going the other direction, you’ve seen some significant belt tightening show up in that line item, so I was wondering if you could add a little bit more color there? Thanks. A – Linda Dimopoulos: Yeah what we’d say, really the impact at the reported level is about 12 basis points with the sales leverage at Smokey Bones, so it is having some impact, and contributing to that lack of leverage that we see there, but the utilities and the credit card fees are pretty significant items as well. We also did have some favorability in there related to fewer openings this quarter than last year, so some of that comes through that line as well. About 20 basis points favorable there.

Thank you, and we are showing a question from the line of Jeffrey Bernstein with Lehman Brothers, please go ahead.

Thank you, I had two quick questions. First on brand advertising, couple of your competitors have spoken about their advertising spend going forward and a steady shift to a more target consumer marketing, so I wonder if you could talk about your outlook for your core brands as it relates to TV advertising versus other forms of media, and what measures you use to assess the success in return of these new marketing initiatives? And then I have a follow-up. A – Clarence Otis: Both Olive Garden and Red Lobster are continuing to evaluate target marketing in many forms whether it’s on the Internet or whether it’s against different diverse guest groups like Olive Garden’s Hispanic advertising effort. But in general both brands given their scale and scope are very driven by Network TV, and will continue to be driven primarily by Network TV into the near future, and we look at a number of things here, we look at in the near-term we look at incremental guest comp traffic that our promotions get us, and every couple of years we do a return analysis, maybe a mix analysis that gives us a few of what the return on, return is on different elements in our marketing mix: radio, Network TV, coupons and so forth, and that all continues to point to Network TV, while relatively more expensive reach here, is still the best game in town.

Good, and then just one follow-up, I guess a broader question on the casual dining industry, it seems that couple of your peers are noting ongoing consumer trade down on the menu whether its ordering first entrees is there fewer appetizers, if it doesn’t seem to be having a major negative impact on your results, just wondering if you have any color on that, and – if you could comment on the overall outlook for the consumer in the coming quarters? Thanks. A – Andrew Madsen: We haven’t seen material changes in our menu mix as that relates to appetizers and deserts or entres beyond what you would expect to see based on your promotional strategy so the things that we advertise on TV, and the things that we feature with the picture and on menus in restaurant, obviously have elevated preference versus what their normal sales would be. And in any particular period its going to depend on what the mix of those things is, so Red Lobster see the check increase during Lobsterfest because right now because it is featuring fully new Lobsterfest dishes that Lobster tends to be heavier price but there hasn’t been a structural change in any of those areas. Secondly, I’d say we are very careful to make sure that we offer a range of price points so there is something for everyone when they go into a Red Lobster or into an Olive Garden, and there is a group of customers that’s looking for more approachable, affordable items, we have made sure we had those available. A – Clarence Otis: And I think as we look at the consumer, we feel like consumers are in pretty good shape that we’ve looked at consumer whether some pretty high historically record high utility cost, home heating as well as gasoline, and yet consumer spending is quite strong, and that’s because the underlying fundamentals of the economy is quite strong, employment levels are high, and so we certainly see that. When it comes to trade down, I don’t know that that’s being motivated by stress on consumers, certainly the quick service industry is stronger, I think because they have been innovative and their product offerings are quite strong, I think competitively we hold on there. The biggest threat is certainly the lunch, Olive Garden has a very compelling lunch, and they have had strength in their lunch business, and Red Lobster is a very differentiated lunch and so that’s not very substitutable for QSO lunch.

Thank you, and we are showing a follow-up question from the line of David Palmer of UBS, please go ahead. Q – David Palmer: Hi, same store sales of Smokey Bones improved through the quarter, and maybe now in March in a way that gives you sense of improving momentum perhaps as a result of the new menu, and separately was there a – what was year-over-year increase in wage rate during the quarter, I think your saying was about plus two earlier in the fiscal year? A – Clarence Otis: Well, on the Smokey Bone side, second quarter and third quarter the same restaurant sales trend was less negative as you said but that’s not vindictive to us of an underlying improvement in the fundamentals of the business, we still think that the things that we need to do for Smokey Bones in terms of broadening relevance for a wider variety of occasions are is what we need to do. A – Linda Dimopoulos: And on the wage rate, we do see that ticking up slightly, our estimate was about 2.3% of wage inflation. Q – David Palmer: Okay thank you.

Thanks, and at this time we are showing no further questions in queue. Once again if anyone does wish to ask a question please press star then one.

Kent, if there is no further questions we will end the call right here then.

Very good, and no one else has re-queued, sir.

Great, well thanks for joining us today, we appreciate your interest in Darden Restaurants and we look forward to speaking with you on our fourth quarter conference call in June. If you have any questions in the interim, please give us a call here, and have a great day.

Thank you, and ladies and gentlemen this conference will be available for replay starting today, Wednesday March 22, 2006 at 12 noon Eastern Time, and it will be available through Saturday April 22, till midnight Eastern Time. And you may access the AT&T executive playback service by dialing 1800-475-6701 from within the US or Canada or from outside the US or Canada, please dial 320-365-3844, and then enter the access code of 822626. Those numbers once again are 1800-475-6701 from within the US or Canada or 320-365-3844 from outside the US or Canada, and again enter the access code of 822626. And that does conclude our conference for today. Thank you for your participation and for using AT&T’s executive teleconference, you may now disconnect.