Clarence Otis: It’s probably not reasonable. What we saw in May is hard to gauge. We do get weekly Knapp-Track numbers and our best guess as we look at that data is probably in May a lift of maybe a point on a same-restaurant sales basis. But that data does not reflect the run-up that we’ve seen in June in some of the cost that consumers are facing, especially gasoline. We would therefore say there’s still enough going on out there to be fairly cautious. That would be our stance on it and our 2009 traffic assumption would be a click down of about half a point or so from what we were talking about in February. On a net cost basis, in February we talked about net cost inflation of a point after active cost management and probably a point higher than that is what we are thinking about for the fiscal year. We are approaching what is a relatively uncertain environment with some caution and that probably is a wise way to approach it.
Michael Vanetti (UBS): You commented that despite the slightly lower revenue at Red Lobster, the operating profits were actually higher. Could you give us detail on some of the efforts at that chain that are helping boost the profitability with the sales flattish and then to slightly down? What is your expectation in the cost management at that chain this year?
Brad Richmond: Red Lobster had a strong quarter with increased leveraging at the restaurant level. A lot of it was driven by what happened on the food and beverage line. Their largest component is seafood plus their promotional activity. They use all those to their advantage and really had the opportunity to take a flattish sales basis and good active cost management to increase returns at the unit level.
Clarence Otis: The team has been improving basic operations for the last four years. They continue to try to take cost out of their operations that don’t matter to the guest.
Larry Miller (RBC Capital Markets): Did you say that you saw continued run-up in June?
Clarence Otis: No. What I was saying was that what we saw in the industry, the point that we think might be attributable to some of the stimulus checks was May results and that came before the most recent run-up in oil and gasoline. It therefore remains to be seen how that affects the stimulus dynamic that we saw in May.
Larry Miller (RBC Capital Markets): Can we get some more detail on some of those cost management areas that you briefly touched on?
Andrew H. Madsen: We comprehensively look at our entire business. We look at food, labor and G&A expenses. Inside each business, we’ve got multi-function teams that work on identifying costs that have crept into the business and are no longer adding value and test taking those out. We’ve gotten better at managing costs related to workers’ compensation, slips and falls in restaurants, public liability and so on.
It really is across the business and we will continue to do that in fiscal 2009 which involves looking at fundamental ways we can take cost out of how we structurally support the business going forward while making sure that there’s no detrimental impact to the guest experience.
John Ivankoe (J.P. Morgan): In the fiscal 2009 development guidance, you took up Red Lobster, especially relative to 2008 and you took down Longhorn. It does seem a little bit counter-intuitive given that Longhorn would probably benefit the most from more new unit penetration especially as you try to achieve national advertising. What is your comment and what needs to be fixed at Longhorn to start driving comps at that business?
Clarence Otis: We remain very confident that Longhorn is going to be a significant growth vehicle for Darden. In the near-term, in fiscal 2009, net new unit openings are down modestly, which is more a reflection of organization capacity and focus on integration as well as applying some of the Darden site selection tools to the business that didn’t exist before at RARE. It’s more a reflection of those tactical adjustments than it is a change in our thinking about what the ultimate unit potential is.
Going forward, we can open more than 20 a year once some of those dynamics are passed us. What we have to do is take a brand that we think is fundamentally sound in the steak category; one that’s got solid operations and then strengthen some of the brand management fundamentals. It’s not unlike where Red Lobster was a couple of years ago. We need to broaden appeal of the business and really are looking at menu and building and what the brand stands for. That’s why we’ve worked so hard over the last couple of months to strengthen the brand team at Longhorn. There’s a new head of marketing, Terry Stanley. There’s a new head of culinary and beverage, Kurt Henkens. There’s a new head of consumer insights, Brad Marcunis. We’ve brought on Gray Advertising to help with the repositioning work in the advertising. As you know, Gray has been a valued partner at Olive Garden for some time. We’ve brought on Zenith Media to help us look at how we purchase and traffic spot media more efficiently and some other innovative opportunities to expand reach there in the near-term.
What has to happen is build on a solid operations foundation, broaden relevance with particular focus longer term on menu and building.
Some of the other things around advertising and promotion can start to have an impact more mid-year in fiscal 2009.
John Ivankoe (J.P. Morgan): When might Longhorn actually receive national cable advertising? Does it begin to make sense to start investing ahead of the curve especially if unit development is going to be increased in the out years?
Clarence Otis: It does and very broadly speaking, there’s three ways to think about where Longhorn is today. They are in roughly 25% of the U.S. with all spot television. When you get to about 35% to 40%, then you can do the national cable that you were talking about, being national TBS, national TNT, Lifetime and so on. When you get to about 55%, that’s when you can be on network TV across the country. One of the reasons we decided to partner again with Zenith Media is so that we can work with our development team in Zenith Media to coordinate site selection so that we can get to those penetration levels as quickly as possible. It won’t happen in fiscal 2009 but that’s something the team is working on. We’ll have better visibility on that as we go forward.
Matthew DiFrisco (Oppenheimer): Pertaining to the development and the availability of those sites, where do you stand as far as historically comfort zone of being locked in on those given the overall slowdown in the economy and in retail and the anchor mall tenants not opening up their stores as much? Do you have the pipeline that you used to in years past or are you compensated by cushioning in it which makes you feel good about that target?
Clarence Otis: We feel very confident in the strength of our development pipeline. There are a number of dynamics going on. Some developers are pulling back but at the same time, some of our competitors are slowing down in terms of their unit growth. A company like Darden with brands like Olive Garden, Longhorn and Red Lobster, is expanding. We feel very confident in the site pipeline we’ve got for 2009 and as we look at 2010.
Bryan Elliott (Raymond James): Could you give us a little help with some comments on how to quantify all of the calendar shifts that were talked about earlier?
Brad Richmond: At this point we probably don’t want to go much beyond the comments that we made there because we are projecting pretty far ahead on some finite details there. The direction that I shared would be something that you definitely want to incorporate as you try to look at expectations for each quarter.
Bryan Elliott (Raymond James): Since you haven’t highlighted anything unusual about May, should look at it as a month of particularly strong market share gains?
Brad Richmond: There were two unusual things about May; one was double pricing for Olive Garden, which has already been commented on. Secondly, there was a year-to-year shift in Olive Garden''s promotion that featured a price point from the first quarter last year into the fourth quarter and the year we just finished. There was therefore a promotion mismatch for Olive Garden as well.
Joseph Buckley (Banc of America): Could you talk about lapsed customers and the period of time that these customers might have lapsed? How do you plan to get them back in?
Andrew H. Madsen: Technically, the definition of a lapsed user is someone who hasn’t been to the brand in a year. More generally, the way we think about it is over the last several years, we’ve lost users of the Red Lobster franchise who directionally tend to be a little higher income, a little higher education and a bit more brand sensitive. To bring those users back, we need to make the menu more appealing and we need to make the building more up to date. Those are the things that show our testing is beginning to work; for instance, today’s fresh fish advertising in support of that this year. Some of the more culinary forward dishes that the brand is developing, the way people have reacted, including lapsed users to the bar harbor prototype and what we are trying to do to take design elements of that and put it into the remodeled restaurants, all of those things are giving us a good feel that we are eliminating the fundamental barriers that have kept lapsed users away but not doing anything to diminish the appeal to current core users.
Our research shows that as we dissect the user base, we are maintaining share with our current core guest but attracting more of these lapsed users. We need to do much more of it for sure and we are not done but we are confident that the strategy is right; we are making progress. Given the lead time of development, we thought it was appropriate to enter phase 3. All of this is going on top of an operations foundation and unit economics that are substantially stronger today than they were two years ago. Thus unit level returns at Red Lobster fundamentally are where they need to be for us to open value-creating new units so long as we can maintain traffic.
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