Highlights From Darden Restaurants's (DRI) Q4 Conference Call: High-End Hurting, But Strong Brand Recognition Helping

June 24, 2009 1:57 PM EDT

Last night, Darden Restaurants (NYSE: DRI) reported Q4 EPS of $0.90, 4 cents better than the analyst estimate of $0.86. Revenue for the quarter was $1.98 billion, versus the consensus of $1.98 billion.

Highlights From DRI's Q4 Conference Call:

• Q4 combined comps fell 1.4%.
  
• Raised the quarterly dividend by 25% to $0.25 per common share.
  
• Sees FY10 EPS of $2.59-$2.85, versus the consensus of $2.91. Sees FY10 sales down 1% to up 1%.
  
• Sees FY10 blended comp sales unchanged to down 2%.
  
• (CFO) Darden's total sales from continuing operations increased 8% in Q4 to $1.980 billion, driven by new restaurant sales growth at Olive Garden, LongHorn Steakhouse, Red Lobster and additional operating week.
  
• Olive Garden's same-restaurant sales were down 0.6% for the quarter, and total sales increased 11.5%.
  
• Red Lobster also had a same-restaurant sales decrease of 0.6% for the quarter and its total sales increased 6.8%.
  
• LongHorn Steakhouse same-restaurant sales decreased 6.5% for the quarter, while its total sales increased 6.5%.
  
• The Capital Grille had a same-restaurant sales decrease of 22.1% for the quarter and its total sales decreased 9.9%.
  
• Bahama Breeze had a same-restaurant sales decrease of 4.3% for the quarter and its total sales increased 7.6%.
  
• Food and beverage expenses were 86 basis points lower than last year on a percentage of sales basis as a result of reduced food cost. As you may remember, commodity costs were peaking four months ago, and we have benefited from declining prices in the second half of this fiscal year.
  
• Restaurant expenses in the quarter were 59 basis points lower than last year on a percentage of sales basis because of sales leveraging from the additional operating week, favorable workers compensation and public liability cost development, and lower utility cost.
  
• There were asset impairments in Q4 for the closure of one restaurant, and the impairment of three others, including the two specialty restaurants; Hemenway's and Old Grist Mill that were part of the RARE acquisition. We are under contract to sell those two restaurants in the near future.
  
• Erosion was more significant at the premium end of the industry.
  
• In fiscal 2009, Olive Garden opened 38 net new restaurants. LongHorn Steakhouse opened 16 net new restaurants. Red Lobster opened 10 net new restaurants. And The Capital Grille opened five net new restaurants, while Bahama Breeze and Seasons 52 each opened one net new restaurant.
  
• In fiscal 2010, our focus will be on further strengthening our balance sheet and preserving the financial flexibility to respond to change -- challenges and opportunities that may emerge as a result of the current economic weakness.
  
• We will be opportunistic when it comes to share repurchase facing our activity on the economic environment, company sales trends, and industry dynamics...Alternatively, share repurchases like to be relatively limited the entire year should we track to the low-end of our sales and earnings range. Finally, despite our bias towards capital preservation, our cash generation remains very strong.
  
• (COO)During fiscal 2010, the key strategic priority for Olive Garden remains unchanged, and that's to sustain accelerated new restaurant growth, while also maintaining same-restaurant excellence. They plan to open approximately 30 to 32 net new restaurants this fiscal year. And, ultimately, we
  believe the brand has the potential to operate 800 to 900 restaurants in North America.
  
• During fiscal 2010, Red Lobster will continue their brand refresh efforts designed to further broaden appeal, increase same-restaurant sales, and strengthen unit economics.
  
• During fiscal 2010, LongHorn will continue their increasingly focused transition from a Roadhouse to a Steakhouse. LongHorn also plans to remodel an additional 30 to 35 restaurants, starting with the Atlanta market, which has some of the older restaurants and strongest Roadhouse brand image in their system.
  
• (President of Specialty Restaurant Group) The current macroeconomic environment has been particularly difficult for premium Steakhouses. Steep declines in business travel and entertainment spending have lead to significant demand destruction.
  
• Capital Grille's sales performance strongly correlates with the erosion in US hotel occupancy rates that started accelerating in calendar fourth quarter last year.
  
• Capital Grille successfully opened two restaurants in the fourth quarter in Boca Raton, Florida and the Time Life building in New York City. They plan to open three restaurants in fiscal 2010.
  
• In Q4, Bahama Breeze outperformed the casual dining same-restaurant sales benchmark by 240 basis points.
  
• In fiscal 2010, Bahama Breeze will focus on expanding their market share as they leverage the escape nature of the brand. They will do this through Beverage News, strengthen the brand's value proposition, and continued operational focus. The team will open one restaurant this fiscal year in Jacksonville, Florida.
  
• Seasons 52 continued to deliver strong unit volumes in Q4 despite the challenging environment. In March, the team opened their first restaurant outside the brand's footprint in the southeast, in Cherry Hill, New Jersey, and it is exceeding hurdle requirements. The restaurant design improves operating efficiency and creates flexible private dining space while reducing the initial investment. Season 52 team will open 2-3 restaurants in fiscal 2010.
  
• (CFO) Given our same restaurant assumptions and new restaurant plans, we anticipate that total sales change for the year will be minus 1% to plus 1%, comparing to the as reported fiscal 2009 sales of $7.220 billion, which includes the 53rd week.
  
• With less unit development in fiscal 2010, we expect capital spending to be lower than fiscal 2009 levels. We anticipate it to be approximately 450 to $475 million, which compares to $535 million in fiscal 2009. Fiscal 2010 includes approximately 25 million in additional remodel spending.
  
• In terms of specific food items, total seafood prices for fiscal 2010 are expected to be lower than fiscal 2009 as global demand has softened. Seafood accounts for approximately one-third of Darden's total cost of goods sold.
  
• Beef prices are lower on a year-over-year basis and we've extended our coverage from September of 2009 to January of 2010 depending on the cut and all of those at lower prices than fiscal 2009.
  
• Chicken and poultry pricesare slightly higher on a year-over-year basis and we have contracted our usage through December 2009 at prices slightly above our fiscal 2009 cost.
  
• Wheat prices are lower on a year-over-year basis.
  
• Energy costs are expected to be lower on a year-over-year basis at least through the calendar year.
  
• Finally for fiscal 2010, we expect our tax rate to be approximately 25 to 26%, which is favorable to the 27.5% in fiscal 2009, although this will vary by quarter depending on the timing of certain tax events.
  
• (CEO) And so we think we are well positioned to succeed in tough times, but also our performance gives us confidence that we're going to emerge an even stronger company and we'll have wider positive gaps to industry benchmarks whether that's sales or earnings.
  
• (Q&A) Referencing Drew's remarks on Red Lobster, the shipping emphasis to value and affordability, is this a messaging change or will there be something more significant occurring at the menu at that concept during 2010? Thanks. (A) Just to clarify my comments there, the overarching goal for Red Lobster this year is to continue their brand refresh, continue to broaden appeal, but we know it's a very value sensitive environment where affordability is a major concern in general and the higher your check is the more of opportunity is for brands in particular and Red Lobster has taken steps to be able to augment their brand building messaging with more affordability and specific value messaging. So their quick catch lunch program that started late in the second half this year would be an example of something that they would be using more consistently this fiscal year.
  
• And do you see a need to respond to the more aggressive couponing, discounting and messaging around that within mid-scale at that concept? (A) Well, we have three broad filters for -- when we think about our promotion, plans and discounting and Clarence touched on this. We want to make sure that
  anything we do in that area contributes to profitable sales growth, maintains the integrity of our business model, and maintains the integrity of our brands going forward. And as we look at what we did in fiscal 2009, all of our brands, Red Lobster included, maintained their competitive level of out-performance of the industry in same-restaurant sales and so we don't see a -- as well as contributing to broadening the appeal of their brands. So we don't see a need to dramatically change what we did in the advertising and promotion side. In fact, we are not sure that would be the best thing for our brands long-term in any event.
  
• Clarence, I just wanted to get a little clarification on your guidance with respect to you said that you
  are being somewhat conservative here, but can you comment a little bit on the trends get worse as far as June or the underlying consumer trends you are seeing and then could you put that in context with what we lapped a year ago with the influence from the rebate checks? Are you seeing as we get through the end of June the rebate checks having potentially less of an effect than they may have had in the beginning of May? (A) I would say that we're not going to comment specifically on June. But if we look at our fourth quarter, so March, April, May, each month was roughly about the same, I mean, when you look at the industry, May was slightly weaker, but a lot of that, I think had to do with rebate checks year ago. It was hard for us to get a little handle on what the contribution was. We talked at that time,
  maybe it added about a point to the comp side. Year ago June, I don't know that we saw a whole lot for rebate checks, because you look also the month where gas prices spiked north of $4 and so, I think whatever positive effect stimulus checks may've had was offset by that year-ago. And so, as we
  think about the next 12 months, we are looking at what we've seen the last 3 to 6 which is basically been sales at about the same level really, I mean, there is little bit of variation from month to month, but that hadn't changed all that much. And so that's what we're looking at as opposed to any deterioration in June. I think when you look at our brands May -- Red Lobster would have continued to outperform at about the level that it's been outperforming at. Olive Garden, it was a little bit of shrink, but a lot of that's just because they had such a strong year ago May, where I think they were up 11 percentage points versus Knapp-Track which was fairly significant and its comp was about 11%, yeah.

Darden Restaurants, Inc., through its subsidiaries, engages in the ownership and operation of full-service restaurants in the United States and Canada.

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