Darden Restaurants Earnings Call Insights: Updates on Olive Garden and Red Lobster

On Friday, Darden Restaurants Inc (NYSE:DRI) reported its fourth quarter earnings and discussed the following topics in its earnings conference call. Take a look.

Olive Garden

David Palmer – UBS: I think investors will want color on your targets given the growth rates as you exited fiscal ’12, so just a series of small little questions asking those colors – that color on the sales, for instance, what’s sort of industry-wide casual dining chain same-store sales performance? Do you think it’s 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 ’12? And lastly first half versus second half, it feels like the first half sales from some of the comments you’re 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 which are below average or below targeted same-store sales.

Clarence Otis Jr. – Chairman and CEO: And I’ll start just on the industry, we think the industry conditions are going to look a lot like they were in fiscal 2012 and we think the overall economic environment is going to look a lot like that. And so in 2012 we’re in 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. In terms of the other questions.

Andrew H. Madsen – President and COO: Well, just 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 that promotions are going to be meaningfully stronger than they were last year. In the 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 2 for 25 is going to be much stronger than the Carbonara Ravioli promotion last year that is 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 advertising behind that will help maintain momentum throughout the year.

Red Lobster

Michael Kelter – Goldman Sachs: 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, maybe you guys explain some of our 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?

Clarence Otis Jr. – Chairman and CEO: I think we talked about it. Really March is when we saw the spike in consumer and gasoline prices, as we’ve talked about before that initial spike is something that matters, it does effect behavior that starts to dissipate over time so we got a premium price promotion that’s timed to Lenten so March was the right time, it has to begin at the very end of February and so 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 in the earliest as we look out at the data that we get generally across the overall consumer environment beyond restaurants. And certainly the industry thoughts in May and decelerated a whole lot, and 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 ’13, are you going to be maintaining or increasing TRPs, is there going to be any sort of phasing shifts we should be aware of in terms of the timing where advertising won’t come to the back half to coincide with initiatives that are coming or how do we think about the ad spending behind the brand?

Andrew H. Madsen – President and COO: Historically, Olive Garden hasn’t advertised around Mother’s Day. They did last year, but historically, they typically don’t, and 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 comparable in terms of absolute weight to what it was in fiscal 2012. It will be up a little bit in dollars because the 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 started in the second quarter that we think is going to be a little less expected and is going through break through a little more effectively. Then starting in the third quarter, we’re going to have some advertising support behind new menu with more everyday affordability that we think is going to resonate with Olive Garden guests as well.

Clarence Otis Jr. – Chairman and CEO: I think as Brad mentioned, when you look at Red Lobster and LongHorn, we do expect increase in weight, and so 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 the focus on affordability and introducing more price accessible offerings. So, to drive awareness of that menu, they’re going to launch with fairly significant weight behind it.

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