Darden Restaurants (DRI)
Q3 2011 Earnings Call
March 25, 2011 8:30 am ET
C. Richmond - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Clarence Otis - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee
Matthew Stroud -
Andrew Madsen - President, Chief Operating Officer and Director
Eugene Lee - President of Specialty Restaurant Group
Brad Ludington - KeyBanc Capital Markets Inc.
Jeffrey Omohundro - Wells Fargo Securities, LLC
John Glass - Morgan Stanley
Matthew DiFrisco - Oppenheimer & Co. Inc.
Jason West - Deutsche Bank AG
David Tarantino - Robert W. Baird & Co. Incorporated
Alvin Concepcion - Citigroup Inc
Mitchell Speiser - Buckingham Research Group, Inc.
John Ivankoe - JP Morgan Chase & Co
Jeffrey Bernstein - Barclays Capital
Joseph Buckley - BofA Merrill Lynch
Howard Penney - Prudential Equity Group
David Palmer - UBS Investment Bank
Previous Statements by DRI
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Welcome to the Third Quarter Earnings Release Conference Call. [Operator Instructions] I'd now like to turn the call over to our host, Mr. Matthew Stroud. Please go ahead.
Thank you. 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 the 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 cost; technology failures; health concerns including virus outbreaks; the intensely competitive nature of the restaurant industry; factors impacting our ability to drive sales growth; the impact of the indebtedness we incurred in the RARE acquisition; our plans to expand our newer brands like Bahama Breeze and Seasons 52; 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; severe weather conditions; disruptions in the financial markets; a possible impairment in the carrying value of our goodwill or other intangible assets; a failure of our internal controls over financial reporting; 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 2011 fourth quarter earnings and same-restaurant sales for fiscal March, April and May 2011 on Thursday, June 30, 2011, after the market close.
We released third quarter earnings results yesterday afternoon. These results were available on PR Newswire and other wire services. We recognize that most of you reviewed our third quarter results, so we won't go through them in detail once again in an effort to provide more time for your questions. Rather, Brad will provide some additional line item detail about the financial results for the quarter. Drew will review the third quarter operating performance of our larger brands. Gene will speak about the Specialty Restaurant Group's recent performance, followed by Clarence, who will have some closing remarks. After that, Clarence, Drew, Brad and Gene will respond to your questions. Brad?
Well, thank you, Matthew, and good morning. Darden's total sales from continuing operations increased 5.5% in the third quarter to $1,980,000,000. This strong top line performance compares to an estimated 0.9% total sales growth for the industry as measured by Knapp-Track, indicating our meaningful market share growth. On a blended same-restaurant sales basis, Darden's third quarter sales were up 0.9%, which is consistent with the estimates in our January 31 pre-release. For context, industry same-restaurant sales, as measured by Knapp-Track and excluding Darden, are estimated to be up 0.1% for the quarter.
Olive Garden's third quarter U.S. same-restaurant sales were flat, which is 1.5 percentage points below our prior estimate. Red Lobster's third quarter U.S. same-restaurant sales increased 0.1%, or one percentage point better than our prior estimate. LongHorn Steakhouse third quarter U.S. same-restaurant sales increased 6.1%, which is 1.5 percentage points better than our prior estimate. We also saw accelerated same-restaurant growth gains in our Specialty Restaurant Group. The Capital Grille's third quarter same-restaurant sales increased 8.4%, Bahama Breeze third quarter same-restaurant sales increased 3.4%, and Seasons 52's third quarter same-restaurant sales increased 4.2%.
Now let's turn to a margin analysis of the third quarter. Food and beverage expenses were 12 basis points higher than last year on a percentage-of-sales basis, as a result of increased food costs due to the planned, negative mix changes related to our promotional offerings. As we mentioned at our recent Analyst Day, we have many of our food costs locked in for the current fiscal year, and we do not expect higher -- excuse me, and we do expect higher food and beverage expenses as a percentage of sales in the fourth quarter, some of which is due to the timing of Lobsterfest promotion at Red Lobster. Now since our Investor and Analyst Conference, we've continued to opportunistically build coverage of some key commodities into next year, so we continue to be comfortable with the food cost inflation outlook for the next year that we shared with you at that time.