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Darden Restaurants, Inc. (NYSE:DRI)

February 26, 2013 8:00 am ET

Executives

Clarence Otis - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee

Matthew Stroud - Vice President of Investor Relations

David C. George - President of Olive Garden

Valerie Insignares - President of LongHorn Steakhouse

David T. Pickens - President of Red Lobster

Eugene I. Lee - President of Specialty Restaurant Group

Harald Herrmann - President

James Lawrence - Chief Supply Chain Officer and Senior Vice President

C. Bradford Richmond - Chief Financial Officer, Principal Accounting Officer and Senior Vice President

Andrew H. Madsen - President, Chief Operating Officer and Director

Analysts

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

Will Slabaugh - Stephens Inc., Research Division

John S. Glass - Morgan Stanley, Research Division

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Keith Siegner - Crédit Suisse AG, Research Division

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

John W. Ivankoe - JP Morgan Chase & Co, Research Division

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

Robert M. Derrington - Northcoast Research

David Palmer - UBS Investment Bank, Research Division

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Paul Westra - Cowen and Company, LLC, Research Division

Jason West - Deutsche Bank AG, Research Division

Michael Kelter - Goldman Sachs Group Inc., Research Division

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Clarence Otis

Good morning, and I'd like to welcome everyone back, not just in the room, but that includes the folks that are joining us on the Internet. And we had some lively conversations last night over dinner, and there were a couple of things where we -- a couple of areas where we got to some clarification during dinner and I want to make sure that the folks who are here this morning, who were not at dinner, and the people listening in on the Internet have the benefit of that clarification.

There were 2 areas, one was regarding incentive compensation for next year. And I think what we were talking about really is it works very differently depending on the different levels of the organization. So for our restaurant managers, we will accrue incentives to a normal level next year and that level for them really reflects what the market pays managers at similar restaurants for achieving the goals that they're given. It is not based on the inherent challenge that the goals themselves represent. And so that's how it works for restaurant managers and it's really about making sure that we keep the best managers in the business and have them appropriately motivated. The same approach is true, really for that next level at the support center, so this would include financial analysts and marketing analysts and directors and even some of the junior officers. So again, it's what the market pays in positions at similar organizations for achieving the goals that they're given as opposed to the inherent challenge in those goals. It is very different though for the top 30 officers. There, we accrue to a bonus amount next year that's going to be based very heavily on the inherent challenge in next year's plan, and that is something that the compensation committee of the organization will determine before the board approves the plan in June. And so our compensation committee is responsible for that entire top cadre of officers, 30 officers.

In terms of -- the other thing where there were some clarification was really on our dividend approach. And our intent is to grow our dividend each year. Our cash flow support being able to do that. That said, over time what we would expect is to have a dividend payout. If you look back over the long-term, that would be about 50% on a forward-looking basis. And so the net of that is that there will be years, like next year, when the dividend grows faster than earnings and there will also be years when it grows slower. But we would expect consistent growth every year and for that growth over the long-term to result in a dividend payout that's 50% on a forward-looking basis. And so those are the 2 clarifications that we had over dinner. Again, I wanted to make sure that those who weren't able to join us last night, and who are on the Internet, get the benefit of those clarifications. And with that, I will turn it over to Matthew. Matthew?

Matthew Stroud

Okay. Thank you, Clarence. So good morning, everybody, and welcome back. I trust that everyone in the room that joined us for dinner last night had an enjoyable evening, and we'd like to thank Red Lobster and the team there, once again, for their outstanding hospitality and their food and beverages last night. It was an enjoyable experience. Now let me, once again, cover some logistics this morning. As a courtesy, we ask that you please turn off your mobile devices or put them on silent. Today, there's going to be 2 question-and-answer sessions, and because we're webcasting the conference again, we ask that you -- all your questions be directed into the portable microphones that we'll circulate around the room for the benefit of those listening to the -- on the webcast. And if you're listening to the webcast and you want to ask questions, you're free to -- welcome to email me at mstroud@darden.com and we'll get your questions in the queue. Today, we'll post the presentation slides on our website at the end of the day, or at the end of the session this afternoon. And for those of you in the room, we will have a memory stick, flash drive with the PDF of the presentations on it and you can take with you.

So our agenda this morning features Dave George, President of Olive Garden; followed by Valerie Insignares, who is President of LongHorn Steakhouse; and then Dave Pickens, President of Red Lobster. And after Dave speaks, we'll have a brief question-and-answer session and then a short break. When we return, Gene Lee, President of Garden Specialty Restaurant Group will speak, as will Harald Herrmann, President of Yard House. Following Gene, Jim Lawrence, who's SVP of our Purchasing Group, will present. And after Jim's presentation, we'll again open the floor up to some questions and then following that, Clarence and Drew will offer some closing comments and we'll adjourn the conference at noon. Logistics again at noon, we have 2 buses that are going to the airport. There's a 12:15 bus and a 1:15 bus, and I know some of you who signed up for one or the other. For those that are on the 12:15 bus, we'll have a box lunch that you will be able to take with you. Those on the 1:15 bus, we have a buffet lunch and you come in and sit down and have a bite to eat with us.

So as we begin, let me again call your attention to our forward-looking statement disclaimer. During the course of this presentation, Darden officers may make forward-looking statements, which are subject to risks and uncertainties and investors are cautioned not to place undue reliance on those statements. Darden's forward-looking statements are made under the Safe Harbor provisions of the securities laws. We refer you to the full text of our disclaimer, which appears on this slide and also to the information contained in our 10-K, 10-Q and 8-K reports, and there are amendments and exhibits which have been filed with the Securities and Exchange Commission. Also, the financial and physical information of this presentation required By regulation G can be found under heading Investor Relations on website at darden.com. Now it's my pleasure to introduce Dave George, President of Olive Garden. Dave?

David C. George

Thank you, Matthew, and good morning. As you well know, Olive Garden has been an industry leader on almost any measure. Today, I'd like to highlight our strong foundation and share some thoughts on the substantial opportunities ahead. Olive Garden's strength as a broadly appealing brand and its powerful unit economics have facilitated our growth to over 800 locations generating average unit sales volume over $4.6 million. This produces annual Olive Garden cash contributions for Darden in excess of $455 million. Now the Olive Garden brand DNA is anchored in 3 critical pillars: Italy, family and value. Italy influences the food that everyone loves and provides us with rich emotional imagery of Tuscany and the Italian countryside. Family allows us to leverage the casual dining category benefit of connection in a way that we own. The spirit of family is extremely powerful with our team members as well, and creates a prideful culture, which we feel is a competitive advantage. Value enables us to be accessible to all consumers as reflected in Drew's income slide yesterday. Our long-standing core menu equity of unlimited soup, salad and bread sticks conveys the generosity that delivers on value for our guests. And this value positioning is relative -- relevant for both lunch and dinner. These 3 DNA elements dictated the way we have brought the guest experience to life in the past, articulated by our brand promise of an idealized Italian family meal, a warm and engaging family meal experience centered around a dining room table. The service platform was professional and somewhat structured by servers in classic white shirts and ties. Moving clockwise around the slide, you see a menu design inspired by old-world Italy and this design carried over into the restaurants with a typical cafe decor shown in the bottom center picture of RevItalia restaurant bar area. Value, of course, is represented by our core brand equity of unlimited soup, salad and sticks. And, "when you're here, you're family" became synonymous with how consumers remember Olive Garden.

So when we look at Olive Garden today, we see a very strong foundation. A strong brand as we've just described as well as strong financially, with over 800 locations generating $3.7 billion in annual sales and a 17-plus percent restaurant return on sales. However, despite this strong foundation we have experienced declining same-restaurant sales for more than 18 months now. So why is that? Well we believe we've become a little bit overly confident about a few things. We know our competitive advantage has narrowed, particularly in 2 historical strongholds for Olive Garden, affordability and value and lunch. We were also slow to react to changing guest needs. Our core menu variety is lacking diversity, our guest experience takes a little too long and we have 400 locations that have become outdated. So where do we go from here? Well first, we slow down new unit expansion. This allows us to focus on improving the consistency of delivering a high-quality guest experience every time in our existing locations. Next, we start evolving our guest touch points to become more relevant with today's changing consumer, basically improving the what-you-get side of the value equation. With work on our menu design, our food quality and variety, better targeting certain guests for certain occasions, an expanded and more appropriate lunch menu and completing work on the Via Tuscany remodel. And lastly, we will work on the what-you-pay side of the value equation by improving the affordability of both the core menu and promotional platform.

So let's look at a little of these in some more detail. With reduced growth, it's important to note that Olive Garden new restaurants are highly value creating and their performance has nothing to do with slowing down the growth rate. We feel that reducing openings by 50% to approximately 15% is very reasonable for a system that has been used to opening between 30 and 40 locations per year for some time now. The FY '14 openings will be geographically dispersed so as not to put pressure on any one region of the country, allowing all operators to focus their time on delivering outstanding experiences to each and every guest in our existing locations. So this leads to our operations team's focus. We must increase the consistency of delivering high-quality Olive Garden experiences for every single guest. We will achieve this through emphasis on 4 critical areas. Number one, simplification. We must streamline our guest experience systems in order to make our employees' job easier for them to perform at a very high level. This involves food production, culinary line execution, service systems, wait time management and throughput execution. This is all about improving the experience for the loyal guests we serve every day. Staffing and scheduling involves having the right people in the right place at the right time to ensure an elevated experience. And attentive service is critical to every guest experience, including simpler, faster service in support of our Pronto! Lunch menu as well as our service partner program at dinner. Now when we talk about elevating brand relevance, it's important to remember that our critical DNA elements of Italy, family and value are timeless. So as we look to make Olive Garden experience more current, we apply an up-to-date lens on them to reveal today's perspective. An idealized Italian family meal evolves to an Italian gathering place where everyone feels like family. The meal doesn't have to take place around the dining room table but to -- wherever you might be gathering. And family is whomever you might be with at the time. You also see our new server uniform here, which has been highly engaging for our team members; our new menu design; the remodeled bar area of the Via Tuscany remodels; and an affordable protein-forward core menu item. All of these portraying an Olive Garden that is changing with the times. A closer look reveals our core menu design, which is much more pertinent today, showing a transition from the old-world look of our past menu to a bolder, more present-day look. On the inside, we've created a lively, more clean look and feel through the selection layout as well, revealing broadened menu variety, including the addition of our new three-course Italian dinner section for $12.95 and our lighter fare platform at the bottom of the page. These are just 2 examples of the multiple platforms we told you we would be adding to the core menu over time. Some of the specific new menu items include, in our lighter fare section, Lasagna Primavera with Grilled Chicken and Seafood Brodetto. Both of these deliver on freshness and quality and provide solutions for guests looking for healthier options. They are both under 500 calories. Now if you have not seen our new creative campaign yet, the following commercial I'm going to show reflects an execution that is more brand-equity focused, targeting guests looking for healthier choices.

[Presentation]

David C. George

We feel this campaign is more energetic, engaging and current. In addition, on the core menu, we are broadening our appeal at lunch beyond our core equity of unlimited soup, salad and bread sticks with the addition of calzones, sandwiches and half sandwiches that guests can combined with unlimited soup, salad or sticks starting at $6.95.

Now on the remodel front, we realize there is an opportunity to elevate the exteriors and interiors of over 400 of our pre-Tuscan farmhouse restaurants. We know from the LongHorn and Red Lobster work that the most impactful elements of the remodel are the ones that guests can see during their dining experience inside the restaurant. What you see here is a typical RevItalia exterior and the latest remodeled exterior. We believe these changes signal that something new is taking place inside. Now here is an example of some of those interior improvements, the old RevItalia cafe and the new Via Tuscany bar. The quantitative feedback we have has been very positive and the changes so far are clearly generating incremental traffic. However, our thinking on how to revitalize the Olive Garden brand and guest experience has evolved and become more clear since the remodel program started. We now believe the brand and experience need to reflect more of today's Italy, as mentioned earlier. And while we believe the exterior of the Tuscan farmhouse is timeless, the interior needs more of a current up-to-date look and feel versus just a modified Tuscan farmhouse feel. This direction would be more in keeping with the other brand touch points that we have already changed, including the new ad campaign, the new menu design and the new server uniforms. In addition, we now believe that the logo and sign needs to be made more current as well and should ideally be implemented with the remodel. So before we rush into spending hundreds of millions of dollars on remodels we feel are not fully optimized to our more recent vision of the brand, we will delay the rollout of this program until we're sure we have it right, which will probably be sometime during the second half of fiscal '14.

Now on the affordability front, we are working hard to bring everyday affordability to our core menu through our number of new platforms while we also deliver compelling new promotional messages that are simple for our guests to understand. Shown here are 2 new menu items presently on the core menu, our new Parmesan Potato Crusted Chicken and our new Chicken Toscano, both bringing more affordable core menu offerings to our protein-forward selections. On the protein -- on the promotion front, our current promotion, a three-course Italian dinner for $12.95, is a good example of a compelling new promotional construct. The value and news is driven not by any one element of the offer but by the opportunity for guests to connect to over a multicourse meal experience for the great value of $12.95. Also shown here is our 2 for $25 Italian dinner construct, which was very strong for us this past July. I also have the latest commercial for the 2 for $25 Italian dinner. This one is different from the last commercial, in that it is a much more food-focused to drive cravability and visit intent.

[Presentation]

David C. George

So we believe that all these brand relevance strengthening initiatives, coupled with our strong brand foundation, will enable Olive Garden to deliver on our promise of an Italian gathering place where everyone's family. And to wrap up, the final piece of our foundation is our great people, the more than 86,000 Olive Garden team members. Our team is aligned with a desire to win and we're capitalizing on our cultural strengths to address our opportunities with vigor. Thank you. And now, it is my pleasure to introduce the President of LongHorn Steakhouse, Valerie Insignares.

Valerie Insignares

Thanks, Dave. Good morning, everyone. It's my pleasure to share with you our progress at LongHorn toward becoming America's favorite steakhouse. We'll review what we've done so far to build a strong foundation as well as our priorities moving forward to capture our full growth opportunity. So let's begin by taking a look at the growth opportunity that exists in casual dining steak, a category that's big and durable. With $10.5 billion in annual sales, the category is almost double the size of casual dining seafood and slightly larger than Italian. And when we take a look at who's capturing those sales, a little over half of total share is going to the large chains with significant remaining share, 43%, going to small chains and independents, and as we look at the category over time, major chains have been gaining share from both small chains and independents. We remain confident that significant growth opportunity exists for LongHorn by taking share from all 3 groups: major chains as well as small chains and independents. And we feel that LongHorn is well-positioned to capture our full growth potential and become a national brand with 600 to 800 restaurants generating $2 billion to $2.5 billion in sales annually. Today, with over 400 restaurants, we're more than halfway there. Over the last 5 years, we've made significant progress in building a strong foundation for accelerated growth. The brand has benefited significantly from Darden's Restaurant Support platform as well as elevated brand management capabilities. Our investment in media has doubled, including the introduction of national cable advertising. We completed the roadhouse to steakhouse remodel. And in addition to launching a new steakhouse lunch strategy, we've also enhanced our dinner offerings while investing in affordability, and we meaningfully accelerated new unit growth. As a result, LongHorn has been able to deliver consistent double-digit total sales growth for the last 3 years, driven by strong same-restaurant sales growth that's outpaced the industry. We've also accelerated the number of new units for the last 4 years up to our current estimate of about 10% of our base, and we're generating more than sufficient cash flow to fully fund our base business as well as our growth investment needs. And over this time, we have grown and maintained strong margins that are value-creating, with the last 3 years reflecting the significant impact of beef inflation as well as investments in affordability. So we believe the strong foundation positions us well to capture our full growth potential.

Now let's take a look at our 3 key priorities moving forward. First, differentiating the brand and guest experience; second, strengthening affordability, so that our guests can dine with us more often; and third, continuing our aggressive journey toward national penetration. First, let me share with you how we're going to differentiate the brand and guest experience. Starting with our unique brand promise, a guaranteed cut-above experience. For us, that translates into how we deliver a great experience to our guests as "steak done right" and service that over-delivers in a warm Western setting. "Steak done right" means boldly seasoned, perfectly grilled fresh steaks offered with innovative preparations. Service that over-delivers means friendly, attentive service from the minute you walk in the door to the time you walk out as a loyal guest, all in a setting that makes you feel like you are welcome to a rancher's home. Now in order to differentiate our brand, we need to evolve our advertising campaign. In 2009, we launched "Discover the West in You". And although it achieved our goal of moving away from the roadhouse image and strengthening our steakhouse perception, we thought there was an opportunity to more clearly differentiate the brand personality of LongHorn. Our consumer insight is that we believe today's fast-paced world is full of compromises and shortcuts, leaving people feel cheated, disillusioned and unfulfilled. Our guests are hungry for real substance, more action, more fulfillment in their lives, in their relationships and in their food. Our brand inspiration is that the world needs more Code of the West, meaning more substance over style, action over talk and doing things the right way versus the easy way. So in the fall, we evolved our creative to speak with a stronger voice and strengthen our credentials as steak experts with "You Can't Fake Steak". To better bring this to life for you, I'll share our current Steakhouse for Two ads featuring our flaming LongHorn logo and a bit more of a bold attitude than our previous campaign.

[Presentation]

Valerie Insignares

Now in addition to the changes in our advertising, we introduced a new core menu that further elevates the LongHorn experience as a cut-above the competition, including the differentiated leather-bound menu versus what you typically experience in a casual dining steakhouse. Our goal being to more clearly more communicate our steak expertise, make it easy to read and convey more menu variety. We also introduced a panel describing our 7 steak cuts, more variety than any other casual dining competitor offers. We also introduced some distinctively LongHorn steak offerings with bold flavors, taste and ingredients, including the few pictured here. On the left is our 30-ounce Porterhouse for Two, featuring our largest filet and strip in a single juicy steak brought to you on a special serving platter served with our new LongHorn steak sauce made table-side, including 2 salads and 2 sides. And on the right is our new Rancher’s Sirloin offered in any size you'd like topped with hickory-smoked bacon, a sunny-side up egg and bordelaise sauce. We also added a new guarantee to our menu, stating that are steaks will be a cut-above. There's a steak and then there's a LongHorn steak. It reminds our guests that we've been around 30 years, so we know steak. Our steak has is always fresh and flavorful, giving you tenderness and juiciness in each flavorful bite. And in addition to the great food and legendary steaks, we're focused on providing our guest with service that over-delivers. Previously, we used a process-driven approach called Steps of Service to train our service teams. We believe this made our servers sound robotic and impersonal and our experience undifferentiated in casual dining. Our goal is for every guest to be treated like a regular guest. So our goal is to focus on the outcomes versus the steps. This gives our people the freedom to share their personality and attitude as well as their passion and pride in our food. As a result, as Drew shared earlier, our guests are receiving more attentive service as evidenced by our rank improving 2 spots in our tracker results versus the casual dining competitors. And the third component of how we'll differentiate the guest experience is the atmosphere. Pictured here is our typical remodeled steakhouse dining room, creating a more contemporary expression of Western warmth. Now in addition to differentiating the brand and the guest experience, our second priority is to strengthen affordability in both our promotions and on our core menu. Our first promotion of the year highlighted our Flavorful Under 500 section of the core menu, featuring a complete steakhouse meal with entrées, side and salad for under 500 calories, starting at the regular price of $11.99. A perfect way to support our guests' New Year's resolutions to eat healthier. And as I shared earlier, we are currently featuring our Steakhouse Dinner for Two for $25 versus $29.99 last year by redesigning our offer to lower the price point and make it more competitive and compelling for our guests. To reinforce everyday value on our core menu, as you saw earlier, we continue to add a 5-second tag to our advertising, highlighting our successful steakhouse lunch combinations starting at $7.99, featuring a variety of soups, salads and sandwiches. In addition, we added a new attractively priced steak to the menu, our 7-ounce Flat Iron Steak has a deep hearty flavor and was recently featured at $12.99. These are just a few of the examples of how we'll continue to focus on affordability for our guests.

Now moving on to our third and equally critical priority, we'll continue our aggressive journey toward national expansion. As you can see by this map, we're currently operating in 38 states. The red states represent our legacy markets to the east, which represent our highest density. The green states are emerging markets where we've each either recently entered or have more meaningful growth potential in the future, and our blue states represent significant growth opportunity mainly to the west. So based on our projected growth for the casual dining steak category and the strength of LongHorn's performance, we feel our ultimate potential lies in 600 to 800 restaurants. And here's what capturing that full potential as a national brand looks like when we grow from our current base to 700 restaurants, which is the midpoint of our range assuming today's dollars. Our average unit volumes would increase by 20%, driven by guest count growth. This would generate an additional $1.2 billion in sales and $175 million in incremental operating profit enabling us to invest total marketing dollars at similar levels to other national casual dining brands. Thank you for the opportunity to share our progress at LongHorn in becoming America's favorite steakhouse and our confidence in the future. Now, I'd like to introduce the President of Red Lobster, Mr. Dave Pickens.

David T. Pickens

Thank you, Val and good morning, everyone. Our team at Lake Buena Vista Red Lobster really enjoyed the opportunity to host our dinner last evening. And as Matthew said, I trust that you enjoyed the experience and that you just might "Sea Food Differently" after that meal. We'll talk more a little bit about that in our time together this morning. My plan is to share with you our team's progress as it relates to building a bright future for Red Lobster, a bright future for Darden and of course, a bright future for our stakeholders. I'll begin with our vision which is to be the undisputed choice for seafood in casual dining. And as we look forward and work to bring this vision to life, we see this as a significant growth opportunity for Red Lobster. However, to take advantage of this opportunity, as we shared yesterday, changes are required. And we're very excited about our plans to make this vision a reality. And with that in mind, I'll begin my presentation this morning by grounding us in where Red Lobster is today.

Red Lobster continues to leverage a business model that creates significant value, with annual revenue of $2.6 billion and annual unit volume of $3.8 million. We deliver value-creating, restaurant-level return on sales, well within the range of 14% to 17%. And on a 3-year cumulative basis, our remodeled restaurants are exceeding their risk-adjusted cost of capital hurdle returns. And as a result, Red Lobster generates over $375 million of brand cash contribution before capital expenditures, a significant contribution to the Darden business. We've shared this chart with you in the past and we believe that this data makes 2 very important points as it relates to our growth opportunity. First, currently, Red Lobster continues to dominate market share within the seafood specialist category. As you can see from the chart on the left, Red Lobster has 43% of this $5.7 billion category. First and foremost, we plan to maintain this dominant market share in this space. This is a really important part of our business. Think of this as winning today. However, the chart on the right points to a significant growth opportunity to gain market share that we don't have today. And we feel we've got to address this opportunity to fulfill our vision and deliver on our growth commitments. The chart on the right shows that Red Lobster currently has 3% of total casual dining sales and we see this as a significant opportunity for sustainable and profitable market share growth. Now to capture this opportunity, we believe we have to broaden our relevance on several dimensions, essentially becoming more relevant for more guests, for more occasions. Think about that as winning tomorrow.

Remaining in the present, you're well aware that same-restaurant sales growth at Red Lobster has been inconsistent or volatile in the past. And this chart clearly makes that point. Negative same-restaurant sales early in fiscal '11 followed by positive same-restaurant sales in fiscal '12 and of course, this year's performance to date. As we look back and think about this performance, a significant opportunity to be sure is with promotional consistency. And to be clear, this is critically important. That focus will not change. We have to win today. However, we believe an additional opportunity is to stabilize as well as grow the base business by focusing even more expansively on the base business, essentially enhancing organic growth while continuing to execute our traditional promotional strategy more effectively. This slide paints a different picture of same-restaurant sales growth on a 3-year cumulative basis. It shows that our same-restaurant sales have grown plus 2.3% over this time period. Now to be clear, we benefited from our strong promotional performance in fiscal '12, as I mentioned earlier. However, we do believe that this reinforces that we are working on many of the right things at Red Lobster. As background though, we see the opportunity, that I mentioned earlier, and that really remains unchanged. For Red Lobster, it's about growing market share from casual dining competitors and executing this strategy on multiple fronts versus being overly dependent on promotions, which by definition, does contain some degree of inconsistency. And this will require a more relentless focus on further enhancing the relevance of the Red Lobster brand going forward. I mentioned progress earlier, and we believe that we have made progress against that objective, driven by a comprehensive multi-year plan that we have shared with you in the past. The foundation for this progress has been our focus on a "Simply Great" operating discipline. This strategy reduced unnecessary complexity from the business. With that as a foundation, we then introduced our Today's Fresh Fish menu in fiscal '08, and we now print Today's Fresh Fish sheets twice daily in our restaurants highlighting several varieties and preparation of fresh fish. And in fiscal 2009, to complement that initiative, we introduced wood-fire grilling as our signature cooking platform. At the same time, we trained over 3,500 team members to become certified grill masters, significantly elevating the culinary expertise in our restaurants. And our Today's Fresh Fish sheets now includes the name of the certified grill master working that specific meal occasion. And if you would have an opportunity to observe your menu last night, the grill master that was working that evening's name was on that sheet. We continue to proceed with our Bar Harbor remodel initiative designed to reposition the brand. And at the end of fiscal '13, we will have remodel over 75% of our restaurants. In addition, we launched our strategy to provide affordability assurance in fiscal '11, and we believe that it continues to be critical to provide our guests with affordable price promotional offerings with price certainty. As Drew mentioned yesterday, what you pay matters. And finally, we launched our "Sea Food Differently" ad campaign, an additional strategy to reposition the brand last fiscal year. And as a reminder, this campaign strategy uses the authenticity and honesty of real Red Lobster team members to communicate everything that has improved at Red Lobster, geminize [ph] the brand and demonstrate that Red Lobster goes the extra mile to provide every guest with a great experience. Red Lobster's brand equity measure by I-Tracker continues to strengthen as well, and Drew shared this information with you yesterday. This slide reinforces the point, more specifically, that remodels are enhancing brand health primarily in the area of atmosphere. The starting point for this slide is fiscal '08 and the ending point is fiscal '12. And this information is consistent with what Drew shared yesterday, as I mentioned. The 3 dimensions I would highlight are atmosphere I like, up-to-date and cleanliness. Our ranking or competitive position, which we believe is more important than a rating improvement, shows a positive trend. Atmosphere I like improved from 7th to 5th, up-to-date improved from 6th to 4th and cleanliness improved from 5th to 3rd. Enhancing atmosphere perceptions we believe is critical to regaining brand relevance with changing casual dining consumer demographics, and these results also validate that we are repositioning the brand more favorably in the minds of casual dining consumers today than in the past. This slide demonstrates the overall shrink of the Red Lobster brand with prior 3-month users. And the format of this data again is consistent with the prior slide. And as you can see, our ranking has moved to #1 in fiscal '12 for future visit intent from #3 in fiscal '08. We believe this attribute represents the overall strength of the brand and is critical to driving future visits. We believe we are essentially building a desire with our guests to come more often. And our growth priorities going forward are focused on removing barriers and providing more compelling opportunities for more guests to visit Red Lobster more often. We see this as a sign of positive momentum that has the potential, when we execute our plan with excellence, to drive sustainable and profitable same-restaurant guest count growth.

Our 2014 growth priorities are designed to build on and leverage our current brand health momentum and strategies I've mentioned earlier. I'll begin with our strategy to aggressively address our affordability opportunity. The Four Course Seafood Feast for $14.99 you see on the slide is an example of that strategy. In fiscal '14, we plan to revise our promotional strategy and cadence to feature more promotions than we featured this fiscal year, with more focus on affordability and value. We plan to further evaluate our promotional constructs to ensure that we execute our promotional plans even more effectively. And our promotions must be supported by additional strategies to deliver traffic growth. Promotions alone are not enough to win today or to win tomorrow. We also plan to further leverage our new core menu to broaden appeal and strengthen the base business. Now, I'll explain the slide in a second, but I want to remind you that the 3 key opportunities our new core menu was designed to address was affordability, choice and variety and the veto vote. We launched our new core menu in October, and this slide shows the preference growth on entrées under $15. Now the chart on the left shows the percentage of menu items by price, pre our core menu transformation and post our core menu transformation. As you can see, the percentage of items under $15 moved from 40% of our menu to 56%. The chart on the right shows the percent preference by price. This has moved from 41% to 51%. The net of it is, that our new menu yielded 10 points of preference growth on items under $15. We're very pleased with the results of our new core menu, although it is early, and we see this as an opportunity to build frequency with current guests as well as attract new guests. And it's also an opportunity to significantly address affordability. We plan to leverage our learning and evolve our "Sea Food Differently" advertising campaign to further strengthen brand equity and showcase our affordability strategy as well as for secondary advertising like our new core menu. We are pleased with our new campaign and our team is focused on opportunities to further elevate the execution of our campaign strategy to make our advertising even more effective in the future than today. We also plan to complete our Bar Harbor remodels by early fiscal '15. As you can see on this slide, the average investment is between $400,000 and $430,000 and the guest count lift is between plus 4% and 5%. You've seen the impact on the brand health earlier and we believe that this strategy is a critical driver of base business guest count growth as well. At the same time, our operations leaders are focused on elevating our in-restaurant execution. As Drew shared yesterday, based on our I-Tracker results, Red Lobster ranks 5th in consistently good experience and 6th in attentive service. We have an opportunity to significantly improve our ranking in this area, especially with our historical check average. Our ultimate goal is to have the guest experience at Red Lobster to be a driver of same-restaurant guest count growth, effectively strengthening the base business. And for us, it starts with getting better and more consistent in the area of server attentiveness. We have opportunities there and our team is focused on addressing them. And finally, we plan to leverage our new Spanish-language advertising campaign to increase frequency and penetration with Hispanic consumers. This exciting new initiative launched in January and we are very pleased with the execution. Let's take a moment to view our ad with which features our new core menu where we invite our Hispanic guests to [Spanish] the Red Lobster.

[Presentation]

David T. Pickens

The tagline is come to Red Lobster and "Enjoy a Sea of Flavors" or "Disfruta un Mar de Sabores." I'm glad I've got that done, I've been thinking about that.

As we look longer term, I'll share with you 3 growth opportunities that our team is focused on. The first is to further explore, evaluate and leverage additional opportunities to further increase our relevance with Hispanic consumers. The second area we're focusing on is to identify opportunities to source profitable market share growth at the weekday lunch occasion or weekday lunch segment. And finally, we plan to leverage the growing consumer interest in health and wellness by creating a more direct link with Red Lobster and the inherent health benefit of seafood, with the overarching goal being giving more guests more reasons to come to Red Lobster more often. I'll close with this. As you know by now, at Red Lobster, we have asked consumers to "Sea Food Differently". And by definition, to achieve our vision and our future growth potential, we have asked ourselves and our entire team to see Red Lobster differently. We believe we're on an exciting journey toward what we believe is a bright future and we believe that we can deliver on our brand's ultimate potential. Thank you, and I'll turn it back over to Matthew.

Matthew Stroud

Thank you, Dave. We're going to ask Val and Dave George to come on up, too. We'll do questions with the 3 Brand Presidents who've just presented.

Question-and-Answer Session

Matthew Stroud

Joe Buckley, I saw your hand up first so we'll give you the first shot here.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joe Buckley, BofA Merrill Lynch. A question on LongHorn, and really from data that was presented yesterday as opposed to today, the value right here on LongHorn dropped the most out of the 3 brands and the return on new units slipped from 150% above your hurdle rate down to 110% above your hurdle rate. These sound like worrisome signs, so could you address those and how you're thinking about it and what it means to the health of the brand and the expansion strategy?

Valerie Insignares

Sure. As Clarence mentioned yesterday, and Drew as well, the returns on the new units, basically that difference is driven by the significant beef inflation that we've experienced. As far as the drop in the value rating, clearly we're not happy with that change. As we look at the progress that we've made in future visit intent, as that being the main driver of our future guest count, we did improve -- I think it was 3 points to 3rd, right behind Red Lobster and Olive Garden. So we feel good that the brand is going in the right direction. Really the things that we talked about, focusing on in terms of strengthening the affordability both in promotions and on the core menu will be what will makes the difference so we can win today.

Jeffrey Andrew Bernstein - Barclays Capital, Research Division

Jeff Bernstein from Barclays. Just a broad question perhaps, a quick comment for each of you on this. I'm wondering if you can address the comment yesterday about focus on value. And I think the comment was we're going to have presumably temper average check growth at all 3 big brands, but offset hopefully with an improvement in traffic. So I'm just wondering, perhaps from each of you, if you can just offer a little bit of color. You each talked about value platforms $20, $25-type offerings, what that does -- what the target mix -- or what that does to the margin when you push something like that? How much of a restaurant margin hit would you be willing to take on something like that to drive traffic? And I guess, ultimately, LongHorn will be the biggest question because, to follow-up on Joe's question, it seems like the unit growth you're looking at doubled. But it seems like maybe the investment is changing a little bit. I just want to make sure that you're comfortable with the direction LongHorn is going in before you double the brand if it's now going to be more of a focus on value.

Valerie Insignares

And so I'll start with that. As you saw in the promotion that we showed the ad for, for 2 for $25, that was a significant change versus the last time we ran that promotion. So we feel confident that we have some options in terms of how we design our promotions in the food that we'll be able to offer the guest and making sure that those price points are sharp enough to get the guest in the door so that we get the returns that we need.

David C. George

Just as you know, value is made up of a combination of what you pay and what you get. And I think we have a opportunity to continue to improve what you get both from an execution perspective on a day-to-day restaurant, the guest visit. But the affordability issues have to be attacked both from a promotional perspective and an effort to drive traffic or to drive visitations, as well as on the core menu as well. And we mentioned -- Drew and Clarence mentioned yesterday that it's somewhere -- 80% of our guests order off the core menu. So these affordability platforms that are in the promotions are really about driving new visitation. And then when consumers come in, hopefully there are opportunities for them to enter at multiple price points in each of the categories of the core menu in order to make the experience as affordable as they want to make it. If they want it to trade up, they can. But we need to make sure that we have opportunities for them to enter at every level, so that their ultimate check when they leave is reasonable. And I think that through putting the right products on the core menu, through culinary innovation and through putting promotional platforms and core menu platforms together that are particularly targeted against affordability, we can help manage the margins.

David T. Pickens

I'll just add quickly that I think the 3 of us would prefer to not comment on the specific initiatives we're going to be pursuing in the future to more aggressively address affordability. However, there's a couple of points that I would make to support what's been said. One is, we have to ensure that the message comes through. It has to be really clear that this is what I'm going to pay and this is what I'm going to get. And the Four Course Seafood Feast is what we believe is a pretty good example of that. There's a lot of noise out there, as you know in the marketplace with significant price pointing and lots of deals. And it's got to come through, and we're working with our teams to ensure that. You just really can't miss the price of that offer. The second thing, to tie on to what Dave said, is we believe there's got to be more than 1 or 2 places to find affordability. I mean, our core menus are where most of our guests make their choice for their entrées, either for lunch or for dinner. And that affordability has to be strongly represented there as well. And what I showed you, the chart about the 10 points and preference growth for items on the core menu under $15 is an example of giving guests that opportunity, telling them about it with secondary advertising about our new core menu. And then the guests are finding that, which helps us address the affordability opportunity that may exist beyond just our promotional prices. That promotional price points will not be enough we believe for Red Lobster to win.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

This is Steve Anderson, Miller Tabak. The question I have is about day part expansion opportunities. Dave Pickens' view, have you seen any -- what kind of progress have you seen in the lunch day-part and the Take 5 or early afternoon happy hour period? Can you describe, if at all, any positive traction there and by extension for the 3 major brands, any opportunities in that early afternoon happy hour that you might want to pursue in the future?

David T. Pickens

I'll weigh in with a quick response. As we've recently launched this Take 5 opportunity for discounted appetizers and some beverages where legal. At the same time we've also launched these lunches under -- for $7.99 nationally. We moved for us pretty quickly and nimbly to do that. We really felt we had to give ourselves permission to try some things we haven't done before and, candidly, to take some risk. At this point, we haven't had it in market long enough to tease out with a high degree of statistical confidence what that's doing for the business. But we do believe that we're seeing some guests count growth or traffic growth at lunch from those offers. And we were able to leverage some of the items on our new menu to do that. At the same time, we think lunch, and I mentioned it is something that we are exploring for in the future, is a pretty big opportunity for us. If you think about the check at Red Lobster at dinner and our check at lunch is higher than the casual dining average, so we've got an opportunity to again think differently about the lunch experience at Red Lobster. And we're certainly pursuing that and giving it some thought.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Brian Bittner from Oppenheimer. I wanted to talk about Red Lobster. This quarter, it seems as though -- for a lack of a better word, just the 2-year trend kind of fell off the cliff. And I know that February was a very tough month. But based on your analysis of the quarter, I mean, what can you tell us about what happened within the business? Just more color on the comp that just happened in the 2-year trend deceleration.

David T. Pickens

And as we think about the comps on a 2-year basis as quarter -- year-to-date, we did move negative on a 2-year basis for the third quarter based on what we've shared as our outlook for the third quarter in our release and our discussion yesterday. Two things behind that. One is, we were going up against up pretty strong comp the prior year. The second dynamic is the first 2 quarters comps on a 2-year basis were very positive, so we fell below that. We think it just accentuates some of the opportunities that we spoke about a little bit earlier. We've got to continue to focus on affordability. We've got several initiatives in the marketplace that will deliver what we believe are some exciting momentum. I mentioned Spanish-language advertising that started in January. Our core menu started in October with a very strong focus on 15 new items under $15. Business cycles take some time, so we're measuring and watching those results carefully. But we believe underneath that, we're addressing a barrier for growth. Our challenge as we think about it is to sustainably and profitably grow same-restaurant guest count and same-restaurant sales. And as I've mentioned, we've got to have other ways of doing that besides the promotional platforms that we've used in the past, so we've got to -- we have to fight to win today and tomorrow on multiple dimensions or multiple fronts versus just depending on the next promotion to help us beat last year. That's just not going to be enough.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Was the weakness in the quarter just across the board? Or was there any color specifically you can comment on?

David T. Pickens

No. I would say across the board. Again, there are some things that are not within our control. We can't control weather. We can't control what the competitors may have done. We can't control how people may think about the effect of payroll tax, for example, that was different at the first of the year. What we can do is ensure that we've got the right strategy and that we're executing that against that with a high degree of excellence and urgency. And we think you'll see that in the future.

David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division

It's David Tarantino from Baird. My question is for Dave. Olive Garden today is a very profitable business, and it looks to me like you're heading down the path of making some fairly substantial changes to every element of that business. So I guess the question, as the new leader, how are you thinking about balancing the need to make some of those changes to reinvigorate the brand with also protecting the very profitable business you have today, and, for example, not alienated -- alienating some of the loyal guests that you have? And then maybe secondarily, could you talk about how patient or impatient you are in terms of how you implement some of those changes?

David C. George

Well, you're right, David. Olive Garden is a powerful business. And to me I see that as an advantage. It's a lot harder to change a struggling business and turn it around than it is one that is moving along full steam ahead. And I think that, that strength, the strength of the brand and the strength of the financial foundation of the business enables me to do things quicker. But we also have to be a little bit more careful in that because there is a greater amount of risk involved there. And I think that we think the changes that we want to make are relevant to our consumers. We think that they'll be especially targeting towards the future growth of the brand and of the business. It's going at the millennial age group. And we think we have to slowly transition to a more relevant experience, whether it be through the food, the atmosphere, the type of service. We know -- I've spent the last 4, 5 weekends out in the restaurants talking to guests and visiting and talking to them about the new menu, about the new look and feel of the servers, about the new commercials, and the feedback is extremely positive. So the Olive Garden guest, they understand the transition that we're making and actually looking forward to some new items and some new freshness behind the Olive Garden brand. And I think that, that enables us to actually move a little quicker because I think they're demanding it.

Will Slabaugh - Stephens Inc., Research Division

Will Slabaugh from Stephens. I want to ask you about the Olive Garden remodel process. If you could go into that in a little bit more detail as far as maybe what's working really well, or you're maybe underperforming your expectations. What potentially sounded the alarm to let you pump the brakes? And then more specifically, what those changes might look like down the road.

David C. George

Well, the real reason we delayed this is because we don't think that the remodel process, as it stands today, the work that was being done up until now, took the brand far enough to where it needs to be. Originally, the strategy was to get the old RevItalia restaurant equal to the look and feel of the Tuscan farmhouses. We think that there's an opportunity to go a step beyond that. And as we revisioned the brand, the long-term brand relevance around adding a little bit more current up-to-date look and feel behind it, we felt that we needed to go a little bit further than the present work that was being done. We think we're pretty happy with the exterior work in regards to signaling that there's been some change made. We just want to make sure that when we get done with these 400 RevItalia restaurants, and we have to start remodeling Tuscan farmhouses following that, which are -- the original Tuscan farmhouse is 13 years old now -- that we don't have to come back and redo a new program for them. So the object now is to bring the look and feel of the work that we're going to do up to a level that it can elevate the existing Tuscan farmhouse look to be that much more relevant when we get to those as well. And so we think that the commercials and the menu and the uniforms are a real good representation of that. And it's really not about making it contemporary or modern. You're not going to see stainless steel showing up tomorrow in an Olive Garden Tuscan farmhouse, but just make it more relevant to today's consumer, more current and less Old World style, if that makes sense.

John S. Glass - Morgan Stanley, Research Division

It's John Glass from Morgan Stanley. Both Red Lobster and Olive Garden are losing share, at least as defined by your concept, below the industry average. So it's not just the industry; it's your brands specifically. Where is that share going? I know it's always a difficult question to answer, but you'd probably have the better answer than most because you do a lot of analytics. Is it lateral -- people going from seafood to steak? Or is it trade down to the bar and grill operators? Is it -- are you losing share to your in-kind competitors, to similar brands? What do you know about where people are going since they're not going to your 2 brands as often?

David C. George

Well, at Olive Garden, the deterioration and guest counts, have happened mostly in 2 occasions, at lunchtime and at early week dinner. And obviously, at lunchtime, we've seen a lot of the competitors adopt platforms that have been very successful for us for many years like unlimited soup or unlimited salad, where a lot of the bar and grill players are offering those types of platforms at lunchtime. So I think that's probably some of the lunch challenge. The dinner occasions. It's really about being -- having more relevant products, having more affordable offerings early in the week. All the time for every visit, I think that affordability is probably driving the issue. And you saw that some of the brands changed value, change their ranking in the value perceptions, and that's probably where consumers are trading out to.

John S. Glass - Morgan Stanley, Research Division

Any specific in that day-part you mentioned, bar and grill for lunch?

David C. George

I think it's probably -- it could be bar and grill as well as early dinner because of the -- their improvement in affordability ratings -- value ratings.

David T. Pickens

I'd echo that. I think the chart Drew showed yesterday that showed the brands that were somewhat unidentified that had really made progress on affordability would be the brands that might be scooping up a certain amount of that market share, because what you pay just matters so much more today and we could argue that, that's probably not going to change for a while. At the same time, at Red Lobster, one of the different dynamics is that our loss in traffic or share at lunch is a little more because of the percentage of that business for us is pretty low. And that's why I mentioned an opportunity to explore a strategy to kind of regain momentum at lunch or to build market share. And for us, it's about -- and I used this term a lot, it's about being relevant. We are very relevant for a weekend dinner occasion at Red Lobster. So by that, I mean, you would think about us as a place to go for dinner. We'd be in the consideration set of many consumers. However, when you look at the weekday lunch occasion or even weekday dinner to a less of a degree, we are less relevant. We're not as much as a -- we're not as high in the visit intent brand awareness as we need to be. And some of our strategies have to change to make that happen. Chris talked about a very exciting technology platform, and Brad shared the investments we're making there. We'll be able to utilize that to reach out to different guests and talk to them a little bit differently. What we say about the weekend dinner experience at Red Lobster, that messaging is going to need to be a bit different than what we talked about to get people to come to lunch or weekday dinner. Those are very different segments or occasions, to be sure. And that difference is accentuated when affordability matters as much as it does today.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

Jeff Farmer at Wells Fargo. So just based on everything we've heard over the last 2 days, what products, promotions, strategies give you guys greatest confidence in your ability to turn around traffic in the near term? So essentially, a lot of people not necessarily in this room are very focused on shorter-term trends over the next 1 or 2 quarters. What do you think you have that would be most impactful over the near term to really drive some essential [ph] sales and traffic?

Matthew Stroud

If we told you that, we'd be telling everybody else.

Jeffrey D. Farmer - Wells Fargo Securities, LLC, Research Division

So let me take one different tack then. Not going to go there. So you alluded to at least, again, Red Lobster, Four Course Seafood Feast. My question is from what percent of the fiscal '13 promotional calendar did that type of promotion represent? Meaning, a price point promotion that did that drag traffic? As you look in FY '14, just let's index this, if you have 1 or 2 of those in FY '13, what's '14 going to look like? How much more aggressive are you going to get across all 3 concepts in terms of going out to that value positioning?

David T. Pickens

From a Red Lobster standpoint, I'm not sure I would go that granular. But let me just say this. We do believe we need to have an additional number of promotions in '14 than what we featured in '13. And our strategy for our promotions is to more aggressively address affordability. But affordability doesn't just stop there. Some of the things that we've talked about, that we think should give us confidence in the near term is initiatives that haven't gotten into our base yet. We haven't really wrapped on them. So we launched this new core menu in October. We have 12 weeks of media this year telling our guests about this core menu. That gives us confidence that we're going to see traffic growth from that new core menu. Spanish-language just launched in January. This gives us the ability to reach 5 million adults we don't talk to today and we've yet to benefit from that because we've just launched in January, but that feels like momentum. And those are the kind of things that strengthen our confidence in the near term, yet our focus is always somewhat beyond that. And I guess I'd leave it at that for now.

Matthew Stroud

Yes, I would say also, to echo what Dave said, there will be more promotions in '14 than there were in '13. And there will be slightly more of them price pointed but not aggressively below where we were in the past.

Valerie Insignares

Yes, and the only add I would have is that as we shared, we need to continue to focus on the what-you-get side of it as much as the what-you-pay. So the experience has to be differentiated versus our competitors because the price points, if there are all similar, what's going to matter is what the guest experiences when they come to the restaurant.

Keith Siegner - Crédit Suisse AG, Research Division

Keith Siegner from Crédit Suisse. My question is for Dave Pickens. You highlighted the desire, if not the need, to move beyond seafood in terms of longer-term market share gains. Yet when you talked about the menu transition in preference shifts, you didn't highlight what may be the preference shift was post to new menu transitions toward non-seafood. Can you tell us how that changed? And then second, when you think about the value of non-seafood, since value is such as a focal point today, what is the consumer telling you about the value of those new non-seafood options? I mean, just for me looking at it, it seems like they're carrying some of the premium price point of seafood even though they're not. Like, for example, if you were to compare them to Olive Garden, it feels like they would either be a little less expensive or come with a free desert. So any color there would be helpful.

David T. Pickens

As we look back at the performance to date in the marketplace as it relates to our new core menu, we added a significant amount of news that was also seafood news and non-seafood news. And again, Red Lobster by definition is going to stand for seafood. We believe an opportunity for us as it relates to the veto vote, is if consumers aren't aware of some really great non-seafood items we have, like the chicken dish you may have enjoyed last night, they may not be able to say, "Yes, I'll go to Red Lobster. I don't like seafood, but I know there's a really great chicken dish there." What we've seen, and again it's early, is our preference on non-seafood items has doubled with the addition of a new core menu. As it relates to value and affordability, we have the Four Course Feast on the menu full-time now similar to what you saw earlier with the Olive Garden menu, and that's getting significant preference. So we'll continue to major, for lack of a better word, in seafood. That's what Red Lobster stands for. We need to elevate our minor, if you will, our non-seafood. And we think that the team's work on the new core menu is a great step in that direction. And we've just got to continue to let it play out in the market, step back and ask ourselves, how can we enhance this? How can we think about different platforms? That was discussed in Drew's presentation yesterday and what else can we do to address opportunities that our menu doesn't address. But we feel the menu that we launched back in October was done with a high degree of excellence and partnership across the entire organization. And results are -- it's still early, but very pleased with the indications we're seeing.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Matt DiFrisco, Lazard. Valerie, I have a question with respect to LongHorn. Darden's history, I guess, has always been sort of being the #1 in a brand and growing it out and being the consolidator of that category. You did a very good job of detailing the opportunity in steak and the size of the steak category. But clearly it's unique for Darden. You're starting out. You look like you're hitting the markets and you're #2 or 3. I wonder about that strategy. Can you talk about your experience certainly like for instance, Texas. You have about a dozen stores that have opened in last year or so, 2 years. How do those returns compare? I know when RARE owned the brand, they wanted to be #1 in Florida and Georgia and that's sort of how the steakhouse category has these regional guys that are strong. How are those returns and is that sort of contributing to your hurdle rate and your lack of pricing power sort of coming in at 110% of the hurdle rate rather than like Olive Garden, 140%. Is that a -- that thing you just have to get in the fight on a national basis, and we're going to see that for the next couple of years?

Valerie Insignares

Over the last several years, we've been investing in affordability given the rate of inflation in beef. And over the long term, again, we feel that's the right thing for the guests in terms of delivering value and competing over the long term. It is very different than my previous experience at Olive Garden because the brand is different in different markets. In Florida and Georgia, we are very strong. There's more LongHorns in Atlanta than Red Lobsters and Olive Gardens. So I think each market is a little bit unique in thinking about how we expand for the future. As far as our performance in Texas and other new markets in the new and emerging category that I shared earlier, those are achieving our hurdles and exceeding those hurdles, so we feel good about that, as well as the -- as we look at the brand acceptance measures and tools like Tracker, the brand has been very well received. Clearly the competition in Texas for steak is very different than it's going to be when we get to California. So as we think about where we're taking share, it's within, we know we're going up against the Outbacks of the world with large chains, but there's also opportunity as we've seen within the category for large chains to take share from small chains and independents. So it is a little bit different the way we think about it at LongHorn. As Dave helped establish, it's really having a challenger mindset, which is coming from the new #2 position. So we need to think about things that we can differentiate on that aren't going head to head with our #1 competitor. So thinking about things like really winning on steak and being a steakhouse and standing for steaks done right, is something that there's a lot of pride in our teams from and we feel that we can be differentiator for us from an experience standpoint. But again, as you look at that affordability ranking, that is something that you can't ignore, even though we do index higher with that, over $100,000 guest and $60 to $100 guest, we need to have great quality, compelling products and great prices.

Keith Siegner - Crédit Suisse AG, Research Division

And just as a follow-up on that, when you look to grow outside of those core markets, would you ever think of a -- maybe more of an acquisitive strategy and buy a bucket of stores maybe from a regional player that you think you can just operationally just do better at?

Valerie Insignares

That's an interesting question. I think our development team is always looking at the options that are available in the marketplace.

John W. Ivankoe - JP Morgan Chase & Co, Research Division

John Ivankoe, JPMorgan. I mean, I think there's just an overall perceived need for your service to be faster at lunch and maybe at dinner being more attentive or individualized. So could you comment how you could accomplish -- the question's for really all 3 of you -- but how can you accomplish that goal without additional costs on the service side? And specifically related to that is in the back of the house, if there are opportunities in technology, equipment or process change that allows you to do a better job with the same or even less money?

David C. George

Well, I think there's an opportunity inside of Olive Garden to simplify what we presently do to deliver the guest experience everywhere from food production to executing our product on the line, to the service systems that we follow, to the table management program. All of those systems that we presently use, at least in Olive Garden, have gotten a little bit complicated. And I think there's an opportunity to simplify those and to -- with the intent of increasing the quality of the experience, increasing the speed of the experience, increasing the quality of the food, all of those through a simplification of less products, not necessarily less menu items, but the number of products we have in the restaurant, the amount of steps we go through to turn a table, the amount of steps it takes a service to go through the refill process, which is just crazy in Olive Garden between soup and salad. I think there's ways to look at operationally how to get more efficient at doing those. And that will in turn enable us to invest a little bit and increase service on weekends. Also it will allow us to invest potentially in affordability or higher-quality products or whatever. But I think there's an opportunity definitely to simplify what it takes to deliver the guest experience, at least at Olive Garden.

David T. Pickens

I'm sorry, John. If I may add to that, and I think this is probably true regardless of the brand, is delivering a consistent guest experience that builds loyalty requires great people first. And our first focus has to be on the selection of those people, the training of those individuals and then the retention of those individuals. And making sure that they understand what we're trying to do and why we're trying to do it and how critical their individual role is to what the broad team tries to accomplish because everyone on a team that's successful knows their role and executes that against that with a high degree of excellence and trusts that the team member they are working beside will do exactly the same thing. And with selection, training and retention, that makes a significant -- gives us a significant advantage. Then beyond that, I believe, is forecasting. And I think one of the advantages we have at Darden is we've got some very good analytical tools to help us guide and coach our restaurant teams on how to forecast the number of guests we believe we're going to serve by day. We have technology today that will be enhanced in the future that helps us invest that human capital when we need it most. And then we've got great managing partners and general managers that to me the art of restauranteurship that we heard about yesterday is essentially managing through those meal periods. We do our best to train our people and to make sure we get the right amount of people on at the right time. And then if the guests come in exactly when we think they will, that's really awesome. It usually doesn't work exactly like that, and we're in a very dynamic business where reaction is critical. And taking affirmative action throughout the course of a meal period, regardless of whether we're busy or less busy than we thought to ensure that we all accomplish the goal of the team, which is having every guest leave any of our restaurants with this burning desire to come back as soon as possible because the experience was that great. Easy to say, not necessarily easy to do. But that's really what we think the competitive advantages are at Darden.

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

Sara Senatore at Bernstein. I had a general question for all 3 brands and then specifically for Red Lobster. And that's sort of how do I think about the cadence of when these things hit. Because we're seeing some improvements in your metrics. It looks like we've been seeing them for a little while now. Comps have still lagged. So as you think about when you start to see improvements in things like intent to return or value and when you actually get that to translate into positive same-store sales. If could you talk about that. And specifically for Red Lobster, preference for under $15 has gone up a lot, but again, comps haven't really -- we haven't seen as seen a commensurate lift in comps. So are we set up for just kind of a trade-down across the menu that keeps pressuring comps?

David T. Pickens

I'll start with your question about the variety of initiatives and how these occur, and you've all heard before the essence of strategy is choice. And I would say the essence of excellence is choice as it relates to when you choose to do initiatives that you choose. And when we have 700 restaurants at Red Lobster, when we launched this core menu nationally in October, we tested that early in advance. And we use our General Manager conference last summer as really an opportunity to showcase the new menu and to train our general managers and directors and managing directors on how to go out and land that core menu. That's a huge initiative for us. It's the biggest menu change we've had in our company's 45-year history. And we believe we made a very good choice with the core menu. And then we set our teams up with excellence to be able to really do a great job with the core menu. Early on, some trading is going to happen, and frankly, we plan for some of that to occur. We want guests to try some of these exciting new items. We added 5 new shrimp and fish dishes. We added 3 new salads. We would expect guests that are coming anyway to enjoy some of those and build that into our models, what we believe again gives us confidence going forward. So we've got a variety of initiatives coming that are in place, Spanish-language advertising, new core menu, just to cite 2, that we believe are going to be drivers of traffic growth in the future that haven't been drivers of traffic growth in the past. It does take some time and take some patience. But we believe, based on the metrics you saw, with I-Tracker [ph] yesterday and today, that we are building positive momentum. It hasn't necessarily come to fruition yet, but we're pretty confident that we made some of the right choices and are working on the right next things to continue to give guests more occasions to come to Red Lobster.

Robert M. Derrington - Northcoast Research

Bob Derrington, North Coast Research. I'm curious, I'm listening to you all talk about you clearly operate very large restaurant systems with considerable marketing scale, very strong operating leverage. As I listen to the message, it's consistent that you're all trying to broaden the lens, focus on affordability, bring more traffic in. How does this not turn into just a major market share scrum within Darden, trading customers from one brand to another and really not growing the pie?

David C. George

I think that we individually have identified how we win by identifying a specific target. And we've each got a specific primary target, secondary target and tertiary target, and those are not all the same. And so with Olive Garden being the value player in the marketplace, obviously, we believe that there's an opportunity, as Drew showed in the slide yesterday, that Olive Garden has a slip in under $60,000 income level consumer, so there's an opportunity for us to target that to regain some of that. Whether that applies to LongHorn, probably not so much. So I think there's been clear strategies put in place of how we differentiate targeting different consumers. David or Valerie can answer that.

Valerie Insignares

I would add that we know that our casual dining consumers are also value-seeking, so they're going to be eating Italian one night, steak another, seafood another. So we think that's a strength.

David T. Pickens

And actually, Clarence outlined that yesterday when he talked about our history. We've chosen to be a multi-brand company. And as Val said, casual dining consumers are variety seekers. And by definition, there will be some trading between our brands. However, if we didn't have that steak option within our portfolio, we can all probably guess where guests would go when they're in the mood for that occasion. So our opportunity is to continue to leverage our multi-brand strategy, and we believe we've done that well. We work together in tandem a lot discussing what we're doing and when, looking to do our best to avoid some potential overlaps. But at the end of the day, casual dining consumers want variety. And today, affordability matters more than ever before and our brands have an accountability to win today to address of those things.

Robert M. Derrington - Northcoast Research

So as a follow-up, Dave, as you look at your business and you look to your consumers to "Sea Food Differently," will they ultimately look to see steak differently or see poultry differently or see pasta differently?

David T. Pickens

Well, as I mentioned earlier, we're going to lead with seafood. But if you have seen the 30-second advertising we did, the man-on-the-street interviews to launch our new core menu, there was discussion about a pork chop, for example, and a chicken dish. But there was also a focus, a balanced focus on seafood. And for us, 1 of the 3 opportunities our core menu was designed to address was the veto vote. And to address the veto vote and to win, you've got to have more than 1 or 2 non-seafood things and everything has to be great. If we just add 1 or 2 non-seafood items and they were pretty good, the odds of a non-seafood lover coming back for something that was pretty good are pretty slim. It's got to be memorable like, "Let's go to Red Lobster. Well, I thought you didn't like seafood. I don't but I really love that chicken dish." And I think across our brands, opportunities like that exist today.

David Palmer - UBS Investment Bank, Research Division

Dave Palmer, UBS. A question for you on Olive Garden, I know you're working hard to get to know the brand, flying all around the country, looking at the operations from the inside out. You made a tweak with regards to the timing of the reimaging because of the direction of that. There was already changes in place going on with the menu. There was reimaging, there's the change in the ads. Are the things that you're doing with more urgency? And obviously, you delayed something. But even as you sit here, are things that you're -- arrows that you're pulling out of the quiver earlier, things -- easy wins that you see that you can maybe tell us about?

David C. George

Spending time out in the restaurants was invaluable for me both from an opportunity to get to know our guests, to get to know our team members, to get to know our managers and talk to them about what's going on inside the brand was really powerful for me. Also, I took most of my direct reports along with me, at the time, and they got actively involved in working the restaurants as well. Working side-by-side with team members, waiting tables, bussing tables, making breadsticks, making salad, I mean, we actively got involved in the restaurant. And I think that one of the near-term opportunities that I see is how over the last maybe 4 or 5 or 6 years, Olive Garden has become a little bit complicated for the team members to deliver a high-quality experience each and every time. And I think that, that is a near-term opportunity that we can get after. And it's not going to create a lot of turmoil because it's something that I think they want. I think they already see it and recognize it, and they're looking for someone basically to help set them free. And I think that, that will enable us to strengthen the foundation of the core business and the foundation of the everyday guest experience to a point that will enable us to move quicker on some of the other changes that we want to put in place. And I think it's just really about making sure that we invest our people resources and our financial resources against things that guests and consumers recognize and see and that we don't apply them against things that they don't give us any value for. And then we can then put those resources and finances behind things that do make a difference to the guest experience.

Matthew Stroud

Dave, Val, Dave, thank you very much. We're going to cut it off right here. We're going to take about a 15-minute break. There are some coffee and drinks in the back of the room and outside the room. We can get back in here at about 10 minutes to 10, and we'll start the second half of the morning session. Thank you.

[Break]

Eugene I. Lee

Okay, good morning and welcome back to those on the webcast. It's great to have this opportunity to update you on what's been happening in the Specialty Restaurant Group since the last time I had a chance to speak with you 2 years ago. Today, I'm going to provide an update on the group and the brands. Then I will ask Harald to come up and give an overview of Yard House. And after Harald is done, I'll come back and wrap up the presentation.

The Specialty Restaurant Group is strong business, well positioned to deliver growth in the new era. Excluding Yard House, annualized total sales exceeds $600 million on a trailing 12-month basis. And as we look into next fiscal year, including Yard House, we expect sales to exceed $1.2 billion. Excluding Yard House, our strong sales have produced cash contribution of approximately $115 million before capital expenditures. And including Yard House, we expect cash contribution before capital expenditures to exceed $180 million in fiscal '14.

The group continues to be a significant part of Darden's growth. We have contributed 45% of Darden's total sales growth over the last 12 months, and we're positioned to contribute significantly in the future.

Before we get into why we're confident about our long-term outlook, let's take a closer look -- let's take a quick look back. Over the last 2 years, excluding the 2 acquisitions, we have delivered on the commitments we made 2 years ago at this conference. Over the last 2 years, we've achieved annual sales growth of 17%. The strong sales growth was fueled by competitively superior same restaurant sales growth of 4.1%, as well as growing our number of restaurants from 84 to 105. We also delivered annual restaurant earnings growth of 26% and continued to refine and leverage the support platform and grew annual operating profit 115%.

Now let's take a look at the results with our 2 acquisitions. The addition of these 2 well-positioned growth brands, Eddie V's in the luxury seafood category and Yard House in the varied menu casual dining category, contemporizes the portfolio and adds breadth to the group. With these acquisitions, over the last 2 years, our annual sales growth has increased 30%, our annual restaurant earnings grew 38% and we delivered operating profit of 122%. Including the acquisitions, we've nearly doubled the number our restaurants from 84 to 157 in the last 2 years. We're excited about the potential of this portfolio of brands and the operating group's future.

With the 2 acquisitions, the Specialty Restaurant Group is a meaningfully bigger part of Darden. If we take a look at this chart, we can see that the addition of Yard House and Eddie V's add significant scale. We've gone from 7% of sales pre-acquisition to 12% of sales post-acquisition. With this current portfolio of brands, the Specialty Restaurant Group will continue expand and play an even larger role in Darden's future growth.

Even with our significant growth, Specialty Restaurant Group is self-funded. Since fiscal '11, we have produced enough cash to fund all our new restaurant growth. We expect the increases in cash contribution to fund our growth into the future.

The fact that we've acquired and continue to integrate 2 growth brands while still delivering on our commitments is a testament to the strong, fully dedicated team that we have. Our platform and more importantly, the leaders we have in place are the driving force behind the success of the group. We're able to leverage our strong resources across 5 brands. We have 5 brand presidents supported by senior-level leadership and marketing and culinary development, finance and human resources. Under these teams since the group of strong brand-specific resources that wake up every morning thinking about how they can make their brands better.

For example, on our marketing and culinary, each brand had a dedicated team of chefs focused on culinary innovation and a dedicated marketing resources to drive sales.

We also leverage Darden resources for transactional and other centralized support functions. One example is our partnership with Darden supply chain. We're able to procure a range of products from basic commodities to sophisticated products such as organic produce. We've designed a cost-effective support platform and have a strong talented management team that's focused on the Specialty Restaurant Group and works collaboratively to lead our portfolio brands.

Now let's shift our focus and talk about the current dynamics of the business. We'll take a look at our significant sales growth, our competitively superior average unit volumes, and new restaurant performance, all of which have led to strong restaurant-level margins.

Let's start by looking at our sales over the past 5 years. We're pleased with the way our overall sales growth has recovered from the economic downturn. As we look at the chart, since Q3 of fiscal '10, we've maintained consistent double-digit sales growth pre and post acquisitions. This growth was driven by new restaurant growth and strong same-restaurant sales performance.

Our restaurants have delivered 11 consecutive quarters of same-restaurant sales growth since Q1 of fiscal '11, averaging 3.8%. The strong sales growth over the last 11 quarters has continued to build on our high annual sales per restaurant relative to our competitive set. Average unit volumes of $6.8 million of the Capital Grille significantly outperforms the other large chain operators. Over time, the brand has remained true to its core positioning and is the clear leader in fine dining steak.

Eddie V's also produced a strong average unit volumes of $6.2 million. This is particularly significant as Eddie V's is currently only open for dinner. As the real estate portfolio evolves and we add restaurants in central business districts, we'll add the lunch day-part. And this should further increase average unit volumes. As you can see, both brands are positioned well in the luxury category.

Shifting to varied menu casual dining, Yard House and Bahama Breeze also have very strong positions. This large $18.5 billion category appeals not only to Boomers and Gen X but also strongly to Millennials, the fastest-growing population cohort. Yard House, with 41 restaurants, generates an impressive $8.4 million in average unit volumes. Bahama Breeze with 32 locations also posts strong average unit volumes of $5.6 million.

In the polished casual category, Seasons 52's average unit volume is an impressive $6.3 million. Of the large brands in this category, Seasons 52 significantly outpaces their competitors. The strong average unit volumes of Seasons 52 give us the confidence that we can continue to grow this brand aggressively. With 5 diverse brands well-positioned within the industry, we provide a wide range of market opportunities. These market opportunities enable us to identify quality sites to ensure we're building value-creating restaurants.

Our diversification allows us to slot brands in all 3 retail spaces: urban, high-end suburban and mid-range suburban. Capital Grille and Eddie V's are ideally positioned for urban areas. Seasons 52, Bahama Breeze and Yard House are a perfect fit for high-end suburban retail along with Capital Grille and Eddie V's. Seasons 52, Bahama Breeze and Yard House will also work well in mid-range suburban areas. Overall, this portfolio offers wide-ranging opportunity for growth and is extremely attractive to developers.

Let's take a look at our footprint back in 2007. As you can see, the group had a very strong East Coast presence, but had very few restaurants West of Mississippi and no restaurants in California. Today, we have much stronger presence on both the West and East Coast, particularly in California, Arizona and Texas. Our brands have been well-received in all geographic areas. As we look at our footprint, there's still a lot of opportunity for continued growth.

The Capital Grille will still have opportunities for growth in upscale environments and major cities where we do not currently have locations. Seasons 52 will continue to focus on the top 100 retail trade areas. Bahama Breeze is looking to backfill markets on the East Coast. Eddie V's will focus on developing in major urban East Coast markets. And Yard House will focus on the top 150 retail trade areas.

Now let's talk about our new restaurant performance. We've open 30 value-creating restaurants since fiscal '11. In aggregate, these restaurants are performing 35% above their earnings hurdle rate. These impressive returns are driven by high average unit volumes and strong restaurant level margins. Each one of our brands have strong business models. The Capital Grille, Seasons 52 and Yard House all have restaurant level margins above 17%. Eddie V's and Bahama Breeze also produced strong value creation, with restaurant lower returns in the 14% to 17% range.

Each of the brands in our portfolio produce high average unit volumes and have a track record of growing same-restaurant sales. This sale performance has created strong restaurant low returns and gives us confidence that we can continue to grow these brands in the future while continuing to grow margins.

Now I'd like to take a few minutes to walk you through each brand and their distinct positioning. Let's start with Capital Grille, the premier classic steakhouse with fine dining attributes and personalized service that engenders loyalty. We're able to build this loyalty by serving dry aged steaks, fresh seafood and innovative accompaniments. We're committed to serving the best steaks in the restaurant business and take great care with the entire preparation process. Each steak is carefully aged for 14 to 21 days in a temperature and humidity controlled room for maximum tenderness and flavor. Then we hand-trim it the old fashioned way for a beautiful cut of beef. Finally, steaks are cooked in specially-designed infrared boilers for a nice crisp crust on the outside while making sure the steak is juicy and tender on the inside.

Weekly [ph] committed to serving exceptional seafood. In addition to our menu offerings like sushi-grade sesame seared tuna with ginger rice, we bring in seasonal items like this Ivory King Salmon from the Alaskan Pacific. This salmon has a delicate white meat, it is milder and more buttery than its red sibling, and in fact, it is so rare, it represents only 5% of the catch.

In addition to the food, we provide a world-class wine list served by knowledgeable professionals with a trusted service culture that we call EDGE, exceptionally distinctive guest experiences. This service-based culture has led to a highly reviewed credential and recommended brand by our guests. In fact, last year, Open Table recognized 2 Capital Grille locations in the top 100 best overall restaurants in the United States. Capital Grille also offers customizable private dining capabilities. These include the ability to tailor the experience with multiple menu offerings and unique dining spaces. All of our restaurants are connected via satellite and have state-of-the-art technology for meeting presentations. Each restaurant strives to have a distinctive design, taking advantage of unique architectural elements and draw inspiration from the local community. Capital Grille is a proven brand and a leader in a luxury category.

Let's take a moment and look at leading indicators in the luxury category. To gauge the strength of luxury spending, we use 3 barometers: luxury retail spending versus overall retail spending, business travel spending and hotel RevPAR. Let's first take a look at retail chain store sales growth over the last 3 calendar years. Luxury spending continues to outperform overall industry -- continue to outperform the overall industry and has recovered quicker than overall sales. As you can see, the yellow line representing luxury spending has grown by 7% in each of the last 3 years. While overall store sales have averaged about 4% over the same period.

I also look at business travel. Another sign of the improving environment is the recovery in business travel and entertainment spending, which has been in a broad recovery since the end of the recession. This is a significant driver for business for Capital Grille, Eddie V's and Seasons 52.

Finally, let's look at hotel RevPAR trends. Luxury RevPAR, which represents the revenue per available room within the hotel industry, is another leading indicator of luxury spending. Similar to sales growth we looked at a few slides back, the hotel industry has shown strong performance since the fourth quarter of fiscal '10. Luxury hotel spending has posted double-digit growth in 7 of the last 11 quarters.

Now that we've seen the positive momentum within the luxury category from a few different angles, let's take a look at Eddie V's' position in the category. Eddie V's is an inverted steakhouse inspired by the storied seafood restaurants of New Orleans, San Francisco and Boston. Our restaurants feature classic, fine dining service in a contemporary and vibrant atmosphere. Here's an interior picture of Eddie V's. This well-designed dining room and distinctive decor all add up to a contemporary and the vibrant atmosphere.

To complement the great service, Eddie V's chefs prepare innovative dishes with fresh seafood flown in daily and grilled prime steaks. Each restaurant also features a unique and extensive fresh oyster bar for guests who are looking for something a bit more adventurous. Eddie V's, we create simple but elegant plate presentations. We pride ourselves on serving the highest-quality prime seafood, so we want to let the seafood's natural flavors come through. Our wildly popular crab cake is made with a full half pound of jumbo lump crabmeat. Need I say more?

The brand also boasts a high-energy lounge driven by a three-piece jazz band and an award-winning international wine selection. With the momentum in a luxury category and the differentiated brand elements, Eddie V's is positioned well to mirror Capital Grille in its growth.

Now let's take a closer look at Seasons 52. Seasons 52 is a fresh grill and wine bar serving artistically presented food with a modern calorie promise. The Seasons 52 menu is seasonally inspired with a fresh appeal to farmers market. It represents a unique blend of art and science with creative offerings designed to excite and surprise the palate. Our Tuna Crunch entrée salad is one of our most popular items and makes for a pleasing plate presentation. It features sushi-grade tuna, organic greens and a drizzling of miso vinaigrette.

There are 4 key elements to Seasons 52 brand that differentiate its positioning in the industry: first, our menu offerings and ingredients that change with the seasons; second, the flexibility to adapt to commodity cost pressures with our multiple menu changes; third, a Frank Lloyd Wright-inspired design that creates a warm and inviting atmosphere; fourth, an approachably sophisticated wine platform curated by our master sommelier that allows our guests to be more adventurous and experience wine by the glass they would not normally try. These elements work together to create an on-trend brand that generates strong guest loyalty.

Now let's take a look at Bahama Breeze. Bahama Breeze is well positioned in the next-generation bar and grill category with strong Gen X, Millennial and multi-cultural appeal. The culinary team at Bahama Breeze continues to evolve their platform to reach a broad demographic. The new Bahama Breeze rice bowls are a culinary trend we co-opted and made our own. We have 6 interesting recipes from the Chipotle Beef Bowl you see here to a Caribbean Shrimp Creole Bowl. These menu items offer guests a dish with a great -- with great flavor, color and value. They are new to our menu and have become an overnight success, in both the lunch and the dinner day-parts. A beautiful example of our island-inspired take on the food is the new Ahi Tuna Stack from our small plates menu. It features fresh Hawaiian ahi tuna, marinated in ponzu sauce with pickled cucumbers in between crispy wontons and pineapple salsa.

In addition to appealing to a growing demographic through an innovative menu, Bahama Breeze also offers an energizing experience with strong alcoholic beverage sales. To strengthen this important aspect of the business, we recently introduced late night Happy Hour. The marketing and culinary teams have developed the menu drink offerings designed to drive traffic during this nonpeak period. The atmosphere of the restaurant, which creates a temporary escape to the islands, continues to be a competitive advantage.

Now let's talk about our newest growth brand, and I'm going to ask Harald to come on up and share what's going on -- what Yard House is all about and what he's doing with the brand. So I'm going to turn it over to Harald at this time.

Harald Herrmann

Good morning. Are we on? Yes? Thank you, Gene. As the new kid on the block, I appreciate the opportunity to share the Yard House brand with you today and give you a little bit of insight of the history of the restaurant and also a little bit about what makes us tick as a brand. I thought there's no better way to kick off this presentation than to show you a video we produced about 1.5 year ago. We simply asked some television crews to go into 2 of our restaurants, 1 in Roseville, which is near the Sacramento area, and 1 in San Jose, and film the Yard Houses while they were in progress. So everyone you see in the video is a real-life guest and a real-life team member.

[Presentation]

Harald Herrmann

So we opened our doors in Long Beach, California in 1996. I was the first General Manager of the first Yard House and was fortunate enough to be part of the process as we began with an idea on paper and then opened our doors and have also been fortunate enough to grow along with the brand over 16 years, and now I'm very honored to be part of the Darden family of restaurants as we move to the next chapter of our life.

Our name, Yard House, in the early days, I used to get phone calls of people wanting fabric or garden hoses or rakes and took a while to educate people as to what we were. We -- our name is derived from a 3-foot tall yard glass developed in the 1800s for stagecoach drivers back when drinking and I guess, sitting on a coach. Horses knew how to get their way home, so that wasn't an issue. We retired that glass many years ago and still have it in our lobbies of our restaurants as a namesake and still do serve half yards but the full yard is now part of our lore.

We live in social settings, so we're in urban districts. We're in special event venues, centers, lifestyle centers, while we find ourselves in quite a few different applications and are lucky that the brand is a bit transportable that way. This is Rancho Cucamonga. Also from a design standpoint, we can fit into a lot of different formats, and while still blending in with the centers that we belong to or join, still have a unique presence with our own brand.

We are visual animals. Everything matters, everything you touch and see as a guest, and that's also represented in our design. This is an image from San Jose on our design. We have these large fans. We have custom artwork that's painted for all our restaurants and has been done so for -- well, since inception. These are ribbon murals that we're putting in our restaurants. Now they range anywhere from 40 to 100 feet long, and they bring a lot of energy and engagement to guests and really add color to the room when guests arrive. It is somewhat a deconstructed environment, a lot of rich woods, walnut finishes, a very contemporary application. We do see our -- what we do as being on stage, so we highlight, not only our exhibition kitchen but also our bar, our audiovisual system, our draft beer system. Everything that -- the pillars of our brand are all on stage for guests to engage with, whether it's watching our culinary teams prepare food from the kitchen, which adds a real excitement and vibrancy to the environment or being able to see the keg room that houses our draft beer, which I'll get into on the moment, as well as everything from speakers, which we're not appear to hide from guests, as our audiovisual program is very much a brand pillar as well, which I'll also cover in just a moment.

That's a very proud bartender. Beer is definitely our hook. On average, we serve 130 -- we have 130 handles of draft beer, serving on average 105 flavors of beer. We are a microbrew festival. In many cases, we're serving as many -- our beers serve as many as 12 countries and 40 states. We have over 4,000 gallons of beer in our keg rooms and over 2 miles of beer line in a state-of-the-art draft beer system and program that we designed-built over the last 16 years, and we believe that we deliver great quality and freshness and with the systems and checks and balances that we have in place, put a great beer in that glass when it's ordered.

But we also have the ability now to -- in this new environment with gastrobars and gastropubs, stay relevant. And our chalkboard series, as you walk into our restaurants, we have plasmas that display limited-time beer offerings that are made from local brewmasters that might be a limited release. We tweet this out to our social media community. The record so far has been a full barrel of beer was sold in 1.5 hours in Denver. A beer might last as long as a week or a month, but they are highly sought-after additions to our ongoing portfolio of brands.

While beer is our hook, the soul of our business is, without a doubt, our food. This is our Pepper Crusted Gorgonzola Cheeseburger. It is a great representation of our burger category. We are chef driven. Carlito Jocson, who was my partner before the acquisition, is still with us and leading the culinary team. And from a perspective of food, we have been working very hard to continue to innovate not only over the past 16 years but still today. We're a scratch kitchen, 140 menu items made from scratch every day, which includes the biscotti cookie that's baked in-house that would frame your cappuccino.

We're in a culinary bridge in our eyes. We try to bridge between fine dining and casual, so we live somewhere in between casual and fine dining. Our inspiration not only comes from white-table-cloth restaurants in New York, Chicago, San Francisco, but on the other end of the spectrum, we're also following food trucks and trying to bridge between those 2 bookends to provide contemporary flavors, textures and tastes that our guests know us for.

We're a "come as you are" environment. I'll start with that because we don't separate the bar from the dining room. The bar is the centerpiece, the energy of the building. We don't prequalify guests as they come in. We're just happy they crossed the threshold and showed up. So whether that's cheesecake and a couple coffee on a Saturday night at 8:00 or a Chilean sea bass with a great bottle of wine or a cheeseburger with a beer, we're welcoming to all those uses.

There's no veto vote, we feel, in our menu offering as our price point ranges from $3.95 to $29.95. We also have a variety of different food items, pastas, pizzas, sandwiches, steaks, seafoods, snacks. We run the full category there. So if you were a party of 6, getting into a car, making a decision for dinner tonight, we would appeal, hopefully, to most everybody's wants and needs. We also have a robust vegetarian menu and offer over 20 vegetarian dishes on our menu as well.

Our vibe. So it's not just how we feed you and serve you. It's how we make you feel, and that's an important part of the Yard House experience. When a Yard House is firing on all cylinders, it is a very fun place to be. And it's not just about sustenance. It's about an experience. We spend a lot of time and energy on making sure that, that experience delivers a certain vibe. To get into that more specifically, we run our music program very much the way a radio station would. We have an 8,000-song library. We have 3 music experts on staff who custom program playlists to meet the individual needs of each day-part. So we break down our day-parts into 4 pieces: lunch; happy hour; dinner; and late night. We track beats per minute, and we customize our playlists to accommodate the specific needs of each day-part and the different use that might be in our buildings. So if you walked into a Yard House, and so if it was this seat right here in front of me, that seat at lunch might be business. It might be social. It might be vacation that would turn into possibly office or early dinner to the happy hours. At dinner time, it might be a young family early on, a date or a dinner event, and then as we transition into late night, it would skew more younger and into a more bar-centric atmosphere. So the vibe of our buildings is critical in our delivery.

We've always seen ourselves as a craft concept from inception when we opened Long Beach. And Long Beach still today has 250 handles of draft beer. In 1996 and throughout, our sensibility on the craft side has been to not only deliver that in food and in beverage but also in the sensibilities of art and design, hence, the custom artwork that's painted for us, but also, it's the metals that we use and the craftsmanship that goes into the fabrication of how we deliver Yard House on a 360-degree view, and that's just through our food and beverage.

The next video I wanted to tee up is a quick vignette from our draft beer system manufacturer, who's been with at us also since inception, to just highlight some of that craft story, which we also think speaks to a good sensibility.

[Presentation]

Harald Herrmann

So I mentioned earlier no separation. This is a photograph from our West Nyack location. You can see the beer lines coming out from the keg room to the center island bar, and that center island bar then again serves as the hub for activity within the restaurant.

We are a high-energy environment. The attention to detail on the vibe and the environment coupled with the sensibility of the staff, it creates an environment in which it is high energy and we think certainly one of the reasons and factors for why guests who enjoy the brand, see it as a very fun option for them when they make their choice.

I wouldn't be standing here if it wasn't for the glue of the company, which are our lead team members. We subscribe to a servant-leadership formula. We have an inverted organizational chart. I'm at the bottom of that tree, working for everyone else, and so on up the ladder, it's very common for our lead team members to still engage with the organization. Our lead team members have a voice within the organization. They provide us a constant stream of feedback on what guests are saying, what guests are thinking and also what they need. As a matter of fact, we recently rolled out exposed tattoos on our staff, which we also feel is very relevant in today's marketplace with the young workforce that we have, and we have team members making decisions to either come on board or stay on board based on that decision.

We live in a social media world. We do have social media manager on staff that's been with us for some time. We have a Yard House blog called The Tap Room. It is an internal blog, but it is available to anyone from external. So you're welcome to join us there and get some behind-the-scenes stories about the organization and the people in the organization and the passion that they have for the brand.

Our guests are very diverse. Our core age group is 25 to 45. 50% of our guests though are women. And for a beer-centric concept like ours, you might not think that to be so, but 50% are women. We serve over 1 million children a year, so we are a family restaurant when it's appropriate to bring children in to the restaurant for lunch, happy hour, dinner experience. You don't see too many kids in after 10:00 at night, of course.

Innovate or die. So we are in the middle. We're in the throes of an integration, and we're innovating as we speak. We're launching menu items as we speak and beverage items as we speak. This has been a mantra of our company and our organization for 16 years. The slogan, "if it's not broken," for us, is, "Break it. Reevaluate it, and put it back together again." And as soon as you've done that, start over. So as we go through this integration, we will continue to innovate to remain relevant, hopefully, for years to come. I'll turn it back over to Gene.

Eugene I. Lee

Thank you, Harald. That was a great introduction to Yard House. The brand has strong leadership, has fully engaged team members and has very, very loyal guests. Yard House is delivering superior financial results through industry-leading sales. The competitively superior average unit volumes of $8.4 million are driven by 4 strong distinctive day-parts. The first day-part is lunch, represents 21% of their overall sales. The lunch offerings are compelling, and with a comprehensive menu, there's something for everyone. The second day-part is happy hour, and this represents 22% of sales. The Yard House bar is a great area for people to congregate, to enjoy drinks and appetizers. The third day-part is dinner, and this represents 46% of sales. The Yard House menu is broadly appealing and as discussed, attracts a wide range of guests. The fourth day-part is late night happy hour, and this represents 11% of total sales. Our late-night environment is high energy, and it's great people -- great place for people to come together and socialize, enjoy a beer and snack on appetizers.

Having a strong value proposition and relevance in all 4 day-parts enabled us to maximize utilization of the restaurant and eliminate downtime. In addition, to the 4 strong day-parts, almost 40% of our total sales come from alcohol. These dynamics, 4 distinct day-parts, high alcoholic beverage sales, drive high absolute sales per restaurant and strong restaurant lower returns. And we expect these returns to be enhanced by synergies once Yard House is fully integrated.

Let's talk a little bit -- a little bit more about where we are in that integration. There are 3 key areas of focus in our phased-integration approach: first, people. We've retained all key operational leaders -- leadership to ensure continuity, and these leaders will continue to run the brand. Second, we anticipate full supply chain integration by the end of the first quarter fiscal '14. This transition will enable the majority of the projected synergies. Lastly, we're in the process of migrating all transactional activity to Darden's systems and expect this to be finished in late fiscal '14. The integration process is proceeding on plan. We continue to make refinements after -- at each acquisition and are confident in our approach.

Let's turn our attention back to the Specialty Restaurant Group and talk about our expectations over the next 5 years. We believe the group has the potential to deliver 17% to 19% total sales growth each year, driven by strong same-restaurant sales growth of 2% to 4%, aggressive new restaurant growth of 15%. This sales growth will contribute 35% to 40% of Darden's total annual sales growth in the future. And as we focus on sales growth, we'll continue to leverage the group's operating platform to expand our margins.

As we look ahead to the future, the Specialty Restaurant Group has the opportunity for significant growth. With the potential to add another 150 to 170 restaurants through 2018, generate an additional $1.3 billion in annual sales, an incremental $140 million in annual operating profit, we have a lot of work ahead of us to reach these targets. But we have a well-defined strategy and a strong team and the strength of Darden behind us.

Thanks again for this opportunity to discuss our group. And now I'd like to introduce Jim Lawrence, the Senior Vice President and Chief Supply Chain Officer of Darden.

James Lawrence

Thank you, Gene, and good morning. I appreciate the opportunity to share some insights on Darden's supply chain, the current cost environment and its impact on our business. And while cost management is an important factor of our success, it's only part of our sourcing strategy. Our supply chain mission is to support the company's growth strategy by providing a competitive advantage in terms of product quality, service, innovation and cost. And there are several unique strengths present at Darden, which, when combined together, give our supply chain a competitive advantage in the full-service dining industry.

First and foremost, it's about size, and it's about scale. We use Darden's scale and size to optimize our engagement with all of our trading partners, ensuring we create advantages in the areas of quality, service, cost and innovation as I discussed. Our volumes and our scale also provide us the opportunity to attract and retain some of the best talent in the supply chain industry. We have deep supply-chain expertise, and our team has experience in managing the ups and downs found in a volatile marketplace.

We also provide our team members with the sophisticated tools and processes they need to fully understand the components of cost and to anticipate and plan ahead for major market price fluctuations. As buyers, we take great pride in our ability to work with our brand partners to consistently deliver cost-savings projects, which lower our overall food and energy cost by 1% to 1.5% on an annual basis. As a matter of fact, over the last 10 years, our supply-chain team, by working with our partners internally and externally, has been able to achieve over $250 million in cost-saving projects. We also believe that good is never good enough. We are constantly looking for new ways to transform and automate how we work in order to capture greater efficiency and greater effectiveness and to ensure that the competitive advantages that we enjoy today are sustainable over time.

Our supply chain is large. It's robust, and it's global with $2.6 billion in annual purchases involving 3,000 SKUs with 1,500 vendors in 20 countries around world. We have 36 purchasing professionals who travel the world to source the best quality products at the best cost available. Yet, sourcing is only half of the equation. Logistically, we must move 34 million cases through that network, from this local supply base through 11 distribution centers managed by 3 partners in the distribution arena, so over 2,000 restaurants on a one to twice-a-week delivery schedule.

We regularly deal with complexities associated with the global sourcing marketplace, things such as currency fluctuations, international trade regulations, air ground, ocean trade challenges, U.S. Customs and many other variables. And through our collaborative efforts, we are able to provide strong support and assurance of supply to our 8 brand partners.

As I mentioned, our team buys over $2.6 billion annually in goods and services, and this slide provides insight regarding each major category of expenditure. Seafood is the largest single category of spend at approximately $600 million annually. We have a history of building strong supplier networks around the globe to ensure that we are sourcing seafood products of the highest quality at the most competitive cost. And when you consider the expenditure for beef, chicken and pork in addition to seafood, 45% of the supply chain spend relates to the center of the plate items. So it's an extremely important area of focus for our team.

Due to the volatility of the beef complex and the importance of this protein product for our growth vehicles, we are approaching a land-based protein category in particular beef in the same manner that we've approached seafood sourcing. By developing deep relationships with our major supplier partners and by working with industry leadership, we're developing a more robust sourcing structure to create even greater value.

As this slide suggests, there are many input considerations that we monitor and we manage, and one of the most important considerations relates to corn, wheat and soybean. These inputs are important to our business whether you consider these agriculture commodities as input costs for feed for cattle and poultry or as direct inputs for bakery and pasta in the case of wheat.

Lastly, weather is always an important market influencer. For example, in the case of produce, this is one of the primary drivers of cost. Weather will always be volatile. So during the last several years, we've developed and implemented a geographic diversification strategy for this segment, so we mitigate sourcing risks related to weather while optimizing our overall buying efforts.

Our supply chain team is well positioned to respond to the challenges of this global marketplace. During the past year, we have worked to develop and implement a new organizational structure, including process changes, which allow us to not only strengthen the way that we do business currently, but it also creates capacity as we work to support our 8 brands. This new organizational structure is based on an integrated sourcing model. This model is a matrix team buying approach in which we have created teams, which consist of a buyer, an analyst and a logistician to allow for more comprehensive team-directed decision making. The organizational structure also allows us to develop a deeper and broader understanding and management of the commodity markets, which affect our business, and we have a leader for this team that is dedicated towards commodity risk management.

We've also [indiscernible] a new systems tool, an Ariba system, to support the effort, giving us greater visibility to the buying-decision process. These teams are using formula pricing strategies to set the price of the input costs by working with our suppliers to obtain greater visibility of the cost drivers of our business. Our teams make better decisions, and we can support the competitive advantages that we enjoy today.

In addition to the integrated sourcing model, we are working to implement a supplier segmentation model with our key trading partner, so we can work with them in more robust ways. These key suppliers have the breadth and the depth of resources that will allow us to create stronger, more engaged relationships. These engagements will not only allow us to drive further costs out of our system but will provide Darden with additional value in the areas of service, culinary development, support, guest insights and so forth.

We continually work on the diversification of our sources, not only from a supplier perspective but also from a geographic perspective. This effort creates a more competitive cost environment, but it also provides us with important multiple source points to ensure continuity of supply.

In the area of quality, food safety standards are nonnegotiable for us. They always have been, and we work tirelessly with our supplier partners to continue to raise the bar of performance regarding food safety. As the Food Safety Modernization Act is fully implemented and commercialized, we know how important it will be for us to ensure that we work collaboratively with our suppliers to achieve success.

And lastly, work continues regarding the automation of our supply chain. Working to automize -- optimize the way we share data and move product throughout our network to optimize our service performance for the restaurants while driving cost out of our supply chain, this work enables us to ensure that the right product is delivered at the right price at the right time to provide superior support to our restaurants. The competitive advantages that I described are illustrated through several measurements that we used to monitor our performance in supply chain. One of the measurable results illustrated here, which shows our food cost performance. That is percentage change year-to-year versus the PPI change year-to-year. The PPI line reflects the market basket of goods, which reflects Darden's portfolio expenditure.

While the markets have certainly been volatile during this measured period, we have a long history of strong cost performance, which is a reflection of how we work with our internal and external partners to drive for efficiencies within our network.

Our history of cost management performance is further depicted in this chart. This visual depicts year-over-year Darden food and energy cost, percentage increases and decreases since 2004 and their cumulative impact over that period.

Let me take a moment and explain how to interpret this chart. The solid orange line represents year-over-year cost increases, with annual impacts typically in the flat to 2% increase range except for a few years. The market dropped and resulting low prices in fiscal 2010 with significant savings versus fiscal 2009. The market bounced back in fiscal 2012 with higher-than-average annual inflation and modest deflation in fiscal year 2013.

While we see some year-to-year volatility, as one would expect, Darden's cumulative food and energy cost will have risen by less than 1% over the past decade. We believe these results, largely driven by the cost management results we showed you on the previous slide, had delivered significant value creation and positioned us with a competitive advantage in our business model. As we think about our next fiscal year and the impact of food costs on our business, it's important to think about the macro factors that affect our sourcing strategies, both in the short term and in the long term. One of the most important elements to understand relates to the effective growing middle classes in developing countries. Not only is demand for protein increasing in these markets, but we are also seeing demand for luxury protein items such as lobster and crab increasing demand as well. For example, China used to be a net exporter of shrimp and due to increasing demand for shrimp, this country is now a net importer of shrimp. During the last year, China has moved into the rock lobster and snow crab markets more significantly, and we expect that this activity will increase even more in the future as demand develops even further in these developing markets.

There are other macro factors that are very important to our team, as we manage against world markets. The valuation of the U.S. dollar versus other world currencies is an important consideration, not only regarding the impact it has an agricultural exports in the United States but also on the effect that it has on the buying power countries like Japan and China regarding seafood consumption.

Additionally, biofuel policies will continue to be extremely important to monitor as more and more green volumes are moved from animal feed use into fuel production use. Other factors such as implementation or removal of trade barriers, marketplace acceptance of biotech developments, the urbanization of crop lands and the continued impact of weather means that complexity in managing against these factors will only grow in significance and importance.

I'm going to announce [ph] in a few minutes, so I've taken you through a more detailed information regarding 3 of our most important areas of expenditure: beef, seafood and energy. In regard to beef, a major discussion point in this category relates to the continued contraction that is happening with beef cattle in the United States. While the drought in the summer of 2012 certainly amplified the challenges that were occurring in live cattle, supply constraints were already being experienced in the cattle markets well before the drought. Continued pressure on corn, feed input cost and other input cost considerations were resulting in herb liquidation of continues to be experienced. Other fundamental changes continued to occur whereby cow calf operators are growing older and more segmented. And due to these factors and others, beef cattle expansion is not likely in the short term. On the demand front, recent softness has been driven by the lack of retail activities for beef and the erosion of beef exports in the last year due to continued high cost for U.S. beef. We're going to watch these demand signals very carefully, and we'll opportunistically take positions as the markets allow.

In the important area of seafood purchasing, there are 3 cost drivers in this category: shrimp, lobster, and crab. The major consideration, which is affecting our seafood sourcing efforts, relate to the continued consumption growth in developing markets, as I mentioned, and the short-term supply contraction, which may be appearing in the developing or developing in the shrimp segment. In the area of snow crab, the Alaskan snow crab harvest quota was reduced for this harvest season, and the majority of our annual purchases have been achieved and reflected in our latest cost estimates. And lastly, North American lobster harvest and production, we expect it to remain strong, which will continue to dampen any potential cost increases in the lobster category.

The energy sector has stabilized over the last fiscal year as the world economy continues to struggle with economic expansion, and supplies for the most part have stabilized or, in the case of natural gas, have strengthened. Crude oil stocks are expected to tighten supported by continued growth in China's economy. Both lackluster demand in Europe and growing U.S. supply should help offset any material upward pressure. In regard to natural gas, while the rate of growth has diminished a bit this year, the U.S. is still experiencing significant supply expansion, keeping costs in check. And lastly, electricity will be essentially flat, as there are no significant supply or demand drivers, which will affect that segment.

The next slide provides a competitive -- a complete perspective of our cost estimates by category for FY '14. In seafood, we'll see nominal increases in this area due to the factors that I just spoke about and anticipate inflation of 1% to 3% in this category. With beef, this category represents the most impactful area regarding food cost inflation. We discussed the supply challenges that we have experienced and that we will continue to experience. We're watching demand disruption carefully. We're going to continue to manage against these demand changes effectively, and we expect this category to see inflationary pressures of 8% to 10% in the next fiscal year.

In regard to chicken and pork, similar to beef, high feed costs are squeezing profitability, which limits expansion. Growth cycles are much shorter than beef, so normal U.S. grain crops this summer may induce expansion as early the second half of calendar year 2014. In the area of dairy, lack of U.S. milk production growth during calendar year 2013 from herd contraction and export demand support higher product costs in '14 for our fiscal year.

In the area of oil, assuming normal South American and U.S. soybean crops this year, edible oil costs will decline versus FY '13, as the world soybean prices fall by second quarter FY '14.

Bakery and pasta. Wheat prices will be influenced by corn prices. A normal U.S. corn crop following the drought-reduced crop of 2012 will take wheat prices lower by the second quarter FY '14 in our opinion.

In produce. Variable weather risks, higher seed and fuel costs are putting upward pressure on produce for FY '14. And lastly, in beverage. Annual cost increases for beer and spirits are expected to push FY '14 costs higher.

So the net effect for Darden in FY '14 is that we are approaching net inflation of 1.5% to 2.5% after cost savings projects for our next fiscal year for food costs and 2% to 4% inflation regarding energy cost.

As we wrap up the supply chain section, we'd like to leave you with a brief snapshot of our coverage. Seafood is covered for the remainder of fiscal 2013 and for 35% of June through December fiscal 2014. This level of coverage is typical given the normal seasonality of our catch and with 80% of our beef requirements contracted for fiscal year 2013 and 40% of June through December usage under contract for the next fiscal year. We are monitoring the recent softening of domestic demand, as I said, and weakening of beef exports would remain opportunistic in extending beef coverage given the prohibitive premiums present in the market for extending coverage. Our poultry requirements have been contracted for calendar year 2013 at prices below prior year. Keep in mind, beef, chicken and seafood account for approximately 45% of our total spend.

Dairy coverage is typically short term due to perishability concerns and milk market pricing, so we have limited coverage in that category.

Pasta and breads are 100% contracted for the remainder of this current fiscal year. We have not taken coverage in the next fiscal year, as we anticipate the grain markets will soften as the new crop nears harvest. We have 95% of our produce usage contracted for this fiscal year and almost all of our first half usage in FY '14 contracted as well.

On a blended basis, we have almost 80% of our needs contracted for the fourth quarter of this fiscal year and approximately 1/3 of our needs covered for the first half of the next fiscal year. This coverages are generally consistent with the positions which we've taken in prior years.

To summarize, we expect commodity costs to continue to be volatile, and additional crop yields will be necessary to keep pace with growing world demand. While we anticipate that weather conditions in the U.S. growing regions will return to normal and that yields will materially improve versus last year, the protein complex will continue to be constrained from a supply perspective for the near future. We will continue to watch closely the recent softening in the beef markets, which we believe are attributed to weakening retail and export demand. And we'll be opportunistic in our buying efforts.

Overall, our team is very well positioned. We have a long history at Darden of creating competitive advantages through our supply chain efforts, and we continue to work with all of our trading partners to create value in multi-dimensional ways. Our teams are strongly positioned for the future, and due to our organizational changes, our process revision, system design, and ongoing collaboration with our brand and supplier partners, we are well equipped to continue to provide competitive advantages for the enterprise.

Thank you very much. And now we'll have questions and answers, and I'll ask Gene and Harald, I believe, to come up.

Matthew Stroud

Thanks, Jim. We're going to have Gene come up and get some chairs set up.

Unknown Analyst

A question on Yard house and I guess, as you look at the business historically, how does the alcoholic beverage component trend? Do the units actually open up with a higher bar business and then trend lower as people understand the dining element of it? Just wondering about a little bit of the history there.

Eugene I. Lee

Harald?

Harald Herrmann

Already, first question. It -- our restaurants do open...

Unknown Executive

Here's your mic.

Harald Herrmann

A mic, okay. Thank you, Andy. Our restaurants do open alcohol heavy in markets that at times do not know what a Yard House is as we're entering into a new market, but more and more realizing as the brand becomes more recognized across the nation that we're opening up with a pretty balanced portfolio of both.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Nicole Miller with Piper. Jim, what are you doing to have the opportunity to source regionally? And also, what about natural and organic? Do you kind of support the core brands in terms of authenticity, customization that ultimately would probably best reach the Millennials?

James Lawrence

Yes. So in the supply chain, we think about creating value for our clients. Our clients are going to drive those decisions. So we have the ability to take their lead and support any needs that they may have in terms of regional sourcing. A great example of that is with the SRG efforts. We have regional, seasonal sourcing that provides the nimbleness that they need to have for the business but also allows us to structure the work that we do to provide the synergies. So all those decisions relative to natural, organic, regional, seasonal will be driven by our brand partners.

Eugene I. Lee

Yes. And Nicole, today, we have 180 products approved into the Darden network that we're utilizing in the SRG, but those products will also be available for the large 3 brands into the future.

Nicole Miller Regan - Piper Jaffray Companies, Research Division

Approved in -- is that regional, natural and/or organic?

Eugene I. Lee

Yes, yes. So the purveyors approved all the way through to QA. These things are -- we're ready to roll with them. And so like when we start rolling Seasons into building California, we've already gone up improved local farms, farmers markets, so on and so forth that we're going to pull product out of.

John S. Glass - Morgan Stanley, Research Division

It's John Glass. What's the gross -- this is relating to the supply chain and commodity outlook. What's your gross inflation outlook net of your cost benefits? You didn't really articulate what those would be. In the past, you've talked about some of the initiatives you had to structurally improve your cost advantage over time, centers of excellence, et cetera. So what do you think your gap is structurally or to [ph] the market over time?

Eugene I. Lee

So we're at 1.5% to 2% as net after cost savings, and so we would be at 2.5% to perhaps 3% in regard to gross impact in terms of food inflation, which I believe is in line with USDA estimates relative to food cost inflation. We're going to see leverage out of our Darden direct supply initiative. I think Brad talked about that a bit. We're going to continue to ensure that we reap those benefits that we've been establishing for the last few years, but then some of the numbers are going to be reflecting themselves.

Brian J. Bittner - Oppenheimer & Co. Inc., Research Division

Brian Bittner. On the beef costs, I understand you expect beef to just continue to exhibit these market dynamics that support this inflationary trend for the next couple of years. But I mean, what about the rate of that trend? I mean, can it really keep going 8%, 10% or even though these market dynamics are going to continue to make a come back a little bit to some type of more normal rate of inflation?

Eugene I. Lee

I think it can, and I think that what's happening right now is we're seeing demand destruction, which is kind of topping out that price elasticity in terms of that raw material. So we were at $130 cattle, and now we're down to the $120s. We can go in the teens. I think we're not going to see expansion in terms of beef at the cattle markets until we see some weather patterns that are going to be favorable in regard to pasture conditions, as well as corn growth, and that's going to help in terms of the feed input cost factors. But I think, in my opinion, we're seeing some of that topping out now in terms of the $130 cattle.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

It's Steve Anderson, Miller Tabak. I just wanted to follow up on the feed question. You're looking for some of the feed costs to actually go down slightly in fiscal '14. May not be relevant for a cow since there's still a supply issue there, but do you -- can you make any comment with regard to other proteins, maybe '15 and beyond?

Eugene I. Lee

Right. So what we would anticipate seeing is that with chicken, you're going to see a quicker expansion picture because of the grow-out. It takes 3 years for cattle to grow out in terms of the gestation period and the harvesting; pork is a little bit, shorter period of time. So we haven't seen those signals yet, but we anticipate that if we see solid weather in the summer months to allow for that expansion to happen.

Stephen Anderson - Miller Tabak + Co., LLC, Research Division

Another commodity question. Have you done any work on -- you mentioned biofuels in your presentation. Have you done any work or have working estimates of -- if we killed off the ethanol fiasco where corn might be trading?

Eugene I. Lee

Our work has been done in different industry segments, and we participate in some of those conversations. I don't have that number off the top of my head but we believe it's embedded into corn cost and that's -- and it's probably here to stay for the near future.

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

I have a question. It's Sara Senatore. I have a question about the Specialty Restaurant Group. And effectively, the same-store sales have been a little bit more modest recently so even though we've seen -- you put up some metrics that correlate, and they've seen some improvement. More recently, we're looking at very low single-digit comps out of the same-store sales. Can you talk a little bit about what you think needs to happen to drive closer to mid-single-digit same-store sales? Is it macro? Is it kind of initiative -- store-level initiatives? And then also, how do margins look in the context of low-single digit, same-store sales margin expansion, contraction?

Eugene I. Lee

Okay, let me start backwards and saying in the low-single digits, we're still creating a little bit of leverage with margins. So in the 2 to 3 range, we're able to continue to improve margins. As far as same restaurant sales go, I would say our more casual brands are struggling -- have decelerated a little bit off the last 12-month trend.I think, we're seeing casual -- some of the same headwinds that we're feeling and we discussed in the large 3 brands today. So Yard House and Bahama Breeze and on -- Seasons 52 has not been immune to that either. We saw the same effect, the same out-call [ph] to February effect in that brand also. The 2 more luxury brands, we have not seen that yet, but as I said to someone earlier today, if we go back to the turndown in '07, '08, luxury trailed casual; casual trailed -- tailed down first, then luxury, 5, 6, 7 months later started to fall off. But right now, we've dropped -- well, we were averaging close to 4% in the last couple of quarters. We're down at 2%. So that has more to do with I think a slower growth in the more casual brands.

Unknown Analyst

Question for you, Gene. Maybe to back up a step and think about the Specialty Restaurants Group at a really high level. Can you elaborate on what you see as the biggest benefits from operating those brands as a portfolio versus individually? And then if you of think over the next 5 to 10 years, maybe longer-term, do you see the ability to increase the portfolio further and gain additional benefits of scale that way?

Eugene I. Lee

I'll start with the second question first. It's hard for me to think about that far ahead and wanting to do another acquisition, as we're in the midst of still integrating 2. So right now, I would say, and as Clarence said yesterday, we have enough in the brand in the portfolio today with the 5 brands to have a long runway. As far as the benefit, I think it really revolves around the platform and the amount of the senior level talent that we're able to put on these smaller businesses. You could never afford, if you're stand-alone business, you couldn't have -- we were able to bring Will to be our marketing leader. You wouldn't be able to get a leader like that. You wouldn't have a senior HR person. You wouldn't have a senior finance person to work on a small business. So we're able to take these senior-level people, leverage them across and then build some efficiencies in. We build a lot of G&A efficiencies in this multibrand setup where you just couldn't do it if you're -- the G&A would be almost 50% higher if these were 5 stand-alone businesses. And then the second piece is the cross-brand collaboration has been great. We've been able to really work with the creatives, with the marketing folks, with the training folks having a fungible resource pool that gives us great flexibility. So if we have to open 2 Seasons 52s on 1 day, we're able to pull people from other place -- parts of the organization to help get that restaurant open. Whereas, if it was by itself, it can only open 1 restaurant and have to wait another 3 weeks before it opened another restaurant. So that fungible pool of talent is very important in it, and I think it's all around the support platform and the G&A that we're able to run and support of these businesses.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Matt DiFrisco, Lazard. Question about sort of the strategy of growth. I guess, there's synergies as well with growth if you look at how the big 3 have grown. Oftentimes, you see of map of stores and you see an Olive Garden and Red Lobster in the same lot together. Do you see that potentially going forward? And is that a strategy where you can bring your capital structure of DRI behind you and get in bed with developers that might need help today and take out so much square footage that no one else can take up?

Eugene I. Lee

Absolutely, and we're doing that a lot now. We're able to bring a developer a good portfolio of options. And so we like to line up Capital Grille and Seasons 52 right next to each other. We think that's a great combination. We're not sure yet how Eddie V's and the Yard House is going to play into that. But we know what we've done in West Coast Plaza, that Seasons and Cap Grille work real well together. We've got them -- even pre-acquisition, they were, in Fort Lauderdale, they were right next to each other in the front of a mall. We think they create great synergy. So as we go forward, we are getting looks at every new development that's being done in America. We're getting first look for our 5 brands. And so we're able to go and talk to developer, what are you trying to do with the development, where do we best place our brands and then how we leverage a deal across all 3 brands. And we're negotiating for 3. We got a lot stronger negotiating position than we're just negotiating for 1. So absolutely we're going to do that. We're going to do it in the right way, but it's a great portfolio for the developer to deal with.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Can you give us maybe an estimate of next 3 years or so, what percentage of those stores be opened in markets that you're not new to, that you already have a flag down in and then you're just adding another store to it?

Eugene I. Lee

I would say -- the question is a backfill question. I'd say 50% of our restaurants today are backfill where it's -- our urban Capital Grille location, now we're going suburban or we've already penetrated with 1 Seasons 52, and now we're going to add 3 -- 2 or 3 more to the marketplace. So I'd say 50% of what we're doing is backfill, with the exception of -- I mean, I think Yard House as we come east, we'll have less backfill early on.

All right Jim, we're getting out easy.

Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division

Gene, could you give us a little color on sort of the ideal type of market, these different concepts are suited to and along the lines of the runway that you mentioned? How many units you think you can grow to in each brand?

Eugene I. Lee

Okay. Capital Grille, obviously, as I said earlier, urban central business district's ideal. There are not very many central business districts left where we don't operate. We still have -- we're still not in St. Louis, we're not in Cleveland, there's some markets in California where we don't have a presence, we're not in Portland, Oregon, so we still have some opportunities there where, I think, 48 Capital Grilles today, we believe that the opportunity is somewhere between 70 and 80. It could grow past that. We're doing a restaurant here. We're going to open in a few weeks in Orlando with our second location. And there seems to be a real casualization of fine dining right now. And we're testing, pushing this out a little bit to see if we can create the volumes and achieve the hurdle rate. Seasons 52, we've been saying 150 to 200, we believe that is the -- is a great target. Upscale retail areas, Seasons is working the best in right now, that'll be our target. We prefer a pad, if possible, but we will go inline in upscale server [ph] retail allocations. Breeze, we're working. There's still -- I think, when we think about Breeze, we're still trying to learn a little bit more about why the real estate works and why it doesn't work. We're trying to gain some more clarity around that. Now you saw, as Brad, put up some numbers for Breeze yesterday, that returns on the new restaurants have been real strong. But we think we got to dig in to fully understand it is that, that we've opened in great trade areas in New Jersey. And if we opened any brand there, it would be doing great. So we got some work around that. But we want to keep Breeze right now on the East Coast in the suburban retail trade areas. Eddie V's, when we bought Eddie V's, we did not buy a pipeline of restaurants. We're getting ready to open our first Eddie V's in Tampa in 4 weeks, the first deal that we did outside the Northshore Mall. And then we will open a restaurant in Orlando this fall. Then we've got to cut more deals done and then we're going to start focusing on the big East Coast cities. We think we understand the big East Coast cities. We think we can develop them. We understand how the markets trade, and we think that from Philadelphia North, they're waiting for Eddie V's. And they'll be a great brand and do really well. Yard House, I think, Harold laid it out today, we're looking at the major retail trade areas, entertainment centers. We've got a history of doing -- having some great restaurants like L.A. LIVE that are really next to big entertainment functions. But we think Yard House is very portable. We did the acquisition. I think we talked about this in the call. We looked at the Cheesecake footprint and said, "Wherever there's a Cheesecake, there can be a Yard House." That's how we're thinking about the real estate.

Unknown Analyst

Jake Butler [ph] From Susquehanna. The question about the supply chain and just how much of a benefit you get from efficiencies in scale. In thinking about 2014, the 2% to 2.5% -- or 2.5% to 3% gross inflation, what would that be without the scale and the efficiencies you get?

C. Bradford Richmond

I'm not sure if I understand the question, but we're typically running between 1% and 1.5% of our food costs, regarding [ph] Cost savings initiatives. Is that you were describing?

Unknown Analyst

No, more just the overall scale that you have just the fact that have a large organization in purchasing power. Aside from incremental efficiencies, just your overall efficiencies, trying to compare your inflation to what your competitors might be seeing?

C. Bradford Richmond

Yes, I think it's hard to define with exact precision. But I know that we track our cost structure with our competitive set, and those companies that provide information on their food costs publicly. And we trend favorably to those companies. We trend favorably to customized reports around market reviews like on Arbarian [ph] Seafood. And so there's multidimensional ways that we view our performance. And we are very confident and proud about that performance and that's embedded -- our slides and scale and really the way that we collaborate with all of our 8 brands, whether we -- we were talking about SRG earlier, the way that we work with our brand partners allows for that. The way that we work with our supplier partners allows for that so it's all embedded in that ability to source and distribute effectively.

Paul Westra - Cowen and Company, LLC, Research Division

Paul Westra at Cowen and Company. Jim, I was wondering if you can talk about the lobster aquaculture investment? What has been the historical hurdle or tactical hurdle that you're trying to overcome to have success here? And maybe some volumes you expect in the near term? And ultimately, your idea of the longer term, is it the hope that you get to see in type of cost benefit that we saw in shrimp, and frankly, we saw on the land animals 50 years ago?

James Lawrence

So I'm going to a little bit more general about lobster aquaculture as a business development project. But I know that it's a benefit to us in the long term because it's going to help offset demand pressures that we're going to see coming from the Asian markets in particular around the lobster. That is a multiyear, longer-term end benefit for the organization. And so that's how we see that. There will be some benefit to Darden because of the fact that we're going to have more supply in the market over time. But I unfortunately, I can't speak to any of the specifics relative to the financials.

Matthew Stroud

Okay, well, if there's no other questions. Jim and Gene and Harald, thank you very much. We're going to ask Clarence and Drew to come on up. We're running a little bit ahead, so I'm certain we will get you out on time for those that need to make that 12:15 bus. But we'll -- expect to take another 20 minutes. Maybe a question here for Clarence and Drew. And we'll wrap up and let you go. I'll have a couple of logistics at the end here that I'll clarify with everybody, but [indiscernible] so let me get you guys another mic, so...

Jason West - Deutsche Bank AG, Research Division

Jason West at Deutsche Bank over here. On the last call, you guys talked a bit about making more aggressive investments and sort of value and affordability to really turn the needle on traffic. And can you talk about kind of where you are in that process? We didn't see it in the Feb quarter but there were a lot of other noise that quarter with consumers and weather. And is that process still in the early stages? Or have we made those investments and you expect to see that sort of come through pretty soon?

Andrew H. Madsen

Yes, I'd say we're beginning and it varies by brands, and it is both in promotions and on core menu. So, in roughly October, Red Lobster added the Four Course Seafood Feast to their menu. They added the 15 items under $15. We're seeing preference build on those items. But as Dave said in Q&A earlier, it takes some time for that to turn into incremental traffic, just like it took some time for us to see that when we tested the core menu. Olive Garden in January added their 3 Course for $12.95 to the core menu. And they've also been pursuing a more consistently aggressive approach in their promotions like 2 for $25. It was on in January. And we did start to see some promotional momentum from that. It got derailed a little bit with February as we talked about before from a macroeconomic standpoint. But we are beginning to see some benefit from those things and we expect it to continue over time, both on the everyday business core menu and in promotions.

Clarence Otis

And I would agree. So as we talk about a go forward, we've been talking about check average growth of 1%. That's inclusive of mix and pricing. That's a pretty significant investment in affordability. And that is a consequence of decisions we are making both on core menu and on promotions. And it really is a continuation of some of the things we've already put in place as well as new things that. And so as Drew has mentioned, 15 under $40 prix fixe on the menu at Red Lobster, prix fixe at Olive Garden, introduced October, introduced January, but the visit frequency and the average guest is once a quarter. And so a lot of our guests still haven't even experienced those things. As they experience them and do that on a repeated basis , that's going to be part of what drives the mix change. So steps we've already taken in addition to some of the things that we'll do in the future.

Clarence Otis

And it's -- maybe this is an opportunity to go back to something we talked about yesterday. It's important to try and disaggregate the averages, the 1% that Clarence mentioned. So when we're doing things to bring in new customers that are more price-sensitive, more affordability-oriented, that doesn't apply to every guest coming into the restaurant. So remember, it's 15% to 20% or so of business. And to dimensionalize that a little bit on the "30 shrimp" promotion that Red Lobster did, it's priced at $11.99, but when we look at the check detail for all the restaurants, all of the guests coming through Red Lobster, the guests that bought that "30 shrimp" had an average check of about $18, roughly, which is about 15% or so below the average. The menu average is $20. But the guests who didn't buy "30 shrimp" had a check average meaningfully above the $20 average. And so it isn't kind of a one-size-fits-all that everybody is paying a lower price.

Michael Kelter - Goldman Sachs Group Inc., Research Division

It's Mike Kelter, how are you? Two questions and maybe the first one, if you go back in history when Red Lobster had some issues in the mid-'90s, it was when it got over 700 units. And at that point, comps rolled over. You decided you need to close some units, and it was able to grow from there. Olive Garden's comps have started to fall off at a similar stage where you -- once you got over 700 units, and it may be an incidental finding, but maybe you could compare and contrast and help us feel a little bit more comfortable that Olive Garden doesn't -- isn't necessarily going to see the same fate over the next couple of years.

Clarence Otis

Yes, I'd say it's very coincidental. We look at the country and the size of the consumer base, it's dramatically bigger than it was in the mid-'90s. So Red Lobster itself is over 700 restaurants. After those closures, we've been without a whole lot of aggressive new restaurant openings. They'd gotten back to that size because of the size of the market's grown and Red Lobster operates -- I think Val showed it in a segment -- seafood segment -- that, that's not all the seafood occasions in those seafood specialist restaurants in casual dining. But seafood is a very small segment of casual dining at 700 restaurants. Italian is significantly bigger. A lot more folks who say they don't eat seafood, than would say that about Italian or even steak. And so I think the market's size is not the issue, and the market's sufficient.

Andrew H. Madsen

And the restaurant-level dynamics are very different too, so a number of those Red Lobsters weren't cash flow positive where that's not the case at Olive Garden today.

Clarence Otis

Well, I mean, Olive Garden, its check average has returns that equal Capital Grille's. I mean, they are the 2 strongest brands in our portfolio, Olive Garden's stronger than everything else in the Specialty Group.

Michael Kelter - Goldman Sachs Group Inc., Research Division

And then the other question I wanted to ask you is, if you wouldn't mind maybe just playing the what-if game a little bit, understand how you're thinking and how you're going to approach things. If traffic doesn't return to positive as you guys are hoping it might, what's your -- what leverage do you have for plan B to get traffic going again? And how will you approach it? And similarly, if that doesn't -- if the traffic doesn't return to positive and the dividend payout ratio goes from 60 to 70 as opposed to 60 to 50, how will you approach that at that point as well?

Clarence Otis

Well, I don't think we want to get into a lot of what ifs. We do think traffic is the key lever. We're confident we can grow traffic. We've consistently outperformed on traffic, if you look back, really, until about 12 months ago, and we feel pretty comfortable that we can continue -- we can do that again. So we don't know that there's a whole lot of value in playing those what-if games. We're pretty confident that we can get traffic moving in the right direction.

Andrew H. Madsen

And just to go further on the traffic performance. If you went back to last fiscal year, our blended traffic for the large brands was up about 0.5 point. The year before that, it was down about 0.5 point. Both of those are about 1 point or 1.5 points ahead of the industry. And so the -- what Brad showed yesterday is really grounded more on us returning to the levels that we've typically been able to deliver in terms of outperformance relative to the industry by doing the things we've talked about on improving the guest experience, improving affordability and then redefining the experience for the future.

Clarence Otis

And so given what Drew just said about the industry, what you outlined would reflect a dramatic structural change in the U.S. consumer beyond what we think we've seen right now, with the structural changes we're dealing with right now. We don't anticipate that. To the extent that that's the case, we're living in a dramatically different world, and we'll respond to that.

Andrew M. Barish - Jefferies & Company, Inc., Research Division

Andy Barish at Jefferies. Two more, I guess, more near-term questions, both applying to the Olive Garden business. Have you made -- there were some promotional misses kind of in the last 2 years as well. Have there been changes made in terms of sort of testing promotions before national rollout? And then secondly, with the pushback of the remodels, I believe, the older non-Tuscan farmhouses are underindexing the overall comp by a pretty noticeable amount. So can you lift the current look and feel units enough you think in the next year to sort of get the brand going again or the older units going to continue to sort of hold things back?

Unknown Executive

So I'll take the promotion question first. From a testing methodology standpoint, not a lot is changed internally. But externally, a lot is changed. So we were finding that we are testing promotions 9 to 12 months in advance of when they would go national and the dynamics in the marketplace were different, and so they didn't always perform the way we anticipated. And so the testing methodology hasn't changed substantially, but the dynamics in the market have changed. Beyond that though, we have made meaningful structural changes to the promotional approach at Olive Garden, in particular. So where, for the last couple of years, we were really on an approach of introducing new dishes that were brand building and sometimes featured a price point, it was secondary to the message, and sometimes didn't feature a price point at all. We started the year with one of those Taste of Tuscany, that was all about the freshness of flavors of Italy and Tuscany, in particular, romancing new dishes and then mentioning a price point secondarily. That's very different from the approach that they've taken most recently which says, "Come to Olive Garden and you can get a great, highly satisfying experience for $25 for 2 people or a 3 course meal for $12.95", where the emphasis is strictly on affordability, less about the individual dish news. Now when they come the restaurant, we want them to have a great experience and we want them to see everything else that's on the menu that demonstrates the breadth of appeal that the commercials are trying to convey, but the promotional construct is different.

Unknown Executive

There was a second part to the question.

Andrew H. Madsen

I forgot the second part of your question.

Michael Kelter - Goldman Sachs Group Inc., Research Division

Are you able to lift the non-Tuscan, the older stores, with some of the menu and marketing news, do you think or...

Andrew H. Madsen

Yes. I think everything that we're doing that Dave talked about was simplification and staffing and scheduling operationally and that focus, as well as the new ad campaign, that promotional emphasis making the core menu more relevant with a lighter fresher section, the 3-course meal for everyday affordability, all those things are broadly appealing, not just in a Tuscan farmhouse but in the non-Tuscan farmhouse restaurants as well. But in addition to that, we do have a meaningful opportunity to update the look and feel of the atmosphere as Dave talked about. And we're going to get to that going forward as well.

Clarence Otis

And we do think it's important -- because these are once in a decade decisions to get it right. So Red Lobster is completing a remodel. We think we had a miss on the remodel before this. And so Red Lobster is doing a second remodel of some restaurants before Olive Garden gets to that first remodel of those other restaurants. That is something we don't intend to do again, I mean, that's a lot of capital and we could have done a better job than to put the close-to-home, which is the priority remodel in, when it really wasn't working for where the brand needed to be longer term.

Will Slabaugh - Stephens Inc., Research Division

Will Slabaugh from Stephens. I wanted to get back to the data that you showed yesterday and in particular, the bar and grills gaining share and like kind of losing on that intense return metric. And then, I guess, the broader question is do you want to really follow those guys down to the lower price point and be in a position of a "deal" or is the fact that your intent to return is actually showing a positive move, showing that what you're doing with the brand over the long term is actually a good thing and so just kind of bouncing those 2 out?

Clarence Otis

Yes. I will start and I would say that we want to make sure that, I guess, say, they want an intent -- that intent to return is high, but they aren't able to return as frequently as they like. And so we got to make sure that we enable them to do that. But we do it in a way that doesn't erode all the attributes that drive intent to return, so that's the challenge. And so we don't want to go down the road of having the value scores go up, all the other attributes go down including intent to return. But we do need to help those guests that like to return more that can't because of affordability issues, come more.

Andrew H. Madsen

Yes. I mean, we think it's instructive when you think about a spectrum of getting near-term momentum potentially at any cost and build a brand like Olive Garden and Red Lobster. In the long run, they can last for generations. On that spectrum, we want to be very careful that we move aggressively to improve our near-term momentum, but do it with our eyes wide open, and we don't discount so substantially that we cheapen the experience. We don't focus so aggressively on productivity that service erodes and then in the future -- and we get a little better momentum for the next several quarters but, eventually, the brand changes, the experience erodes and you're not left with the same foundation that you started with. So we're being very careful on how we balance those things. So we are being more aggressive on affordability. We are really elevating our focus on consistently delivering a great experience but at the same time, we're trying to evolve experience that our guests get to make it more relevant for the future and protect that brand equity that we've got of the future visit intent.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

Joe Buckley, BofA Merrill Lynch. Just in the store base [indiscernible] amount of cash, you have lots of options to use the cash. When we look at the return on invested capital numbers for the company, they've been lower like for the last 5 years. And do you think about it in those terms? I mean, do you -- the individual projects may be meeting your hurdle rates, but the overall return on invested capital, it came down about 5 years ago and is lower yet. And just curious if you think about it from an overall enterprise perspective.

Clarence Otis

;

We do. And so we've got 2 sets of invested capital we think about. We think about incremental capital against the hurdle rates, and you see that in the new restaurants. But we also think about what's the return on the capital in the entire business. And so our cash flow return on investment model that we use to try to understand what our long-term targets need to be is one that says what do they need to be so that the entire business creates value, not just incremental capital that's put into the business because there's a lot of capital already in the business. So what does the return on the entire business need to be? And that model really establishes ultimately what the long-term sales and earnings targets ought to be. And so that's what we look at. And that's a model that is instructive about long-term direction. Now within that, you've got the annual and cyclical factors that we have to deal with. And if it's lower than it was 5 years ago, it's because of -- in between now and 5 years ago, there was a great recession. And so we've got to deal with that or else the long-term model is never going to work because we'll get ourselves into a loop where we're not able to compete effectively today, so tomorrow doesn't matter. And so if the return on invested capital is coming down, it's because we're dealing with a down cycle that we've got to get ourselves through. We think that some of that decline that we've seen in the last 2 -- few years, is a little more structural, a little less cyclical than we thought. And so we're adjusting our strategies for the future to reflect that. And so the productivity gains that we've made are critical to making sure that the return on invested capital in the business continues to create value. And so we spend a lot of time taking dollars out of the base. Because of the current competitive environment, we've got to reinvest some of those dollars back in, and we're doing that through affordability. But we will continue to look for ways to generate significant transformative reductions in the cost of running our business, as we keep our eye on that return on the entire business, not just the incremental capital.

Joseph T. Buckley - BofA Merrill Lynch, Research Division

And maybe just one follow-up, just on promotions. It seems you had some instances like the 4-course $15 offer at Red Lobster, the 3-course $12.95 offer at Olive Garden, where the initial run of that promotion has worked quite well and the second run of it, at least what's visible to us, hasn't worked. And just kind of curious how you think about that. I realized both of those have been added to the menu on a permanent basis so, obviously, you think it's an important part of the value message, but the actual promotions seem to fizzle the second time around, and just kind of curious your thought?

Andrew H. Madsen

Yes. Sometimes when you do something the second time, it doesn't work as well as the first time. But we think those constructs, overall, are still very relevant and we can make them work just a little bit harder if we develop dishes inside them that are a little bit more brand defining beyond just the 3-course $12.95 construct. We think some of our bar and grill competitors have done a better job on that as we've seen them evolve 2 for $20 constructs. So we think the second time -- we were still very satisfied with the second time that Red Lobster ran their 4-course, same with Olive Garden. But we think they can do even a little better if we had a little more brand news underneath that price point, just like our bar and grill competition has.

Clarence Otis

And I would just emphasize that we were very happy with the results that we got on the second run. I think the consumer reaction to the first run, especially at Red Lobster, just tells you how much consumers are looking for that brand to do something like that, because they would like to come more often. And so double-digit kind of comp increases just speak to the power of that kind of offer for a brand like Red Lobster. It's just an affirmation of that future visit intent number that Drew put up.

Unknown Analyst

Just a question, perhaps a follow-up on that, as we think about margins. Obviously, with the value, the focus, you've laid out kind of your EBIT margin expectation looking beyond the fiscal '14 anomaly of 10 to 30 basis points a year of expansion. Wondering if we could look more specifically, and I know we got to talk about it, I guess, last year at the Analyst Day kind of the difference between the EBIT margin and restaurant margin. If the EBITs going to expand 10 to 30 basis points per year, how do you think about the restaurant margin with the value focus over the next few years? You guys talk about on the slide kind of mid- to high-teens for the different brands, the way you define it. But should we expect or would it be acceptable for those brands to see those restaurant margins decline over the next few years as the value push becomes more significant? Unless you fully offset that with increased traffic, which would be nice, but is it realistic that we should assume the restaurant margins decline of -- the promotions designs that -- promotions your rolling out are margin neutral, so that is an incorrect statement and therefore, it is absolutely reasonable to predict that restaurant margin.

Clarence Otis

Well, I would say, first of all, the investment in affordability is not just the promotions, it's the core menu as well. Because a promotional investment alone, probably doesn't move the margin a whole lot at all, and so it's really a core menu. But it's also the core menu where we would expect the longer-term payoff in traffic, I mean, that's going to be a much bigger lever for a longer-term traffic.

Andrew H. Madsen

Yes. And I'd say in addition that we really are looking to make our brands more accessible for more guests on more occasions. And so over time, we expect more guests. Some of them, not all of them, but some of them, will have a lower check. And ultimately, we want the result to be a higher level of total sales and a higher level of operating profit, which is ultimately what we're managing the business for. And that's the way we're designing our promotions and that's really why you can't just take things off the core menu as they exist today and sell them at a lower price.

Unknown Analyst

So it's not unreasonable I guess, the way it's designed right now to think about that restaurant margin stabilizing at that level with an increased traffic, perhaps a little bit of a lower margin on the core menu, but you have that neutral.

Clarence Otis

I think that's right. I think what Val talked to is -- it's different by brand, I mean, for LongHorn the pressure on restaurant-level margin right now is going to beef inflation, in fact, we're choosing not to fully price for that.

John S. Glass - Morgan Stanley, Research Division

It's John Glass. This is actually a good sort of segue or a follow-up to that. Brinker made a pretty profound change in the business model a couple of years ago recognizing that the pricing environment has permanently shifted, value is a permanent piece. So they lowered their cost structure so they could survive in a lower-price environment the way we're all sort of doing so now. What have you done in that respect to lower, at the restaurant level, structurally your cost? Do you think there's another leg of structural cost reductions at the restaurant levels and production methodologies to service production methods? Can you talk about what the opportunities going forward and what you've already achieved maybe that we haven't noticed.

Clarence Otis

Yes. I would say a couple things. One is that we have a lot of focus on efficiency at the restaurant level anyway, and always have. And a lot of tools at the restaurant level, and we're not the only one in the industry. My sense of Brinker is that they're getting to industry standards, so all of us don't have the same opportunities they have, because we've been there and done that for a while. So that's part of it. But we still have focus there and we still have opportunity. On top of that, we spend a lot of time looking at the restaurant support infrastructure in trying to get that to be more and more productive. And Drew and the Brad laid out, it will be the materials that you take with you what that has looked like over the last 3 or 4 years. I forget the cumulative number on an annualized basis now, but it's north of $100 million. So all of that is part of what we always do. We think there's more to do. We think technology will enable some of that, so it is about digital engagement with our customers. And it's about better segmentation, all those things, but it's also about restaurant level productivity.

Andrew H. Madsen

And the biggest driver in what Brad showed yesterday on those 4 transformational initiatives and the incremental savings, and I forget exactly now, Brad, but it was maybe 30 -- but the incremental was maybe 30 million, 25 million to 30 million labor? 20 million to 25 million, so that was close. But it was really all about doing a better job of running the restaurants to the standard we've established today. And we don't think we were doing that as consistently as we needed to. Part of the reason was our organization structure and our focus, our spans of control, so it isn't so much about a new way of running the restaurants from a productivity standpoint but it is about getting the outliers, and there's a significant number of outliers to the standard we've already established. Now at the same time, we're going to have some of our senior-most operators thinking about what the future looks like from a service standpoint. Part of that is that restaurateur ownership and mentality and approach that I talked about yesterday. But part of it might also be, are there just better more effective ways to run the restaurant. So Dave George suggested, hinted at some examples that he's seen early days at Olive Garden to not only make the guest experience better more consistently, but also to make it more efficient as well.

Unknown Analyst

My question is a little bit of a follow-up to Jeff's, I guess. As far as the restaurant margins, if we look at where you're investing and where you're growing, if you just held it as an everything all else equal and your sort of replacing LongHorn growth for what was Olive Garden growth, are you going to possibly see a negative mix as far as the restaurant margin contribution from that new square footage growth, and is that accurately forecasted over the next couple of years in your model?

Clarence Otis

We are replacing it with a combination of LongHorn and the Specialty Restaurant Group. So both of those are growing, I guess, the Specialty Group actually, at its current size, is now growing at a much higher percentage than -- LongHorn has grown 10% roughly, Specialty grew at 17%, 18%. So it's the combination of the 2. And so the answer is no, we don't really see a change in mix from that. When you factor all of those in and you look at LongHorn plus Olive Garden in the past, now, more LongHorn plus the Specialty Group.

Andrew H. Madsen

Right. And with high confidence, it's the returns on that combination is still well above our cost of capital and hurdles there.

Clarence Otis

Yes. But the Specialty Group's $1 billion, growing 17%; LongHorn's $1.2 billion, growing 10%. The combination of those returns in Specialty Group are higher, again, about where Olive Garden is today.

Unknown Analyst

To that point, I guess, if you look at the Specialty Group, it's $1 billion, it's growing 17%, your multiple in the public market today is low-teens. Those characteristics deserve a higher multiple and are getting a higher multiple in the public market today. Originally, the Specialty Group seemed to be an incubator of brands, before when it was Smokey Bones, Bahama Breeze, and they were going to graduate into the big 3. It doesn't look like it's that not anymore, it's a little bit of a different profile and those brands are probably always going to sort of stay together and they're not going to be commercial national brands necessarily. What's the philosophy of still holding on to them as within this company rather than spinning them off and trying to get a higher valuation?

Clarence Otis

Yes. We think that there's tremendous synergy, a lot of it on the supply chain, a lot in other places. We think that we'll always look at various possibilities. And we've looked at how that might look as a stand-alone business, it would have a lot of vulnerabilities. We think there are tremendous synergies. We think the Specialty Group's growth profile is really helped by being part of Darden. I mean, I saw that chart that Gene showed, same-restaurant sales growth for the Specialty Group is extraordinarily strong last couple of years. But they're also some negative 20s back in 2009, 2010, the kind of numbers that would require you to reposition your brand if you stood alone. And we saw that repositioning, for example, at Morton's and Capital Grille. Because Morton's had to reposition itself that way, now has white space that it didn't have in that category. So being part of Darden is a huge advantage to the specialty brands.

Andrew H. Madsen

And we don't talk about it frequently. But there's also increasing synergy coming from the specialty brands to the large brands. So the corporate executive chef from Capital Grille recently moved to Olive Garden to help them elevate culinary innovation. Several of the dishes that I've showed yesterday, they were just examples, but they are representative of the culinary expertise and capability that we can bring to bear across all 8 brands in the category that can have -- in our portfolio, that can have a big competitive advantage in the category for us. So there are synergies both ways.

Clarence Otis

Yes. And I mean, even on the culinary side going the other direction, you met Red Lobster's Executive Chef, Chef LaDuke last night. He's going into Capital Grille to replace Jim, who came out of Capital Grille into Olive Garden. He wanted to show that pork chop last night.

Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division

Sara Senatore. I have a question about industry trends, because Clarence mentioned maybe some structural or secular headwinds that previously might have been thought of as cyclical, and I think one of those is probably fast casual. I think for a long time there was a view that fast casual is a value proposition, it was better maybe for the quality of ingredients, prices have come down a lot in the casual dining segment. So are you seeing anything that would suggest that maybe you're slowing the onslaught of fast casual or the share gains that seemed to be primarily coming from casual dining for that segment?

Clarence Otis

Yes. I would say the structural change we see is really in that income demo that Drew showed. I mean that's a group that we can't expect a return to anywhere near the frequency levels that they used to have. Now what's going on inside the group is varied. So I talked yesterday -- some of it is life stage, right, so a lot of it is Millennials who are just entering the workforce and like every other generation, when they just entered the workforce they don't have a lot to spend. And so full-service is not something that's affordable to them. There are other options, fast casual is one of those options, and then some of it is more than life stage, some of it is about these macroeconomic sort of pressures on income and wage growth. So it's really in that group were we're seeing a lot of structural change. It's a little different than what we thought we'd see. I think fast casual has done a good job of responding to a number of consumer needs but certainly, the needs of the Millennials is one of those when it comes to affordability, when it comes to customization, all those things. I do think the fast casual has its challenges going forward because there is a price point above which it really is stepping on top of a full-service experience that's much more multidimensional and much more attractive to people. At the same time, they've got to deal with beef inflation because a lot of them are beef-oriented organizations at double digit. And so they've got a margin squeeze or else you're sitting there thinking, I could be at Chili's having a drink and the only incremental cost to this is the drink. And so I think there is that, they've got to deal with that cycle. I think it's the food cost cycle as much as anything else that they got to deal with.

Andrew H. Madsen

Thank you.

Clarence Otis

I think that's it.

Matthew Stroud

All right. Drew, Clarence, thank you very much.

Clarence Otis

Thank you. We do appreciate all of you joining us for the last couple of days. We do believe, as we said, there are some very important consumer and competitive realities. Out there these realities, as we've said, amount to a new era here at Darden, there are some important changes that we're making to make sure that we can take advantage of those realities to do a couple things. I mean more consistently win in the marketplace today and then win on a sustained basis in the future or tomorrow. And we talked about those changes, they involve reshaping our portfolio to increase the contribution of the Specialty Restaurant Group. They involve reshaping our organization to put dedicated resources on each of those time horizons today and tomorrow. They involve investing in the efforts of both of those groups through tempering average check growth. We think that's important to support traffic growth, reducing unit growth, again, at Olive Garden so we can get the kind of focus we need there on regaining momentum and investing, as we said, in transitioning to the new health care landscape in a way that really maintains engagement among our employees. And then finally, investing and retaining our people, who are the best in the business and the key to any success that we're going to have in any time horizon. We think that we're well positioned as an organization, given the strength of our brands, given the collective experience and expertise that we have, given the operating cash flows we have, to make the changes that we need to make. So again, we appreciate your attention, and Matthew has some instructions.

Matthew Stroud

Yes. I want to reiterate my thanks for all you to coming to Orlando today. We appreciate your effort to get here. And we appreciate those of you that listened in on the webcast, as well. So thank you very much. Obviously, if you have more questions, please reach back to us as you get back to your offices. We wish you a safe journey. To those that are going on to other destinations today, those who were leaving on the 12:15 bus, it will be right out here, leaving promptly at 12:15. We all have box lunches for you to go right by the departure at the bus at the convention center entrance, right over there. Those of you that are on the 1:15 bus with us and you want to have the buffet lunch, that will be in the room next door. And others of you that aren't going to join us, again, thank you very much and pleasant journeys to where you're headed.

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Source: Darden Restaurants, Inc. - Analyst/Investor Day
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