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Darden Restaurants, Inc. (DRI)
February 25, 2013 2:00 pm ET
Matthew Stroud - Vice President of Investor Relations
Clarence Otis - Executive Chairman, Chief Executive Officer and Chairman of Executive Committee
Andrew H. Madsen - President, Chief Operating Officer and Director
C. Bradford Richmond - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
David E. Tarantino - Robert W. Baird & Co. Incorporated, Research Division
Nicole Miller Regan - Piper Jaffray Companies, Research Division
John S. Glass - Morgan Stanley, Research Division
Sara H. Senatore - Sanford C. Bernstein & Co., LLC., Research Division
Joseph T. Buckley - BofA Merrill Lynch, Research Division
Michael Kelter - Goldman Sachs Group Inc., 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
Matthew J. DiFrisco - Lazard Capital Markets LLC, Research Division
John W. Ivankoe - JP Morgan Chase & Co, Research Division
Keith Siegner - Crédit Suisse AG, Research Division
Robert M. Derrington - Northcoast Research
Herbert Bruce Thomson - Thompson, Siegel & Walmsley LLC
Mitchell J. Speiser - The Buckingham Research Group Incorporated
Paul Westra - Cowen and Company, LLC, Research Division
Previous Statements by DRI
» Darden Restaurants Management Discusses Q2 2013 Results - Earnings Call Transcript
» Darden Restaurants Management Discusses Q1 2013 Results - Earnings Call Transcript
» Darden Restaurants Management Discusses Q4 2012 Results - Earnings Call Transcript
And before I go any further, let me cover some logistics. As a courtesy, we ask that you please turn off your mobile devices or put them on silent. There will be one question-and-answer session this afternoon. Because we are webcasting this conference, we ask that all questions be directed to the portable microphones for the benefit of those listening on the Internet. And if you are listening on the webcast and desire to ask a question, you can certainly email me at firstname.lastname@example.org with your question, and we'll submit the question to the team. We will post the presentations slides on our website tomorrow afternoon. And for those of you in the room, we will give you a memory stick loaded with the conference presentations when you leave tomorrow.
So our agenda today will feature Clarence Otis, Darden's Chairman and Chief Executive Officer; followed by Drew Madsen, Darden's President and Chief Operating Officer. After which, we will have a 25-minute break. We'll resume with Chris Chang, who's Senior Vice President of Technology Strategy at Darden; followed by Brad Richmond, Darden's Chief Financial Officer. And after which, there'll be a Q&A session.
And then we anticipate adjourning the meeting today, shortly before 6:00 p.m., at 6:15 p.m. for those of you here in the room that are going to go to dinner with us, we'll have buses that are headed over to the restaurants. The buses will leave from the convention center entrance. We'll talk about that a little bit later at the end of the day.
So as we begin, let me 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 the information contained in our 10-K, 10-Q and 8-K reports and their amendments and exhibits, which have been filed with the Securities and Exchange Commission. Additionally, financial and statistical information in this presentation required by Regulation G can be found under the heading Investor Relations on our website at www.darden.com.
Now it's my pleasure to introduce Clarence Otis, Darden's Chairman and CEO.
Thank you, Matthew. And I would like to join Malcolm -- Matthew, rather, in welcoming and saying good afternoon to everyone that's in the room today, including Malcolm, as well as those who are joining us on the web.
This year, our fiscal 2013 certainly has been a tumultuous one for us as a company, with sales and earnings that are well below what we expected at the beginning of the year. And so from our perspective, this is a very timely meeting. And it's timely because it gives us an opportunity to talk with you in some detail about a couple of things, our business situation, our current business situation; and secondly, what we believe we need to do and will do going forward. An important part of the discussion will be our view of key consumer and competitive dynamics because these dynamics, which we believe add up to a new era, are relevant to both where we are and where we need to be.
We'll also spend a considerable amount of our time together talking about how the strategic and tactical choices we're making will affect our near-term business model and our near-term sales and earnings growth expectations. And in the end, what we hope is that one thing comes through loud and clear. And that is our entire leadership team is well aware that in order to regain operating momentum and set ourselves up for sustained future success, some important changes are necessary. And as we look forward, our overarching goal is to deliver competitively superior value. And as we think about what it'll take to do that, one advantage we have is that we're an industry leader, and we have all the resources that come with industry leadership, including strong brands, considerable collective expertise and experience, an effective and efficient operating support platform, and significant and durable cash flows.
Now that said, it is clear to us that given our current business situation, we are indeed in a new era; that, that is what the consumer and competitive dynamics we're seeing right now amount to. And these new realities mean that in order to deliver the kind of value we're interested in and capable of, we have to change.
To appropriately frame the conversation about what needs to change, I'll first review our strategic history, and I'll do that because some of the things we've done strategically to earn industry leadership speak to the kinds of things we need to do going forward to maintain industry leadership. Then I'll review the current consumer competitive dynamics that we describe as a new era, and that are the catalysts for important changes at Darden, before concluding with an overview of the changes we're making. And following me, Drew Madsen, our Chief Operating Officer; and Brad Richmond, our Chief Financial Officer, are going to provide you with more detail.
Now as many of you know, Darden's leadership for the casual dining industry traced us to the industry's very start. With the creation of Red Lobster, we were one of many who helped pioneer the industry. But more importantly, we were one of a select few of those early pioneers who went on to help pioneer the creation of a national casual dining brand. And we were able to do that for 3 reasons. First, we developed strong restaurant-level operations starting with talented unit managers who were supported by people management, traffic forecasting and cost management tools that grew increasingly robust as Red Lobster increased its unit footprint.
Second, we paired strong restaurant-level operations with strong brand management. And we believe that what's most important is that our brand management approach was rooted in disciplined consumer insight, which enabled us to evolve over time key elements of our brand and guest experience including menu, advertising, service style, look and feel of the restaurants, and then to support that evolving brand and guest experience with effective promotions and in-restaurant merchandising.
And third, we were able to create an enduring national casual dining brand by complementing strong restaurant operations, strong brand management with effective and efficient support. From Red Lobster's very beginning, those leading our company understood that multi-unit success across any reasonable amount of geography would depend on great support. And so we've consistently invested in key areas of support, including our supply chain, our information technology infrastructure and our financial management and support systems. And we did so at levels that provided significant competitive advantage.
Now beyond pioneering national casual dining, our strategic history includes pioneering multi-brand casual dining. And that was the catalyst for significant value creation. When it came to delivering meaningful value-creating growth, being multi-brand was important because in casual dining, a single brand has relatively limited -- relatively few units ahead of it compared to quick service, compared to some other retail categories before it reaches national penetration. And notably an important reason we were able to achieve multi-brand success is because we put in place leadership structures and leadership teams that enabled us to successfully manage the added scale and scope that came with being multi-brand.
And looking back, it's clear to us that having 2 national brands, and more recently, a growing portfolio of other brands is not only why we achieved financial and operating scale that's the cornerstone of our industry leadership position and why we have the tremendous advantages that come with industry leadership, it's also why we've delivered competitively superior long-term shareholder value and done that despite a few more bumps and bruises along the way than we would have liked.
As we look forward, the most important thing about those bumps and bruises is how we responded to them. When faced with significant challenges or just as importantly, with significant opportunities, we've consistently taken decisive action. In the 1970s and '80s, for example, we responded to this prospect of dwindling shrimp and fish supplies and the threat that this posed to Red Lobster's ability to continue offering everyday price accessibility over the long term by helping pioneer shrimp and fish aquaculture.
In the 1980s, we responded to the compelling growth opportunity we saw in Olive Garden by disposing of all the other brands we had at the time. And those included brands that Brad Richmond, our Chief Financial Officer; and Gene Lee, President of our Specialty Restaurant Group; Dave Lothrop, who's our Comptroller, all started with. We did that so we could give Olive Garden the focus it deserved given the tremendous white space that we saw in casual dining Italian.
In the '90s, we responded to the overbuilding that we've done at Red Lobster in the face of overbuilding across casual dining by aggressively closing restaurants that were cash flow negative. And then in 2007, we responded to the increasing evidence that Smokey Bones had limited, limited national appeal, a brand that I'd led earlier in its history by disposing of that brand and acquiring LongHorn Steakhouse and The Capital Grille. And with these actions, we created a brand portfolio with a much stronger growth profile, and that's because LongHorn was well positioned for growth in the steak segment of casual dining, a segment that's much broader, much more attractive compared to the part of the industry where Smokey Bones was positioned. And because The Capital Grille provided us with the critical mass we needed to form a Specialty Restaurant Group that gives us exposure to strategically important higher end of full-service dining. And then finally, in 2011, 2012, we acquired Eddie V's and Yard House, which enhance both the sales and earnings growth contribution we can expect from our Specialty Restaurant Group.
There's one last aspect of our strategic history that's worth noting. And it's worth noting because it is the foundation for all of our other leadership attributes. And that is that throughout our history, we have been consistently willing and able to invest for the future. In Red Lobster's earliest days, the source of financial investment for the future was General Mills, which acquired the brand early on. But for some time now, the source of such investment has been our own considerable operating cash flow. And importantly, we've invested for the future financially via both capital spending, and based on various expense and margin choices that we've made over time, through our P&L.
Now beyond the financial investments we've made throughout our history, we've also consistently invested for the future by committing some of our organizational capacity to efforts focused on sustained success. And this is something that's never been easy. And it's never been easy because in a business like ours, which has such intense day-to-day retail intensity, organizational capacity has always been a scarce and valuable resource.
Now taking this look back over our strategic history and the things that we did to build industry leadership, because as we look forward, our strategic history helps us sort through what must change and what should stay the same. And as we work to strike the right balance between a level of continuity and change required to maintain leadership in our industry, from a continuity perspective, we're committed as we move forward to remaining multi-brand, that is we believe the best path for creating sustained long-term value. We also believe that the portfolio we have today is the right portfolio as we go forward. It's a portfolio that without any additional brands can drive sustained market share growth for the next decade and generate competitively superior returns. And it can do that provided we make the changes that are needed to manage what is admittedly a new level of scale and scope, and that are needed to deliver the guest experiences required to take advantage of the consumer and competitive dynamics that are the new era.
Before talking about the changes that we're making, let me quickly review the dynamics that are driving much of the need for change. From a consumer perspective, a key dynamic is that many guests are financially stretched. In some cases this is a product of life stage, and they're stretched because they're young and just entering the workplace, or on the other end of the spectrum, they're recently retired and for that reason, much more budget conscious. In other cases, guests are financially stretched because of macroeconomic factors having nothing to do with life stage that are weighing on employment and/or income growth. Whatever the reason, the result is that these guests are more focused than ever on affordability. At the same time, there are many other guests who remain financially comfortable, and they are demanding better quality offers. And importantly, the taste and preferences of the financially comfortable do influence the taste and preferences of the financially stretched. And so what we're seeing is that financially stretched guests are looking for more in terms of the quality of experience for less.
Another dynamic on the consumer front is that as we all know, there have been other significant demographic changes generationally, and racially and ethnically. So there are more millennial guests than ever, and there are more multicultural guests than ever. And these guests are important not only because of their numbers, they're also important beyond the potential visits that they represent directly because their tastes and preferences are shaping to a meaningful extent the tastes and preferences of all guests.
Competitively, what's taking place is that, as Drew will discuss in a moment, there has been steady erosion in traffic within casual dining, and this has led to a much more intense market share battle within the segment. And we're also seeing elevated competition within casual dining because for some time now, some brands have been successfully replicating many of the things that have helped Darden win in the past, things like well-conceived and well-executed limited time promotion, taking steps to increase support platform productivity and in-restaurant efficiency, steps that are helping some of them fund more aggressive price discounting.
And we're also seeing other restaurant segments be more competitive with casual dining for certain occasions. And this is being fueled by increased innovation within traditional quick service, the continued emergence of fast casual, and more and better prepared food offerings from quick service retail, which is primarily convenience stores.
In response to these new consumer and competitive realities, we've made some changes, and more change is on the horizon. Most visibly, we've reshaped our brand portfolio. We've done that by adding to our Specialty Restaurant Group, which provides us with greater exposure to new guests and new occasions and, as I noted earlier, also gives the group the scale and scope to make a meaningful contribution to our sales and earnings growth going forward.
We also made several changes this year to reshape our organization so that we're better able to respond today and tomorrow to the new consumer and competitive realities. Among other things, a new reality is that there is now much greater velocity of change from day to day, from week to week in what consumers need and want, and what competitors offer and how they offer it. And so to increase our tactical effectiveness and agility, this year, we established dedicated teams, primarily within our 3 large casual dining brands, that focus solely on winning today.