達登餐飲 (DRI) 2018 Q3 法說會逐字稿

Welcome to Darden Fiscal Year 2018 Third Quarter Earnings Call.

(Operator Instructions) This conference is being recorded.

If you have any objections, please disconnect at this time.

I will now turn the call over to Mr. Kevin Kalicak.

You may begin.

Thank you, Fel.

Good morning, everyone, and thank you for participating on today's call.

Joining me on the call today are Gene Lee, Darden's CEO; and Rick Cardenas, CFO.

As a reminder, comments made during this call will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

Those risks are described in the company's press release, which was distributed this morning, and in its filings with the Securities and Exchange Commission.

We are simultaneously broadcasting a presentation during this call, which is posted on the Investor Relations section of our website at www.darden.com.

Today's discussion and presentation includes certain non-GAAP measurements, and reconciliations of these measurements are included in the presentation.

We plan to release fiscal 2018 fourth quarter earnings on June 21 before the market opens, followed by a conference call.

This morning, Gene will share some brief remarks about our quarterly performance and business highlights, and Rick will provide an update on our financial results and outlook for the year.

During today's call and for the remainder of the fiscal year, all references to Darden's same-restaurant sales will only include Darden's legacy brands since Cheddar's Scratch Kitchen restaurants are new to Darden.

Now I'll turn the call over to Gene.

Thanks, Kevin.

Good morning, everyone.

As you see from our press release this morning, we had another good quarter.

Total sales from continuing operations were $2.13 billion, an increase of 13.3%.

Same-restaurant sales grew 2% in spite of the negative weather impact, which Rick will address in his remarks.

And adjusted diluted net earnings per share were $1.71, an increase of 29.5% from last year.

I'm proud of the way our teams have executed against our strategy we rolled out 3 years ago.

Our operating teams remain focused on food, service and atmosphere.

And at the Darden level, we continue to concentrate on our 4 competitive advantages: leveraging our significant scale to create cost advantages; using an extensive data and insights to improve operating fundamentals and to better understand our guests and communicate with them more effectively; ensuring our brands systematically go through our rigorous strategic planning process; and cultivating our results-oriented people culture to enable growth.

Olive Garden had another solid quarter.

In fact, December was the highest total sales month in the history of the brand.

Overall same-restaurant sales grew 2.2%, the 14th consecutive quarter of growth, outperforming the industry benchmarks, excluding Darden, by 310 basis points.

Same-restaurant guest counts outperformed the industry benchmarks, excluding Darden, by 440 basis points.

During the quarter, Dan Kiernan was appointed President of Olive Garden.

I'm excited to have an outstanding operator like Dan leading the team.

His passion for our team members and guests, coupled with his deep understanding of the brand, makes him the perfect leader for Olive Garden.

Olive Garden continues to consistently deliver strong results, which I attribute to the brand's strategic focus on driving frequency among our most loyal guests.

This begins with flawless execution of the guest experience, and we will continue to focus on simplification to improve execution of our standards.

We were also able to drive more frequency by introducing crave-able menu items that create excitement among our core guests.

We introduced a new appetizer, Loaded Pasta Chips, and a new lunch entrée, the Meatball Pizza Bowl, during the quarter, and both were supported with successful integrated marketing campaigns that drove overwhelming PR buzz.

Additionally, our focus on off-premise sales is doing more than just meeting our guest need for convenience.

It's also enabling us to capture dining experiences that guests would not have previously considered for us.

During the quarter, off-premise sales grew 13% and were approximately 15% of total sales for the quarter.

Building loyalty also means that we need to continue to deliver meaningful value to our guests every day.

During the quarter, we launched a new advertising campaign to build awareness for everyday value, highlighting our Lunch Duos starting at $6.99, early dinner duo starting at $8.99 and create your own pasta starting at $9.99.

The work we're doing is resonating, as industry data shows that Olive Garden has seen the largest improvement in our value ratings versus key competitors over the last year.

Our focus on everyday value and simplification has also allowed us to reduce the number of promotional offers we'll run this year.

As a result, during the fourth quarter, we will not offer our -- one of our most popular promotions, Buy One Take One, that ran during the fourth quarter last year.

Buy One Take One is a strong promotional platform for us, and to assure its long-term effectiveness, we do not want to risk overexposure.

However, not running this promotion may have a short-term impact on our traffic in Q4.

I'm encouraged by Olive Garden's momentum, and will remain focused on making decisions that ensure our guests win.

LongHorn Steakhouse's same-restaurant sales grew 2%, the 20th consecutive quarter of growth, outperforming the industry benchmarks, excluding Darden, by 290 basis points.

Same-restaurant guest counts outperformed the industry benchmarks, excluding Darden, by 420 basis points.

The team at LongHorn continues to make solid progress against their long-term strategy of investing in the quality of the guest experience, simplifying operations to drive execution and leveraging LongHorn's unique culture to increase team member engagement.

We think about investing in the guest experience across all 3 guest touch points: food, service and atmosphere.

While we've been making investments across all 3 areas, our primary focus has been on increasing the quality of our food.

In fact, we've increased the size or improved the cut of nearly every one of our steaks over the last 2 years.

Our focus on simplification, like reducing the number of new items needed to support our promotional offers, is driving more consistency, leading to higher levels of execution inside our restaurants.

That's evidenced by the fact that LongHorn ranks the top of its competitive set on food quality scores.

And while LongHorn's team member management retention levels lead the industry, we remain focused on team member engagement.

During the quarter, we kicked off our third annual Steak Masters competition.

This program provides intense training for our culinary team members, while creating excitement and increasing engagement with our entire team in each restaurant.

And finally, our new LongHorn openings continue to exceed our expectations, and we're building a strong pipeline for future growth.

Now I'll update you on Cheddar's Scratch Kitchen and our progress with the integration.

Same-restaurant sales declined 2.2%, and that decline was driven by the 52 restaurants in the 2 franchise systems that have been acquired over the last 14 months.

Same-restaurant sales at the 91 legacy Cheddar's restaurants were essentially flat.

Operation's leadership is focused on strengthening the restaurant management teams and working to improve operational excellence with a concentration on these previously franchised locations.

Cheddar's is a strong brand that serves more than 6,000 guests per week.

These high guest counts create some unique operational challenge -- challenges that we will address, primarily through simplification.

This will take time as we manage through the amount of change taking place across the system.

Turning to the integration.

It's been less than a year since we acquired Cheddar's, and I'm pleased with everything the integration team has accomplished in that amount of time.

We are now in the final stages of our systems integration.

All restaurants are utilizing our full distribution network, and we successfully transitioned Cheddar's onto the Darden payroll platform in December.

The last major milestone is the rollout of our proprietary POS system, which we expect to complete by the end of the fiscal year.

Our restaurant managers and teams are still familiarizing themselves with our systems and processes, and it will take time before they are fully comfortable using them.

But we're pleased with the insights and feedback we're receiving from the restaurants that are fully integrated into the Darden infrastructure.

As I've said previously, this is a complicated process.

We know we're throwing a lot at the restaurant teams, and we know it's distracting.

But we're confident the long-term benefit will be worth the short-term impact this is having on the business.

Now let me provide a quick update on the restaurant we just opened in Washington, D.C. called the Capital Burger.

This restaurant is a brand extension of the Capital Grille in D.C., which is a very busy restaurant with limited capacity.

The Capital Burger is a way for more of our guests to enjoy a bar-centric Capital Grille with a limited menu featuring our signature burgers.

The Capital Burger will -- leverages The Capital Grille's steak and wine expertise as well as their exceptional service to create an extraordinary burger experience.

I'm excited to see how our guests in that market will respond.

Finally, I want to congratulate all the restaurant management teams at Olive Garden and The Capital Grille for winning the People Report's 2018 Best Practices Award.

Being recognized as having the best workplace culture in casual dining and fine dining is a tremendous honor.

We know what truly sets us apart is our people, and I'm proud of the work each one of our 8 brands does to ensure our results-oriented culture remains a competitive advantage for Darden.

Now I'll turn it over to Rick.

Thank you, Gene, and good morning, everyone.

We had another strong quarter with total sales growth of 13.3%, driven by 11.3% growth from the addition of 154 Cheddar's and 34 other net new restaurants, and same-restaurant sales growth of 2%.

Adverse winter weather negatively impacted same-restaurant sales this quarter by 70 basis points.

The negative impact was experienced in January and February.

Weather for the quarter was in line with the average over the last 5 years, however, we were wrapping on unseasonably mild winter weather in the third quarter last year.

Second quarter adjusted diluted net earnings per share from continuing operations were $1.71, an increase of 29.5% from last year's earnings per share.

We paid $78 million in dividends and repurchased 1 -- $19 million in shares, returning approximately $97 million of capital to our shareholders this quarter and over $440 million fiscal year-to-date.

Additionally, during the quarter, we further strengthened our financial position by issuing $300 million of new 30-year debt at 4.55%, replacing $311 million of our outstanding notes tendered that had a higher interest coupon rate of 6.8% and 6.0%.

We funded the approximately $100 million of premium and fees associated with the tender with cash on hand and commercial paper.

Looking at the margin analysis, I'm going to focus on food and beverage, restaurant labor, G&A and tax, as variances for all other lines on the P&L were relatively small on a year-over-year basis.

Food and beverage expense was 50 basis points favorable to last year, as pricing leverage, cost savings and synergies more than offset commodities inflation of below 1%.

Restaurant labor was 130 basis points unfavorable last year, due to several factors.

First, we continued to see elevated wage inflation of approximately 4% that was only partially offset by the favorability we picked up from pricing leverage and productivity improvements.

Second, we are still experiencing negative brand mix from Cheddar's.

Next, there were headwinds related to mark-to-market expenses for general manager and managing partner equity awards, which I'll explain in further detail in a moment.

Last, in January, we announced a $20 million investment in our workforce this fiscal year, and we incurred approximately $9 million of that amount this quarter, most of which impacted the restaurant labor line.

General and administrative expense was elevated this quarter, driven by mark-to-market expenses related to significant appreciation in the equity markets this quarter.

The mark-to-market of our deferred compensation liability and other equity-based programs increased expenses primarily in G&A, consequently reducing our EBIT.

However, due to the way we hedged this expense to reduce the volatility of earnings after tax, it is almost entirely offset in the tax line.

In the quarterly presentation that is posted on our website, we showed the third quarter details of this hedge.

Market-based compensation increased general and administrative expense by $5.5 million.

Including the impact in restaurant labor I previously mentioned, total mark-to-market expenses reduced EBIT by $7 million and EBIT margin by 30 basis points this quarter.

Our hedge reduced income tax expense by approximately $6 million, resulting in a net earnings after tax impact of $900,000.

In quarters in which the overall equity market and/or our stock price declines, the inverse relationship would be true.

EBIT would have a positive benefit, while the tax line would be unfavorable.

But overall, earnings after tax should be relatively flat.

Turning to income tax expense.

We had an abnormally low performance-adjusted effective tax rate of 4.4% this quarter due to several factors.

First, the application of the new lower tax rate in Q1 and Q2 earnings reduced our rate by 7 percentage points in the quarter.

Next, the resolution of other tax matters reduced our quarterly rate by 4 percentage points.

Both of these favorable impacts were contemplated in the updated guidance we provided in January.

Finally, the impact from the deferred compensation hedge, I just explained, lowered the tax rate by approximately 4 percentage points.

This was not contemplated in our January guidance.

After adjusting for these 3 factors, our normalized tax rate for the quarter would've been approximately 19%.

Now to our segment performance.

Olive Garden, LongHorn and the Fine Dining segment all grew sales in the quarter, driven by positive same-restaurant sales and net new restaurants.

Segment profit margin increased in each of these segments even after the incremental workforce investments by leveraging the same-restaurant sales growth and managing cost effectively.

Sales grew 71.4% at the Other Business segment, primarily due to the addition of Cheddar's and new restaurant growth at the other brands as well as same-restaurant sales growth at Yard House and Bahama Breeze.

Similar to last year, segment profit margin was 250 basis points lower than last year -- last quarter, I'm sorry.

Similar to last quarter, segment profit margin was 250 points lower than last year due to the brand mix of impacting -- of adding Cheddar's and for moving consumer packaged goods out of this segment, primarily to Olive Garden.

Additionally, with this morning's announcement, we increased our fiscal 2018 adjusted earnings per share outlook to between $4.75 and $4.80 from the previous $4.70 to $4.78.

This assumes approximately 126 million average shares outstanding for the year and is driven by same-restaurant sales growth of approximately 2%; new restaurant growth of approximately 40, not including the 11 Cheddar's franchise restaurants we acquired in Q2; and total sales growth of approximately 13%.

We also updated our effective tax rate to be between 16% and 16.5%, down from approximately 18%.

Finally, we brought our annual CapEx guide to the bottom end of the previous range at approximately $400 million.

Looking ahead, we wanted to provide some preliminary guidance for fiscal 2019.

We currently anticipate total capital spending of between $425 million and $475 million, of which $225 million to $260 million is related to growth new restaurant openings of between 45 and 50 and $200 million to $215 million is related to ongoing restaurant maintenance, additional Olive Garden remodels, technology and other spending.

In addition to the CapEx and new unit guidance we typically give during our third quarter announcement, we are providing a few additional items for fiscal 2019 given tax reform and other unique modeling challenges.

First, we anticipate our annual effective tax rate to range between 12% and 13%.

We also expect to make an additional $15 million of investments related to the savings from the Tax Act.

This is in addition to the $200 million of workforce investments we are making -- $20 million -- to the $20 million of additional workforce investments we are making in fiscal 2018 for a total annual run rate of $35 million in P&L investments.

Finally, we expect diluted average common shares outstanding for fiscal 2019 to be approximately 125 million.

And with that, we'll take your questions.

(Operator Instructions) Our first question comes from David Tarantino from Baird.

Gene, I just wanted to talk -- ask about your views on the current environment within casual dining and how you're viewing the underlying momentum in the business in light of sort of factoring out some of the weather issues you noted.

And then more specifically, on Q4, you do have a what looks like a tougher comparison, especially for Olive Garden, and you mentioned that you're not going to repeat the Buy One Take One promotion.

So just wondering about your thoughts on how we should expect the fourth quarter to play out and your ability to sustain positive momentum despite the tough comparison and eliminating that promotion.

As far as the -- let's start with the industry.

We are seeing a little bit of momentum there, a little bit of uptick in traffic, but the real change that we're seeing as we analyze the benchmarks is that the check average appears to be growing and it's picked up some steam.

And as we look at that, we're trying to analyze whether that is the industry taking more pricing, is it a pull back on some discounting, is it a change in promotional strategy.

At this point, we really don't have a good feel, but we do see that check average is up over 3%.

It's been that way for almost the last 90 days.

So that's a significant move up.

And so we've seen a tick up in traffic, but not at the same rate as overall sales.

As far as the fourth quarter, I mean, we gave you -- we gave our guidance.

We think that we're comfortable in that range.

We do have some tough laps, but we think that we've made -- we're making good -- good long-term decisions.

We think there's value in the menu.

We think we're operating and executing at a high level.

So I think we're -- obviously, we're very comfortable with the guidance that we just put forth.

You did make the comment -- introduced the fourth quarter weather issue.

And we have -- we've been in this quarter and every week, we've had a major snow impact for at least 1 day.

And I will add -- and I think I added this during the hurricanes is that weather impacts today are greater than they were 5 or 10 years ago because of the media hype around the situation.

And so it's kind of tough for us to -- and this will be the only comment I'll make about fourth quarter, it's been tough for us to get any type of read around fourth quarter because of the weather impacts in March.

Just a follow-up, Gene, on the elimination of the Buy One Take One promotion, are you planning to run something else in place of that?

Or is it a situation where you're not going to have a major promotion like that in the fourth quarter?

And any way to gauge what the level of impact from that factor alone would be on...

No, it's -- I think -- we believe that we've -- we're actually -- we're going to run some promotion.

I mean, we have taken the promotional calendar.

We've gone from 9 to 6 promotions this year.

We think that's a huge operational benefit.

So our promotional timing is not lining up exactly with last year.

We do have a great promotion that's about to start in 2 weeks that we think that will be really strong.

As we change the promotional cadence, we also change our media cadence, which makes our ability to analyze our business week-to-week a little bit more difficult.

But we're confident that we've got a good promotion for the back half of the fourth quarter.

And we think we've got the right media plan.

And so that's all been incorporated in the guidance we gave you.

Our next question comes from Brett Levy from Deutsche Bank.

Is there a number where you look at your same-store sales [GAAP] and outperformance where you start to get concerned?

If you look at what we've done -- if we look at what we've seen for Olive Garden, it seems to be back to the beginning of your run, about 10 quarters ago.

And I just -- when you think about labor, what can you do aside from just trying to drive greater retention?

What can you do to offset the creep, either incremental training, incremental technology to try to help us get a better sense of what the leverage-ability is on that line?

As far as the [GAAP] would go, I would point you back to our long-term framework and say that we're focused on trying to deliver between 1% and 3% same-restaurant sales in a consistent basis.

And I know there's a lot of attention and a lot of concern about our GAAP . I would point -- I'd go back and look at a 2-year stack, and we didn't lose that much momentum on a 2-year stack.

Also, we lost a lot less momentum on the guest count.

We appear to have a lot less price in the menu -- in our menu compared to our competitors, which we think is a really great thing, and it will play out over the long term.

As far as labor goes, I think the key to labor is simplification.

And we'll continue to simplify our menu, simplify our processes.

And we've done a good job.

I thought the graph that Rick showed in his prepared remarks shows that we are getting some productivity improvement to offset some of the wage rate increase.

It's a line that I don't think that we're going to leverage here in the near term, but we're trying to keep it as flat as we possibly can.

When I look at our businesses, I'm not so sure that there's a piece of equipment out there that's going to help us improve or any technology that's going to help us improve our efficiencies back there.

My belief and my belief will always be that it starts with your menu, and it starts with all your processes and procedures as your products come in your back door.

And that's what we're going to focus on.

Our next question comes from Sara Senatore from Bernstein.

This is actually Anna Papp representing Sara.

So I'm surprised at how modest food inflation has been across the industry despite what appears to be more significant increases in commodity prices.

Can you remind us about how contracting plays into this?

And how we should think about the type of lag there?

It might be between the commodity markets and your inputs.

Because it seems like the industry is taking check up aggressively as you say.

And typically, we'd expect that to happen if costs were up more.

Yes, Anna.

Thanks for the question.

On the commodity front, we contract at different times a year.

We've got a great supply chain team that decides when the right time is to buy, looking at forward rates, et cetera.

We haven't seen a lot of commodity inflation.

As we've said, we were slightly below 1% in the quarter.

What I would say is more of the pricing you're seeing from some competitors is probably to cover the labor, not necessarily the commodities.

What we also know is that as demand has picked up, supply has picked up.

So it has helped keep the commodities from inflating dramatically.

And we also, in our presentation, show that we've got inflation expected in the back -- in the last quarter, in the low single digits.

We've got an appendix back there.

The one place we are seeing a little bit of inflation in food is on the distribution side.

It's getting a little bit tougher and tougher to find people to drive trucks.

So we're seeing a little bit of distribution expense, but that's driven by labor, not necessarily the food cost.

Our next question comes from Brian Bittner from Oppenheimer.

Rick, I appreciate the initial look into 2019 on several line items.

You highlighted the incremental investments of $15 million from the tax savings redeployment.

But as we put all the pieces together for '19, you didn't say anything regarding the Cheddar's synergies.

What's the year-over-year benefit now expected, related to that for '19?

And I have a follow-up.

Yes, Brian, thanks for the question.

In relating -- in relation to Cheddar's synergies next year, what we said last quarter was we expect to be close to the run rate by the fourth quarter of this year.

And we expect to have $22 million to $27 million of total synergies.

So doing the math, you're going to be a little below $15 million next year in incremental synergies.

But we also now expect to be closer to the high end of our synergy range of the $22 million to $27 million.

Hopefully, that answers your question.

Yes.

And just on the labor line.

When you back out the investments in the mark-to-market stuff, the deleverage was close to like 90 basis points.

That's more deleverage than we've seen recently on that line.

Is there something changing there?

Is inflation picking up relative to past quarters?

Or anything else you could point to that's kind of changing the trend in that labor line?

No, Brian.

Nothing is changing in the inflation.

We're still seeing it in the 4% to 5% wage inflation.

And we did have a little bit of Cheddar's mix in there, more than we might have seen in the past, as we bring in more franchisees or we brought in the franchisees in Q2.

But other than that, there is really nothing dramatically different.

We did have a little bit lower check growth and pricing in the quarter than we've had in the past.

Our next question comes from Will Slabaugh from Stephens.

A question on Olive Garden, did your more recent advertising campaigns around $8.99 dinners impact the mix of Cucina Mia!

at all or even the rate of what you would call overall value mix?

And if so, just kind of curious on your thoughts if you're okay with that and if that's kind of the direction you want to go here.

Yes.

I don't think it's had a whole lot of impact on Cucina Mia!

It's only -- we're only offering it from 3 to 5. I mean, it's -- we see that Early Dinner Duos is just an opportunity to attract a clientele that is looking for value during -- really the only time when Olive Garden does -- has some capacity.

So we see it as, obviously, there's some people trading in that were coming in at 5:30, they're now coming in at 5 -- 4:45.

But we think this is -- over the next couple of years, we think this is a real growth opportunity for us just to build this value visit for people who aren't really time-sensitive around when they're eating.

And we hope that over time, we'll just backfill anybody that we shift down into an earlier time zone.

So we think this is a great way to offer value to our consumers in a period of time when our restaurants aren't very full.

Got it.

And just a quick clarification on the guidance, if I could.

It's on the tax rate, just wanted to clarify what you're implying for the fourth quarter.

It looks like it could be kind of closer to 20%, and I'm curious what the reason would be if it did climb that high.

Well, if you heard the prepared remarks, we talked about what our normalized rate would have been in the third quarter, it was about 19%.

So if you're doing the math to get to the 16% to 16.5% and you're getting to around 20%, it's not really that different from what our rate would have been in Q3.

The next question comes from John Glass from Morgan Stanley.

So I wanted to just go back to the change in the promotional cadence at Olive Garden.

I guess, one, specifically if you can talk about what you think that promotion or change in the promotion specifically might do to impact sales when you called that out.

And maybe just more broadly, as you move from 9 to 6 promotions, does that create -- is that the right number now, what we should think about 2019?

And does that change -- affect, for example, the first half of 2019 as you think about lapping or uneven laps around promotional activity?

Yes.

I'll answer the last part of the question first.

I mean, we've -- it will not change the first part of next year.

We will have completely lapped this.

We've been working this all year.

We haven't talked too much about it, primarily for competitive reasons.

We did want to call it out this time because Buy One Take One is one of our most successful promotions, and we're not sure how we're going to be able to really -- how well we're going to be able to offset that.

As far as giving you some guidance into the fourth quarter, all I'd point you back to is our guidance.

We've taken into account what we think the headwinds will be from removing that promotion, and it's in our full guidance.

And I'm not going to give any more color than that.

Okay, that'll help.

And Rick, just 2 modeling questions, if you will.

One is this mark-to-market program.

Is this new?

I hadn't heard about it coming to bear before, and there has been market volatility before.

So is it a new program we should just anticipate this from time to time?

Or is this just the first time it has surfaced as a call out?

And then I just want to make sure I understand the workforce reinvestment this year.

You said $9 million this quarter, so an anticipated $11 million next quarter, the fourth quarter, and then the $15 million in 2019.

I just want to make sure that is correct.

Yes, I'll start with the second one.

Yes, the workforce investment was $9 million this quarter, and it will be about $11 million in Q4.

As far as the mark-to-market -- it's not new.

It was just -- with the run-up in the equity markets for our quarter, it was pretty significant on a 1 quarter basis, and our stock price at the same time caused a lot more impact than mark-to-market than we've seen before.

We've had this program going on for years, but this was just a significant impact for us in this quarter.

Our next question comes from Jeff Farmer from Wells Fargo.

Did you guys comment on the potential refi impact on interest expense as you head into FY '19 with that lower interest rate?

I'm just trying to figure out, I think you gave us some interest rates, but what that might mean to actual interest expense as you move into '19 versus '18.

Yes, we didn't call it out.

But if you do the math, it's about a $5 million net reduction in interest expense for next year when you include the fact that we had to take on a little bit of commercial paper.

Okay.

And then just 1 unrelated question, current appetite or philosophy toward pursuing acquisition of additional concepts in coming years?

Any updated thinking on that?

Yes.

I think right now, we're just -- we're really focused on continuing the integration at Cheddar's, building a solid foundation for that brand and ensuring we get it on the right growth path before we'd consider doing anything else.

Our next question comes from Matt DiFrisco from Guggenheim Securities.

I just have a follow-up and then a question.

With respect to the fourth quarter changing the promotion also, I guess it sounds like for a lack of -- or for simplifying it, you're losing a customer that was probably overly discounted in the first place.

So would that have a favorable effect to your labor margin?

So if you go back to Brian's question about the 90 basis points that you leveraged, will the fourth quarter be set up to, in theory, have less deleverage because you're doing less promotional activity?

No, that's -- it's exactly the opposite.

Buy One Take One is a very, very profitable platform.

And it's not heavily discounted because it is a prepared meal that's going home with a consumer, and it goes home without soup, salad and breadsticks.

So the overall package, it's very additive actually.

So it's a powerful driver -- guest-driver.

And it's also, on average, I believe it's an average-type promotional construct.

I'm glad I asked the question then.

With respect to the $15 million in 2019, can you give us a little bit of detail on where that will be deployed?

Is that just purely higher wages or in what -- or is it more hours in essence or more service for the customer?

I'm wondering what type of customer-facing things or sales driving benefits they could have with that $15 million investment.

Yes.

We're not -- as last quarter, we're not going to talk about the specifics of where those investment dollars are going to go.

They're going to go to improve our overall experience for our guests or our team members.

And well, for competitive reasons, we're not going to talk in a whole lot of detail about that.

Our next question comes from Gregory Francfort from Bank of America.

I've got 2 questions.

One is just on the -- I think you gave a labor bridge in the presentation.

And one of the components was just the productivity of new restaurants.

And are your new stores, I guess, mixing significantly lower on labor?

And maybe what are they doing differently than your existing stores are doing?

And maybe you can apply some of those learnings to the existing stores.

Greg, this is Rick.

The productivity is net of new restaurants.

So productivity was higher.

We have -- we continue to add new restaurants into the mix.

And when they come onboard, they're not as efficient as they normally will be as they move forward.

So productivity without new restaurants would have been higher than the 0.3 that we showed.

All right, understood.

Got it.

And then maybe, Gene, a question for you.

Just on the Cheddar's comps, I remember you saying at ICR, the Cheddar's comps would probably be negative for a while, but it seems like this is mostly driven by franchise stores coming on the books, and you guys maybe taking the average check down.

I guess, can you help me understand how you're thinking about how the Cheddar's business plays out in terms of comps?

And maybe when this drag goes away from the franchise stores that have come on, is that sort of a early '19 sort of a dynamic or is that kind of an ongoing process?

Well, I think it's an -- I think it's a great question.

It's an ongoing process.

And when I look at the overall system, I think there is -- and I'm trying to allude to this in my prepared comments, this is a complex business that's doing a lot of guests.

And we believe after being involved now for almost a year, simplification is the key.

We've got to simplify the processes.

In the restaurants that we've recently acquired, I think we're really focused on the fundamentals.

We're focused on getting -- continuing to develop great general managers in these businesses.

We have some staffing challenges in the restaurants that we've acquired recently.

So I think about getting back to basics and making sure we have the right management team in place.

We have the right number of employees scheduled at the right time.

When you -- I think one of the things that we learned in this is when you buy a small franchisee, where their owners aren't financiers, but they're really the operating owners, and they operate the business.

And there's a lot of emotion, there's a heart and soul of these businesses.

And when you remove them, you might have a little bit more turnover than you thought.

You have a little bit -- you'll have some cultural issues, and it's going to take time to rebuild that and integrate those restaurants into a traditional corporate system.

And I think that's really what we're going through.

These restaurants that we bought, I think there's 10 of them, 10 or 11 of them in Georgia.

These are really high-volume restaurants.

And even with the significant decline, they're still at the system average after this.

So we're really excited about the opportunity to get in there.

We have access to resources in Atlanta because of our huge base in our other businesses.

So it's going to take a little bit of time.

But I would say that when we look at it, we're more optimistic today than we were when we bought the business about the opportunity.

The -- we believe we can have a significant impact on basic restaurant operations and improve the overall delivery and a guest experience to the consumer.

I can't put a timetable on it for you.

You just need to know that we're working really hard at doing these basic things.

As I said, we're almost through the integration.

Next year, we won't be talking about integration.

Management won't be even referring to integration in the restaurants, they'll be the only systems they know.

So I think we're -- we got a lot of work to do, but we're really excited about where we're at and what the opportunities are.

The next question comes from Greg Badishkanian from Citigroup.

It's actually Fred Wightman on for Greg.

In the past, you had taken sort of a wait-and-see approach to any consumer benefits from the tax reform.

Now that we're starting to see some increases in paychecks and take-home pay, and you've talked about sort of that higher-check average across the industry, do you think it's safe to say we're seeing a tax benefit at the consumer level?

I think it's way too early to say that.

And I would, again -- I mean, based on the fact, in the last 3 weeks, we haven't had a week where we haven't had a significant interruption into our business because of weather.

And so I think it's my belief that it'll take time for this extra incentive to get into our overall system, into our economy.

But it's got to be good news.

It's how much of it flows to us.

And I'll go back to the well-positioned brands with great value equations are going to benefit.

And I think that when I look at our portfolio, I think we have the opportunity to benefit from this.

Great.

And then for that $15 million of investment next year, what's the cadence going to be like?

Should that all hit in 1Q or should we see a 50-50 split, sort of like we saw this year?

Fred, it's Rick.

It should be spread pretty consistently throughout the year.

Our next question comes from Howard Penney from Hedgeye.

My question is also on the Olive Garden promotional change.

In the past, when you've changed promotion for previous -- for other brands and I'm thinking about LongHorn, you may have compromised traffic trends in a certain quarter.

But it significantly improved profitability because of the change in the promotional cadence.

Would you expect that, too, for Olive Garden?

No.

I think we've seen some of that throughout the year as we've change the cadence.

I wouldn't expect, at this point in time, anything dramatically to change.

LongHorn was a little bit different.

We were coming off a deep-value platform and going to a different type of offer.

This is -- we're still in the same value range.

It's just a different type of promotion.

And we're -- we know that Buy One Take One was very, very successful.

We're -- we believe that we're overexposing it.

And just like Never Ending Pasta, we only run that once a year.

We need to run Buy One Take One once a year.

So I wouldn't expect the big swing in profitability because of this change.

Now where the profitability does come into play as we move from 9 to 6 is from a labor standpoint.

And we're moving less product around, we're having less all team meetings to roll out new product.

So that's been embedded in our P&L throughout the year.

Our next question comes from Chris O'Cull from Stifel.

I had a follow-up to that last question.

Gene, what have you seen in the data that causes you to be concerned that the Buy One Take One could be at risk of being overexposed?

And I believe we are lapping that promotion right now.

So is that true and are there any other comparison issues we should think about for the quarter?

No.

We are -- you are correct.

We're lapping that promotion from last year.

I think it was more just our intuition that told us that in the long term, you've got to protect the integrity of these promotions over time.

And this is a great promotion, and we wanted to have its traffic-drivability to continue on.

And if you -- we know if we run it 16 weeks a year, it's going to lose some of its effectiveness.

So to me, it's -- when you think about Never Ending Pasta Bowl, it's a great promotion.

But you've got to run it once a year, and you've got to enjoy it when it's going on, and then you've got to take it away.

To make it powerful, it's got to -- it can't be there all the time.

Okay, fair enough.

And then Rick, thanks for the explanation on the G&A increase year-over-year.

But it looks like it's still -- you're running higher than the trend would suggest.

Any other explanations for the G&A increase in the quarter?

And how much of the G&A increase do you expect to reoccur in the fourth?

Yes, Chris.

As we just said, mark-to-market was about $5.5 million.

And the workforce investment didn't just impact the restaurant labor line, it also impacted G&A, $2 million to $3 million.

And so if you take those things out, we were pretty -- we weren't that far off of where we were in Q2.

So we can't predict the stock market, so we can't predict what's going to happen in the fourth quarter on mark-to-market.

But the workforce investment in the fourth quarter should be similar to what it was in the third quarter in the G&A line.

Our next question comes from Andrew Strelzik from BMO Capital Markets.

I wanted to ask you a question on the in-store business at Olive Garden.

If I kind of back out the numbers you gave on off-premise, it seems like the in-store business was relatively flat, which is similar to the industry.

Is that something that you're okay with?

It just seems like -- I know you're taking less price, but it seems like relative to the industry, the in-store business has been -- the gap has been narrowing.

And have you seen any change to the trade-off among in-store and off-premise, as you saw -- continue to see the strong growth there?

I would say that -- well, obviously, we're thrilled that our in-restaurant business is continuing, and I think it actually grew.

They're holding up a little sign across the table here saying our in-store restaurant actually did grow a little bit, which is fantastic.

And I think the analysis that you made was compared to the industry, we're equal to the industry.

Well, the industry has got a lot of take out growth in it, too.

So that's not really a fair comparison.

However, we're focused on it in its totality.

When we think about Olive Garden, our goal is to deliver an Olive Garden experience to people when and where they want it.

And we're -- we understand convenience is a big need state today, and so we look at it in its totality.

So I guess, I would go to a day like Valentine's Day when there's no room to dine in Olive Garden because we're so busy.

It's our busiest takeout day of the year.

And so we're able to deliver an Olive Garden experience to the consumer in a way that they want it.

They can't get into the restaurant, so they're going to take it home.

So I think trying to isolate the 2 different need states is, I think, a mistake, and we've got to look at it in its totality.

There's definitely a continued focus on off-premise.

We're trying to maximize our opportunity there.

But we are really focused on making sure we're creating a great in-restaurant experience because that's a big part -- that's the biggest part of our business.

And our research tells us that the consumer is still looking for a great in-restaurant experience, and those who provide it will continue to win.

I appreciate the perspective on that.

And if I could squeeze one more in, on LongHorn actually.

You've seen pricing, price increases have been a bit lower in the last couple of quarters, at the same time that the mix has been ticking up.

Is that a conscious decision on the pricing to manage the check growth?

And should we expect a kind of a similar construct of check growth kind of as we progress along.

Yes.

We are definitely trying to continue to create value through increasing the quality of the product in LongHorn and also watching what we're doing from a pricing standpoint.

The mix is coming from a couple of components.

It's coming from our simplification, and we're actually selling more add-ons.

But the biggest part of it is a reduction in discounting.

And as we reduce our discounting pressure, our menu mix goes positive, which is just another form of creating value for the guest.

So when I look at the LongHorn mix for the quarter at 2% and only 0.7% in price, flat guest counts and I'm doing -- we're doing this with a lot less discounting, I feel really good.

The next question comes from John Ivankoe from JPMorgan.

I was curious about the chain versus independent share dynamic of what you guys are seeing.

And I ask this question in the context of there being some significantly conflicting data that's out there of whether -- who's taking share versus huge chains or independents.

So I wanted to get your thought on that and also if there's somewhat of an outlook on '18 and '19 as you guys have been through many different cycles before, in which side the pendulum switches, in your opinion, the chains or independents.

Yes, I have been briefed recently on the recent Crest Data, and again, Crest Data is directional.

But what we're seeing is large chains and independents picking up a little share, and small chains actually donating that share.

And so that's the most recent trend, not a huge swing.

I mean, we're talking 10, 15, 20 basis points here.

There's not a lot of movement.

But it does seem like it's coming out of small chains, with large chains and independents growing.

As far as we look into the future, I mean, that's hard to -- so I do think that the large players continue to have an advantage from a cost standpoint, from an advertising standpoint.

And we'll continue to -- should continue to take share if we manage our businesses effectively.

And I ask this question also, Gene, just in the context of smaller or even one-off restaurants that have a better ability to market before, and there's also a lot of discussion about there being some generational preferences for -- it would be like the truly independent owner-operator type of restaurant.

So -- but again, I mean, just really relying on your experience in this case, do you think that's true in '18 or '19?

Or is there still a broad enough swathe of the population that appreciates a high level of consistency that -- this is the overall industry, not necessarily Olive Garden and LongHorn can hold onto that share.

Yes, 2 thoughts, John.

First of all, the independent growth is a coastal problem, and it's happening on the coast.

It's not really happening as much in Middle America.

And secondly, I think that we're also -- there's -- we're also at the top end of a cycle.

I think we saw this in '05, '06 and '07, where there's a lot of capital out there for people to open independent restaurants.

And usually the independent growth slows down as that capital slows down.

And a lot of these restaurants cannot withstand any type of shock, and as we saw in '09 and '10 and most -- a lot of them fell out.

So I think there -- as we look forward, I think a lot is going to depend on the overall economic environment.

Our next question comes from Stephen Anderson from Maxim Group.

I wanted to discuss Cheddar's, and I also saw that you gave a guidance on fiscal '19 CapEx.

Do you have any kind of an estimate as -- with regard to what you would like to spend to renovate some of the older Cheddar's that are out there?

I mean, there's still a lot, particularly on the franchise side, there's still a lot of older units that may not be up to the current prototype.

Yes.

I think that one of the things that we're most impressed with Cheddar's is the durability of their buildings.

They've got a great design that's been able to stand the test of time.

And I don't think that there's not a -- any type of remodel program that's needed.

There's not a whole -- there's a little bit of refresh.

We've got to do some signage changes, but for the most part, the buildings that we have bought are in great condition.

We do have some transformational work in the kitchen with some new equipment that we're putting into some restaurants.

And there will be some capital there, but that's minimal.

The next question comes from Jeremy Scott from Mizuho.

Maybe just high level, I was wondering when you have a quarter like this with so many different weather events, how your takeout business performs.

And maybe you can -- I realize that the 70 bps impact is across the board, but just wondering -- your comments that weather has a bigger impact today than it did 5 years ago because of the media focus, is some of that offset by the fact that you've now laid the pipes, primarily at Olive Garden, to reach the customer at home, and then any changes in your thought process around delivery?

Yes.

First of all -- I'll -- a lot in that question, but I always say that -- no, weather doesn't help us from a takeout standpoint either.

I mean, it's -- we get to a certain point with this weather pattern that we're in, we're just -- the restaurants are closed.

We can't do take out if we're closed.

We take the safety of our team members very, very seriously, and we close our restaurant.

So that the takeout is not there.

The second part of the question around our attitude towards delivery.

I would say that we are focused on Olive Garden, on our large-party catering.

We see that as a huge opportunity.

We're in the beginning parts of really starting to develop that.

We are -- again, as I said before, we're real focused on these.

The average order size is $300.

As we continue to grow that business, it has some impact.

We're still talking, a lot of the third-party delivery company is trying to understand how this is all going to shake out.

And I -- we're testing, doing our own deliveries, so we've got a lot of things happening right now.

And we'll continue to analyze it, and we'll make the right decision for our business when we have the right -- when we have enough information that leads us to a conclusion.

Have you seen takeout growth in any of your other brands?

And I think LongHorn, the last time you mentioned, was (inaudible) Olive Garden.

How is that trending in the last couple of quarters?

Yes, [Timmy].

We're obviously seeing good takeout growth in all of our brands, especially LongHorn as the consumer demands convenience.

And so it's a significant part of the growth story in all of our businesses.

But we're focused -- we still believe we're focused on maximizing the opportunity in Olive Garden because the food travels so well.

And we have unique packaging, we have a unique product offering, and so there's a lot more focus on really growing that.

I would say in our other businesses, we're going along with the demand of the consumer.

And we think that's the place to be.

The next question comes from Brian Vaccaro from Raymond James.

Gene, I wanted to follow-up on John's industry question and also get your perspective on industry supply growth.

There seems to be some indication that we're finally seeing some rationalization in recent quarters.

I'm curious if that's consistent with what you're seeing and hearing from your teams in the field and also your view on supply growth over the next couple of years.

Yes.

On supply growth, I think what we're seeing is we're seeing some rationalization, but we're seeing some good growth.

So we're -- in the last Crest Data I saw -- and it was recent.

It was that we're basically a net, no increase in restaurant growth year-over-year.

But what we're seeing is we're seeing the weaker players start to close some restaurants.

We're seeing some independents fall out, and then we're seeing restaurants come back in.

And the restaurant brands that are growing are strong.

And they're growing for a reason.

So the example I like to use, is when we open a Yard House and we do $8.5 million in sales, we didn't create $8.5 million in sales in that marketplace.

We stole that $8.5 million, it's been redistributed.

And so as we see these stronger players continue to open, it puts -- it does put some additional pressure on the business.

I will tell you that the one thing I have noticed in the last 12 months or so, which gives me confidence that the environment is somewhat improving is that our new restaurants are performing better.

And it does feed into our belief that we've got to continue to build restaurants closer to where people live.

They may be a little less likely to travel distances that they used to travel, especially if some of these malls lose their draw -- drawing power.

But we've been pleasantly surprised to the upside how well our new restaurants are opening, and that tells me a little bit about where we are economically.

All right, that's helpful.

And then just 2 quick follow-ups, if I could.

Rick, the cadence of the tax savings reinvestment, you were clear we saw $9 million in the third quarter, $11 million expected in the fourth quarter.

As we think about sort of the year-on-year impact, wouldn't the $15 million be sort of front-end loaded in fiscal '19 or I'm not thinking about that correctly?

No, the $15 million wouldn't be front-end loaded in '19.

But we had no investments last year -- this fiscal year in Q1 and Q2.

So we will see an increase.

So if you think about the $20 million that we made this year, just assume that's going to flow naturally through next year.

And then the $15 million will also start flowing naturally through next year.

So...

Got it.

Okay, perfect.

And then last one from me, the weather that you've seen in March, if you assumed April and May sort of normalized year-on-year, obviously knock on wood, but how much of a weather headwind for the fourth quarter would that equate to?

Would it be...

Yes.

I mean, that's all incorporated in our guidance today.

Again, we're hoping that you all in New York saw your last storm yesterday.

We said that last week, too.

So weather is out of our control, and there's nothing we can -- we don't worry about it.

We're focused on running great restaurants.

When we have a weather event, we're focused on ensuring our people are safe.

And I think as Rick said in his statement -- in his comments, we saw more of a normalized winter through the third quarter.

I mean, and when we got to the end of February and we looked at it, we said, "Hey, this is a normal winter." We've had the benefit of a couple of mild winters in the past couple of years.

March may turn that upside down a little bit, but we'll give you some color on that in the fourth quarter when March is done.

The last question comes from Matt DiFrisco from Guggenheim Securities.

I just had a question with respect to the off-premise sales.

I think you said it was about 13% or so.

Has that got delivery in there?

I've seen you guys pop up a little bit more on Grubhub with Olive Garden and Yard House and some other brands.

I'm just curious if you could give some comments on that.

Yes, Matt.

That's inclusive of all off-premise.

And yes, you are seeing us pop up, either via a test or we don't know that we're participating with them.

They have a way of just taking your menus and marketing your products.

So yes, that's inclusive of everything, 13%.

And I thought the number that's impressive was 15% of our total sales for the quarter were from takeout.

So you don't have an agreement then with Olive Garden and Grubhub?

They're just taking you and listing you on there?

Well, it depends.

In some markets, we do and -- yes.

I mean, there's a little bit of the old wild, wild west out there right now.

Thank you, speakers.

We show no further questions at this time.

All right.

Thank you.

That concludes our call.

I want to remind you that we plan to release fourth quarter results on Thursday, June 21, before the market opens, with a conference call to follow.

Thank you for participating in today's call.

Thank you, and that concludes today's conference.

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