達登餐飲 (DRI) 2021 Q1 法說會逐字稿

Hello, and welcome to Darden's Fiscal Year 2021 First Quarter Earnings Call. (Operator Instructions) The 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. Thank you. You may begin. Thank you so much.

Thank you, Marcella. 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 in the Investor Relations section of our website at 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 2021 second quarter earnings on December 18 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 then Rick will provide more detail on our financial results and share our outlook for the second quarter.

As a reminder, all references to the industry benchmark during today's call refer to estimated KNAPP-TRACK, excluding Darden, specifically Olive Garden and LongHorn Steakhouse. During our first fiscal quarter, industry same-restaurant sales decreased 26%.

Now I'll turn the call over to Gene.

Thank you, Kevin, and good morning, everyone.

Given the ever-changing environment we continue to operate in, I am very pleased with what we accomplished during the quarter.

We are focused on 4 key priorities: the health and safety of our team members and guests, in-restaurant execution in a complex operating environment, investing in and deploying technology to improve the guest experience and transforming our business model. The progress we made in these areas, combined with our operating results, gave us the confidence to repay the $270 million term loan and reinstate a quarterly dividend.

Let me provide more detail on the 4 priorities. First, the health and safety of our team members and guests remains our top priority. Following CDC guidelines and local requirements, our teams continue to practice our enhanced safety protocols, including daily team member health monitoring. We also continue to configure our dining rooms for social distancing to create a safe, welcoming environment while maximizing allowable capacity. A key part of this work is installing booth partitions to enable us to safely increase capacity where permissible. At the end of August, we had completed installation in just over 500 restaurants in our total portfolio.

Operating in this environment adds another layer of complexity to an already complex operation, and I'm proud of the commitment our teams make every day to keep our guests and each other safe.

Second, we are laser-focused on our "Back to Basics" operating philosophy to drive restaurant-level execution that creates great guest experience, whether that's in our dining rooms, outdoors on our patios or in their homes. But it's not easy. Executing at a high level is more complex today due to COVID-19 restrictions that vary by market.

Additionally, the constantly changing mix between on-premise and off-premise, plus expanded outdoor dining that is weather-dependent, leads to unpredictability in sales. This is why the work we continue to do to streamline our menus and improve our processes and procedures is so important.

Removing complexity from our operations has allowed our restaurant teams to execute more consistently in this unique environment. Our operators continue to deliver great guest experiences by displaying a high level of flexibility, creativity and passion every day, and I'm thrilled to see that reflected in our guest satisfaction metrics.

Third, we are continuing to invest in and implement technology to remove friction from the guest experience. This includes providing multiple ways for our guests to order inside and outside the restaurant across our digital storefronts. Additionally, we are deploying mobile solutions to make it easier for our guests to let us know when they have arrived to dine or pick up curbside order to go. We are also expanding mobile payment options, providing additional convenience for our guests. For our 3 largest brands combined, more than 50% of our off-premise sales during the quarter were fully digital transactions where guests ordered and paid online.

Finally and most importantly, we transformed our business model. Even with the sales declines we're experiencing, our restaurants continue to produce high absolute sales volumes. Therefore, we made the strategic decision to focus on adjusting our cost structure in order to generate strong cash flows while making the appropriate investments in our businesses. This provides us a stronger foundation for us to build on sales as sales trends improve.

The first step in this process was to reimagine our offerings. This resulted in simplified menus across the platform, driving significant efficiencies in food waste and direct labor productivity. Additionally, due to capacity restrictions, we significantly reduced marketing promotional spending, along with other incentives we have historically used, to drive sales. We will continue to evaluate our marketing promotional activities as the operating environment involves.

Finally, we have further optimized our support structure, which is driving G&A efficiencies. The results of all these efforts to transform our business model can be seen in the fact that we generated adjusted EBITDA of $185 million for the quarter.

Turning to our business segments. Olive Garden delivered strong average weekly sales per restaurant of $70,000 while significantly strengthening their business model, resulting in higher segment profit margin than last year. They were able to capitalize on simplification initiatives that strengthen the business model while making additional investments in abundance and value. This work was critical to position Olive Garden to drive future, profitable top line sales as capacity restrictions ease.

Olive Garden same-restaurant sales for the quarter declined 28.2%, 220 basis points below the industry benchmark. Overall, capacity restrictions continue to limit their top line sales, particularly in key high-volume markets like California and New Jersey, where dining rooms were closed for the majority of the quarter. In fact, restaurants that had some level of dine-in capacity for the entire quarter averaged more than $75,000 in weekly sales, retaining nearly 80% of their last year's sales.

Given the limited capacity environment during the quarter, Olive Garden made the strategic decision to reduce their marketing spend as well as incentives and eliminate their promotional activity. They will continue to evaluate their level of marketing activity as capacity restrictions ease.

Additionally, off-premise continued to see strong growth, with off-premise sales increasing 123% in the quarter, representing 45% of total sales. Thanks to technology investments we continue to make, online sales made up almost 60% of total off-premise sales, more than tripling last year's online sales. Finally, Olive Garden successfully opened 3 new restaurants in the quarter, which are exceeding expectations.

LongHorn had a very strong quarter. Same-restaurant sales declined 18.1%, outperforming the industry benchmark by 790 basis points. This strong guest loyalty and operational execution helped drive their outperformance, while they also benefited from their geographic footprint. In fact, same-restaurant sales were positive for the quarter in Georgia and Mississippi.

Additionally, the LongHorn team made significant investments in food quality and operational simplicity, which led to improved productivity and better execution. They also took a number of steps to improve the overall guest -- the overall digital guest experience. Off-premise sales grew by more than 240%, representing 28% of total sales. Finally, LongHorn successfully opened 2 restaurants during the quarter.

The brands in our Fine Dining segment are performing better than anticipated. While weekday sales continue to be impacted by a reduction in business travel, conventions and sporting events, we saw strong guest traffic on the weekends, and believe there will be additional demand as capacity restrictions begin to ease.

And lastly, our Other Business segment also delivered strong operational improvement with segment profit margin of 12.8%. This was only 130 basis points below last year despite a 39% decline in same-restaurant sales. Yard House's footprint in California is impacting same-restaurant sales in this segment.

Finally, I continue to be impressed by how our team members are responding to take care of our guests and each other. We know our people are our greatest competitive advantage, and I want to thank every one of our team members. We are succeeding, thanks to your hard work and resilience.

Now I'll turn it over to Rick.

Thank you, Gene, and good morning, everyone. The encouraging trends and performance we experienced toward the end of the fourth quarter continued into the first quarter of fiscal '21. Furthermore, the actions we took in response to COVID-19 to solidify our cash position, transform the business model, simplify operations and strengthen the commitment of our team members help build a solid foundation for the future. These actions and our continued focus on pursuing profitable sales have resulted in strong first quarter performance that significantly exceeded our expectations.

For the quarter, total sales were $1.5 billion, a decrease of 28.4%. Same-restaurant sales decreased 29%. Adjusted EBITDA was $185 million, and adjusted diluted net earnings per share were $0.56.

Turning to the P&L. Looking at the food and beverage line, favorability from menu simplifications more than offset increased To Go packaging costs. However, beef inflation of over 7%, primarily impacting LongHorn, drove food and beverage expense 20 basis points higher than last year for the company.

Restaurant labor was 20 basis points lower than last year with hourly labor as a percent of sales improving by over 350 basis points, driven by operational simplifications. This was mostly offset by deleverage in management labor.

Restaurant expense included $10 million of business interruption insurance proceeds related to COVID-19 claims submitted in the fourth quarter of fiscal 2020. Excluding this benefit, we reduced restaurant expense per operating week by over 20% this quarter.

For marketing, we lowered absolute spending by over $40 million, bringing marketing as a percent of sales to 1.9%, 130 basis points less than last year. As a result, restaurant-level EBITDA margin was 17.8%, 20 basis points below last year, but particularly strong given the sales decline of 28%.

General and administrative expenses were $10 million lower than last year as we effectively reduced expenses and rightsized our support structure. Interest was $5 million higher than last year, mostly related to the term loan that was outstanding for the majority of the quarter. And finally, our first quarter adjusted effective tax rate was 9%.

All of this culminated in adjusted earnings after tax of $73 million, which excludes $48 million of performance-adjusted expenses. These expenses were related to the voluntary early retirement incentive program and corporate restructuring completed in the first quarter of fiscal '21. Approximately $10 million of this expense is noncash, and the remaining will be cash outflows through Q2 of fiscal 2022.

This restructuring resulted in a net 11% reduction in our workforce in the restaurant support center and field operations leadership positions. It is expected to save between $25 million and $30 million annually. We expect to see approximately 3/4 of these savings throughout the remainder of fiscal '21.

Looking at our segment performance this quarter. Despite a sales decline of 28%, Olive Garden increased segment profit margin by 110 basis points to 22.1%. This strong profitability was driven by simplified operations, which reduced food and direct labor costs as well as reduced marketing spending.

LongHorn Steakhouse, Fine Dining and the Other Business segment delivered strong positive segment profit margins of 15.1%, 11.9% and 12.8%, respectively, despite the significant sales decline experienced in the quarter. These brands also benefited from simplified operations, keeping segment profit margin at these levels.

In the first quarter, 68% of our restaurants operated with at least partial dining room capacity for the entire quarter. These restaurants had average weekly sales per restaurant of $69,000 and a same-restaurant sales decline of 21.9%. And while Olive Garden and the Fine Dining segment had fewer dining rooms opened than our average, these restaurants had the highest average weekly sales per restaurant of almost $76,000 and $90,000, respectively. At the start of the second quarter, we had approximately 91% of our restaurants with dining rooms open, operating in at least limited capacity.

Now turning to our liquidity and other matters. During the quarter, as we saw steadily improving weekly cash flows, we gained confidence in our estimated cash flow ranges. We fully repaid the $270 million term loan we took out in April.

We ended the first quarter with $655 million cash and another $750 million available in our untapped credit facility, giving us over $1.4 million (sic) [$1.4 billion] of available liquidity. We generated over $160 million of free cash flow in the quarter and improved our adjusted debt to adjusted capital to 59% at the end of the quarter, well within our debt covenant of below 75%.

Given our strong liquidity position, improvements in our business model and better visibility into cash flow projections, our Board reinstituted a quarterly dividend. The Board declared a quarterly cash dividend of $0.30 per share. This dividend represents 53% of our first quarter adjusted earnings after tax within our long-term framework for value creation. We will continue to have regular discussions with the Board on our future dividend policy.

Our first quarter results were significantly better than we anticipated. The actions we took to simplify menus and operating procedures and capture other cost savings, along with our choice to pursue profitable sales, have yielded strong results. And now with the full quarter operating under this environment, we have even better visibility into our business model.

For the second quarter, we expect total sales of approximately 82% of prior year, including approximately 100 basis points of headwind due to the Thanksgiving holiday moving back into the second fiscal quarter this year. We anticipate EBITDA between $200 million and $215 million and diluted net earnings per share between $0.65 and $0.75 on a diluted share base of 131 million shares.

In this environment, we continue to focus on building absolute sales volumes week-to-week and quarter-to-quarter. This may result in variability in sales comparisons to last year as capacity constraints lead to less seasonality than we would have experienced historically. Said another way, if capacity and social distancing restrictions remain similar to where they are today, it will be challenging to dramatically increase our on-premise average unit volumes.

Our second quarter is typically our lowest average unit volume quarter, and our third quarter is typically our highest. Additionally, as capacity restrictions ease and sales normalize, we will be able to reinvest to drive the top line and a better overall guest experience.

One last point before we take your questions. Based on our strong business model enhancements, we now think we can get to our pre-COVID EBITDA dollars at approximately 90% of pre-COVID sales while still making appropriate investments in our business.

And with that, we'll take your questions.

(Operator Instructions) Your first question comes from the line of Andrew Strelzik from BMO.

In the press release, you mentioned on the execution that it was better than expected. I'm curious if you could just kind of dig in a little bit there more specifically, either by brand or by cost bucket.

And subsequently, how sustainable are some of the cost improvements? If you can maybe give a sense for how much better you think margins could be if you were to get back to, say, 100% of the prior sales.

I'll take the execution part, and I'll let Rick talk about the margin piece. I think a lot of our execution is coming from the streamlined menus. And our ability to put out product with increased frequency of that product is helping our execution, and our team members are becoming much better at doing that.

When you limit your menu and you focus on key products, the quality of that product just continues to go up. And I also think it transcends itself into the dining room. And I think, today, we've gotten used to the complexity of operating with the COVID requirements. And every day, I think we're running better and better restaurants. Rick, do you want to talk about the margins?

Yes. Andrew, I'm going to start with the 90% number that we gave a second ago. We have made improvements in our cost structure, as Gene has mentioned, and significantly improved our business model.

As sales improve, remember, we assume that some of these costs will come back, but not all of them. The 90% contemplates some costs returning, along with continued reinvestments. And the 90% -- well, the 90% sales level may change depending on the competitive environment and the economic backdrop. Now I will say that if we get to 100% and we make some investments, as we've been talking about, we could see margins improve by 100 basis points, maybe even 150. But again, that depends on the economic backdrop, the competitive environment and what do we have to do to get to that 100%. So I wouldn't tie in the 100% to 150%, but I would at least get into the 90% based on our EBITDA -- I'm sorry, getting our EBITDA back based on 90% of sales.

Okay. Great. And if I could just squeeze one more in. I'm just curious if you think you've seen at all any impact from stimulus tapering off, if you've seen that or any other kind of regional or daypart differences that you've also seen. If you could comment on that, that would be great.

No, we've seen no falloff with the stimulus. Actually, we're seeing average weekly sales across the system improve every single week. So we're feeling pretty good about that.

So we're seeing some restrictions be eased throughout the country. So really nothing from a regionality standpoint. I think you just got to look at the mobility index. And you've got to follow what's happening with restrictions, and you can see guest traffic move along with that.

Your next question comes from the line of Andy Barish from Jefferies.

Just wondering on the kind of comments on on-premise dining and sort of driving same-store sales performance from here. What would it take to, from a capacity constraint perspective, help that number? Can you do more booth partitions? And just the impact of seasonality, starting with the outdoor patio business as well, just try to level set on all those areas.

Let me work backwards to your question. Outdoor capacity is really de minimis for us overall as the system. The good news is that we haven't really been able to use it, a lot of our outdoor capacity in Florida. It's been raining every single day here for the last 6 weeks. So we're going to start getting that back. As we lose outdoor capacity up north, we'll pick up a lot more in Florida than we've been able to use. So for that, that -- when we think about outdoor capacity, it's really not that meaningful for us.

As far as what's going to drive, in the short term, some more same-restaurant sales is additional capacity. We need to get California back. We need some other areas to increase the capacity from 25% to 50%. Once you get past 50%, as long as the 6-foot rule's in place, you're still not going to really be able to really max out your dining rooms. In some areas, we're getting our bar tops back, which are important to give us more capacity inside the restaurant.

And so I think it really comes down to just the incremental improvements in the capacity levels. We're going to probably continue to roll out booth partitions. We'll probably close to double what we have right now. That gives us 6 to 7 extra tables for restaurant in the jurisdictions that allow us to do that. Not every jurisdiction allows us to do that.

I think that our teams are being very respectful of the requirements in their operating environment. And we're trying to create, first and foremost, a safe environment for our team members and our guests. And we're not trying to push same-restaurant sales and risk that experience at all for our team members and guests.

So I look at -- I would look at getting -- getting California back is big in Olive Garden. We've got 100 restaurants there.

Okay. And just a quick follow-up for Rick, if you could. I mean, the same-store sales and the total sales gap in the 1Q were basically on top of each other. The 18% reduction in total sales, is there a same-store sales analog for the 2Q we can kind of point to in terms of a gap?

Yes. It's pretty close. It's not like we have a lot of new restaurants coming into play. So it's within 100 basis points.

Marcella, we're ready for our next question.

The next question comes from the line of Nicole Miller from Piper Sandler.

When I look back to Slide 16 of the presentation, can you speak to the capacity in the first quarter? What was the average? Was it higher or lower as you exit the quarter? Because that can help us kind of inform and understand the capacity in 2Q. I know 90% -- 91% are open, but I'm wondering what kind of capacity mandates or restrictions you're dealing with.

Well, most of the capacity restrictions are around the 50% range, 50% capacity. Some are 100%. But if you average out our company, when you take the 6-foot rule, et cetera, we're probably at the 50% capacity range even at the end of the quarter.

Okay. Okay, super. And then it's not lost on us when you talk about the "Back to Basics," and I think there's obviously no one better than your team at that. And it's the power of teams. So if you think about the roles and the functions, for me, like the chief people officer role comes to mind, how are you really resourcing your team to be effective right now? Can you give us some concrete examples?

Well, I think our engagement with our team members goes all the way back to the beginning of COVID. I mean, it actually goes beyond that but, I mean, I think how we've handled the situation with emergency pay and taking care and staying -- taking care of our people and stay engaged with them and paying their benefits, we invested over $100 million in that short period of time into our team members.

So bringing them back to work has been fairly easy for us. And I think our team members are really engaged in what they're doing. And so we've had a strong culture for a long time. And our team member retention is better than ever, which is really exciting to see.

I mean, I'm looking at retention numbers for our hourly team members that I never thought I would see in this industry. I've been working in the industry for over 30 years. I've never seen retention like this, which gives us the ability to execute at the highest level.

And as we bring people back to work, we're bringing back our most productive and our most dedicated team members. So I think the spirit is high in our restaurants. I think people are excited to be out there. They are making money. I think they're bringing happiness to people that come into our restaurants. I think that energy is -- in this very difficult time is transferring between the guest and the team member.

And I'm in our restaurants every day. And I'm in one of our restaurants most every day, sometimes twice a day, I would tell you that the attitude is just absolutely fantastic, and our team members are doing a great job.

Our next question comes from the line of Brian Bittner from Oppenheimer.

When you talk about getting back to pre-COVID EBITDA levels on 90% of sales, can you just talk about your working assumption on that relative to G&A versus pre-COVID in restaurant-level profits pre-COVID?

Well, Brian, I think on the G&A side, we talked about the EV -- voluntary emergency -- I'm sorry, voluntary early retirement program. And that's going to save us $25 million to $30 million a year on a rolling basis.

And we would expect G&A to start coming back up as we start getting travel, et cetera. We didn't do a whole lot of travel in the first quarter. But most of our investments will be back in the restaurant as you think about marketing spend and labor and other things.

So I would say that if you look at what we say in the 90% range, most of our investments will be back in the restaurant. Our G&A -- we would hope our G&A would be at least below 5% in the -- for the foreseeable future.

Okay. And would you ascribe all of LongHorn's outperformance relative to Olive Garden? Is that all to geographical mix and the 6-feet rule? Or is there anything else that you'd point out as it relates to LongHorn's performance relative to Olive Garden?

Well, I think the majority of it is geographic. And I think the brand strength in Georgia's been incredibly impressive. And I think that it's just a market where there's a lot of loyalty to the brand.

I think the market, Georgia -- State of Georgia trusts LongHorn, and I think people are going to where they're really comfortable. And so I do think that their consumer may be a little bit better off economically but, I mean, the performance is impressive, without a doubt, but it's being driven by Georgia. It's being driven a lot by their footprint.

And my last question, just with Olive Garden, we talked a lot last earnings call about the capacity restraints related to the 6-feet rule. Is there anything else -- if we stay in this environment for a while moving forward, is there anything you are doing to improve the capacity based on the seating configuration within that 6-feet rule that we should know about?

Well, I think we continue to add temporary barriers. I think this team continues to look at, how do you -- can you move a few tables in the dining room to improve the overall capacity? So I think they continue to try to modify that.

I think the thing -- when you think about Olive Garden, just focus on the absolute volumes at $75,000 a week. These are healthy, healthy businesses. And the off-premise business continues to thrive, which is a place that we're going to -- we start putting some marketing back into that business. It would be focused on trying to drive off-premise, not in-premise.

We just -- we continue to evaluate, what's the best way to go with that investment spend? When is the right time to use it?

And so the other thing I would tell you is that this can probably be hard for you to believe, but we have one restaurant that cost us 50 basis points in comps. That's the Times Square Olive Garden. And when we start every single week, $300,000 in the whole from a comp store basis. We are going to get 25% capacity back in Times Square on the 30th.

But that -- to me, that's you wake up every day and you're $300,000 short just in that one restaurant. That's our best restaurant in the Olive Garden system. We do over $15 million there, and now we're doing $2,500 a day.

And so you got some oddball things. Getting California back is going to be huge. California is a big market for us with high volumes. We have a higher check average. And we can see because we're starting to get some counties back, and we can see the impact on that on a daily, weekly basis.

Your next question comes from the line of Andrew Charles from Cowen and Co.

Question for Rick, and a question for Gene. The sales leverage on the labor line was quite impressive during the quarter. I was curious. How would you categorize what you view as permanent savings from the shift to online pickup and more streamlined kitchen operations and efficiencies versus maybe some of the temporary improvements that will persist in 2Q from volumes that are below peak?

And then, Gene, you kind of talked a little bit about it, but just to hit it head on, the 100 partitions that were implemented last quarter to improve seating capacity, I think you said you've doubled it. But curious, what's been the learnings there? How has that helped? And is that a key unlock for you in terms of where we are in this -- in the reopening? Or is that just something that's just a small tool?

Andrew, on the labor line, remember, we've got 2 components of labor. One is the hourly labor, which is where we saw a lot of efficiencies; and the other one is the management labor, which is more fixed in nature.

We would expect the hourly labor to not be as favorable going forward just because of training expenses. We didn't have as much training in the first quarter, and we'll continue to -- we're going to start having some training in Q2 and beyond. But as our sales pick up, our management labor should be leveraged a little bit more than it was before.

So I think there was a question earlier on where we'd get to at 100%, and that 100, 150 basis point improvement will mostly come out of labor and some cost of sales.

Yes, Andrew, on the partitions, depending on the restaurant foot layout, you're going to get 6 to 8 more tables. And most of those will be 4 tops, and the average party's 2.3. So I mean, I wouldn't say it's not de minimis, but it's not meaningful. I mean, you're getting -- especially on the weekends, you're getting another 2 seatings on those tables. So every little bit helps because we have the demand for those tables, but it's not going to move this -- the top line significantly.

Your next question comes from the line of Eric Gonzalez from KeyBanc Capital.

Just on the promotional schedule, I think it's -- I think we're all sad to see that maybe Never Ending Pasta Bowl is not being run this year. And I'm just curious, what needs to happen from a capacity standpoint or a restriction standpoint for that promotion to make sense? And is there a limit, that whether it be 25%, 50%, 70% of dining rooms, reopen where it makes sense to have traffic driving promotions like that one? And then like later in the year, is that a lever that you can pull and bring it back to drive people to the restaurants?

Yes. I think on those high-volume, high-traffic promotions, we're going to have to feel comfortable that we've got pretty much 100% capacity unless the promotion -- unless we come up with promotions that drive the off-premise -- and drive off-premise experience. When I think about marketing and the team thinks about marketing, I think that we want to try to get far along as we possibly can through this crisis or cycle and then fully understand what the competitive set's going to be, what the economic backdrop is going to be. And then we'll figure out how to appropriately layer back in all our promotional -- marketing and promotional activity and our incentives.

We think we can layer those back in smarter and more effective than we had them in the system before. And now we're -- this is a terrible thing that we're going through, but we're trying to find -- okay, we're trying to find positives in this to really rethink and how -- rethink we think how we go-to-market with our businesses. And this is a once in a -- unfortunately, a once-in-a-lifetime option to be able to do things that we probably couldn't do while we're -- where we were pre-COVID.

So I think long term, we're going to look at the situation and we'll decide when we layer in our best promotional options. And we may have to reimagine and revisit some of those promotional options to our guests, so that we can maybe do it at a higher-margin rate. There's lot -- we have lots of questions and a lot of work to do around that.

That's really helpful. And then you mentioned in your remarks earlier that the off-premise mix is a moving target. Can you maybe dig into that a little bit more and talk about what sort of the cannibalization rate looks like as dining rooms reopen or maybe what happens when restrictions are put back in place?

Yes. There's nothing concrete there because each market is behaving differently. And so when you see restrictions change, and maybe your capacity goes from 25 to 50 in certain markets, those -- that volume just switches from off-premise to on-premise. In other markets, it doesn't. It depends what's happening.

We believe there's a good percentage of our off-premise today is being generated by people coming to the restaurant that can't get in because the wait's too long, and there's no place to wait inside our restaurants. And so we think that those people have a tendency to just opt into the off-premise experience. So we really can't quantify that for you because every market is different.

Your next question comes from the line of David Tarantino from Baird.

I have 2 questions. First, on the second quarter guidance, I just wanted to clarify the guidance on the top line. Is that similar to how you're running quarter-to-date? Or are you expecting to see further improvement as states like California start to open up?

Yes, David, our guidance for sales for Q2, remember, it incorporates a 100 basis point headwind for Thanksgiving. So we are running a little bit better than that quarter-to-date, but not by much. And so we do anticipate an increase of about 10% on average weekly sales for quarter 1. It doesn't contemplate any significant change in capacity restrictions, other than the ones that we already know, other than the ones that have already been approved. But it also doesn't contemplate any significant change in sales due to a second wave or a vaccine approval.

So that we thought 82% was fairly prudent. It's slightly below where we're running today, but it does take into effect the 100 basis point swing from Thanksgiving.

Great. And then, Gene, I was wondering, just philosophically, how you think about what Darden might look like as we exit the pandemic. And I guess, what I'm specifically wondering is, is it your goal to drive the sales volumes back to 100% of where you were before the pandemic? Or do you think you'd take less sales with a better, simpler operating model that's easier to execute?

We take -- I want both. I want a simple operating model, and I want higher sales. And I think that we are setting up for that because there's a few dynamics that are in our favor.

Number one, there's definitely been a capacity. There'll be capacity coming out of the system, and we believe that we're well positioned to take share. And we think that the simplified operations will help us improve execution. We'll get better throughput. And so we think there's a pathway to both higher sales, better margins.

I think our teams have done an incredible job of reimagining almost every aspect of their business through this, and I see a pathway to get there. We're -- I think Rick keeps bringing you back to the 90% only as a way to communicate where we think margins are going to be at a future sales level. We're not setting a target saying that we'd be happy with that. We see a pathway for our sales to get above that, and we see a pathway for our margins to be above pre-COVID levels at that time.

Your next question comes from the line of Jeff Bernstein from Barclays.

Great. One follow-up and then a separate question. The follow-up just on the comments you made a moment ago regarding your guidance for fiscal 2Q does not assume any second wave of reinfection. I'm just wondering, as you think about it in the short term, what are you seeing with comps in markets where there are spikes in infection rates, whether you see a step back or whether you see capacity pullback? Trying to get a sense for the worst-case scenario if we were to see a second spike in terms of what you're seeing thus far or what learnings you've had. And then I had one follow-up.

So, so far, Jeff, we've seen no change in demand based on COVID levels in a market, unless capacity restrictions change. So if you're -- your example, we're in South Florida, when we had the spike after the 4th of July, and the restaurant restrictions were very limited, we definitely saw -- we saw demand drop. But that was not because of the consumer, it was more because of the restrictions the local municipalities put on us.

We see a pretty resilient consumer out there. I know that's hard for you guys in New York to imagine, but the rest of the country is not operating that way. And so I would tell you that what we're seeing is it's all being controlled by the local municipalities that they're managing demand more than the consumer.

Interesting. And then the other question was just on the -- I think you alluded to it earlier in terms of what the industry is going to look like and capacity going forward. So I'm just wondering, as you think about the independents and the crisis that are all going through, what are you seeing thus far in terms of, I guess, you'd call it permanent closures or the impact you see for the industry going forward, maybe the supply demand imbalance or whether it's real estate availability or market share opportunity? Just trying to get a bigger picture thought on what you're seeing thus far for the outlook for primarily the independents.

Well, I think the independents have -- obviously have a tough time, right? And as we think about it, we think somewhere between 5% and 15% of capacity will come out of the system during this, maybe a little bit more, but a lot of people will get recapitalized quickly and get some of these boxes back open.

Obviously, that's going to benefit us in the short term and the long term. As far as real estate so far has been one of the things that my hypothesis has been -- I've been a little bit off on. We've yet to see a meaningful change in what we can acquire real estate at.

I thought that being one of the only bidders out there that we would see costs come down. I think we're still going through the price discovery process on that, and we'll see how that plays out long term.

I've got to believe that we will benefit from availability and hopefully, price. Availability is already there. It's just trying to get to what we think the property is worth versus what the reader or the landlord thinks the property is worth. So that's going to -- that will have some impact and help us grow -- get to our 2% to 3% new unit growth over time.

Your next question comes from the line of John Glass from Morgan Stanley.

One of the biggest -- 2 of the biggest shifts, I guess, during COVID, right, has been this growth in the off-premise business across the industry, and second has just been the pickup in delivery -- not delivery, but the digital business overall.

So could I first just talk about the off-premise business? How do you think you need to or do you need to change the format of the restaurant or the -- or some other sort of structural change that you think that can facilitate a better off-premise experience? Or is what you're doing kind of working and the operational changes that are working? Or do you think there's more sort of either pick-up windows or some other permanent changes to the way the restaurants are structured to facilitate that?

That's a good question, John. I think that going into this that we did the majority of our pickup with someone coming into the restaurant and picking up the food. We set up our process because we believe and we have proved out that accuracy and on-time were the 2 most important things that the off-premise consumer wanted.

Through this, we had to go to a different experience, which was we morphed very, very quickly to curbside. And we -- what we've learned through this is that curbside's a better option. And that the burden of on-time and accurate needs to get on us, and we need to have better systems to be able to deliver the same level of accuracy that we were delivering pre-COVID.

And what that means is a lot of our restaurants were on a path to build better capabilities to handle the in-restaurant pickup. And now, as we pivoted to curbside, the capabilities that we need to build inside are different. The good news is that they're cheaper because they're really not consumer-facing. And so it will cost us a lot -- cost us a little bit less to be able to create those capabilities.

But the technology and the expectation of the consumer is for our curbside experience, and we've taken a lot of friction out of that experience over the last 12 weeks. And we're in the middle of really rolling out some technology today to really make that experience a whole lot better as just that notification when you're in our parking lot versus we had a very manual procedure that we had to implement in the beginning of this. And eventually, we'll get the geofencing, and we'll catch up to what some of the bigger retailers are doing.

So we actually think that there's a big benefit in this consumer shift because we're going to take all these people that were in our dining room in our front door picking up food. And they will never enter our building again, which makes it a better experience for our dining guests. So that's really the big change, John, that has to happen.

And right now, we have the benefit of some of our -- having the extra space inside our restaurant that enables us to stage some of this off-premise work. But as we gain more capacity, we will need to modify some spaces and actually add some -- like in the long haul, we're going to have to bump out of the side of the building to be able to handle this extra demand.

But I see it as all positive. We think we can do curbside much more cost effectively than we can do picking up the food inside the restaurant.

And then just picking up on the second thread on digital. So you've got a significant amount of growth in the digital business, particularly on the To Go business. What have you learned from that? Is this a -- are these different consumers, for example? Do you think about now your promotional -- your marketing spend differently because digital has just grown so significantly as a channel?

And I am also curious being just your view on other brands have decided to use digital in various ways through delivery as a way to expand the restaurant into other brands, adding products, adding new brands that's specific to a category that doesn't relate to their existing brand. Is that a viable path for Darden?

So there's 2 questions in there, John, and I'll get to the virtual brand in a second. The first question is, obviously, the data is richer when we're capturing the data from our digital guests, which feeds into our huge database and our ability to market to them. So we can figure out through that and through our tokens that these are our off-premise guests only, and we can tailor all our marketing towards that guest and towards that experience.

We understand what they are buying and what they want to buy. And so we can get smarter with that. We were pretty smart prior to this. We just have more information today. And we'll be able -- our data scientists will be able to use that and market effectively.

Let me just pivot to virtual brands. I'm shocked that it took this long to come up, but I'll be giving you my take on this. Everybody around the room's very nervous right now but I think people are in different places, and they're trying to approach this and deal with this moment in time differently.

For us, this is not the right approach. We want to focus on brands that we've got 20-plus years and hundreds of millions of dollars invested in trying to build. And we want to make sure that they're executing at a high level. I think brands are going to matter, and I don't think you can -- I think brands are developed over a long period of time around delivering a promise to -- a consistent promise to a consumer. I think you have to have a functional need and an emotional need.

And I think that's what our brand builders have done for decades. And to get out on a digital platform and try to do that, I think people probably do what they want to do. I'm not saying it's a good idea or a bad idea. It's not for us. Brands are going to matter, and we think it's a distraction.

Your next question comes from the line of Dennis Geiger from UBS.

Great. Wondering if you could talk about where sort of customer satisfaction scores are at the moment. I think you might have alluded to it earlier, but kind of just based on some of the technology, the other friction-reducing initiatives and maybe some of the other customer experience investments that you spoke to, if you're getting credit for that, if you've seen a notable increase there and kind of to some extent how that's driving some of your go-forward thoughts on share gains, et cetera. That's question one.

Well, I'll be very clear. Our guest satisfaction scores are improving dramatically. So I want to put some context around that, which is what we don't understand is, is it just the consumer expectations are maybe different through this experience? So we're happy directionally where they're going, and we're happy directionally where they're going compared to our competitors. But at the same time, we really -- we're not patting ourselves in the back too much because this is definitely a different environment, and the consumer feedback is different.

So we don't know what the expectations are. But we are very pleased directionally where we're heading with our own internal and some of the industry stuff that we're seeing and how we're comparing to competitors.

Got it. And just kind of as a follow-up to that. No, it's not the biggest needle mover right now, but just as it relates to Cheddar's and kind of any improvements that you've been able to make in this environment and then whether that's resonating, just curious if you could speak to that at all. And more broadly, if the current environment at all has -- and emerging from the current environment and your thoughts there, if that changes at all, how you're thinking about future M&A strategy in any way. If you're able to speak to that.

Okay. You guys are getting really good at getting multiple questions in one question. Now let's talk about Cheddar's first, and I'll come back to thoughts on M&A.

Cheddar's is -- from a business model standpoint, Cheddar's has had the biggest transformation. The work that John Wilkerson and his team have done has been transformative, and I couldn't be more excited about directionally where they're heading.

Tactically, one of the biggest changes and one of the things that we had to really speed up was off-premise capabilities. We had very limited capabilities going into COVID. We only had 2 phone lines going into most of our restaurants. We couldn't even take the demand over the phone. We didn't have online ordering.

So the team rallied. This was supposed to be an initiative that was going to go all the way through fiscal '21, really wasn't supposed to be fully operational to '22. They got together, and they've been able to real quickly upgraded their phone lines. They have 4 phone lines coming in. We now have online ordering. New packaging's being rolled out as we're speaking, and they've developed a native app that is actually getting some pretty good adoption.

And so that piece of it has been really exciting that they've been able to move as quickly as they possibly can. Their in-restaurant dining has held strong. They still don't have a huge, robust, off-premise business, but we need to build that. It wasn't something that people thought of Cheddar's for, but we think there's a big opportunity there. So I'm thrilled directionally with what they're doing and the transformation they have made in their business model.

Just briefly on M&A, there's nothing new to report here. We continue to evaluate opportunities and discuss with our Board. We are very happy with our current portfolio, and we believe that we can achieve our growth targets and our value creation metrics with the portfolio that we have. We believe there's great opportunity for all our brands.

Your next question comes from the line of Chris Carril from RBC.

So I just wanted to circle back to margins and specifically on Olive Garden. So the margins at Olive Garden were particularly impressive this quarter despite the sales decline. So how are you thinking about the margins for that brand longer term?

Obviously, as the marketing and potential reinvestment spend builds, that will create a drag. But how much of the savings that you found do you think you can hold on to?

Yes. Chris, as we mentioned, Olive Garden's segment profit margin was 100 basis points better than last year. We've got a pretty good improvement in cost of sales, partly because of the question I was asked earlier about Never Ending Pasta Bowl. That actually drags a little bit margin for us. The cost of sales was a little bit better. We improved our food waste significantly because of the operational changes that we have made.

That said, a 22% margin on the sales levels they have, we're going to get -- we're going to start reinvesting eventually. We've got marketing that was down about $20 million year-over-year for Olive Garden. And as capacity starts to come back online as Gene mentioned, we will look at our promotional cadence and our marketing cadence.

But 22% is a pretty strong margin. So I wouldn't anticipate us significantly getting better than that as we continue to reinvest to get back to a point of getting back over 100% of our sales. Our goal is to drive our sales profitably, and we have enough room to invest to drive those sales profitably.

And then, Rick, in the estimate of recapturing pre-COVID EBITDA dollars at 90% of pre-COVID sales, how does off-premise versus on-premise mix factor into that estimate? Does that contemplate higher off-premise mix versus pre-COVID levels?

It does contemplate higher off-premise mix in pre-COVID, but not significantly higher. I mean, as Gene mentioned, Cheddar's should be higher. Olive Garden should be higher, and LongHorn Should be higher, but we're not going to be at 40% or 50% of sales premise when we've got full capacity dining rooms.

As you -- as we open, as Gene mentioned, as we open dining rooms, we start seeing that To Go business shift back in restaurant. But we still are -- right now, we're still retaining 60% of our peak premise sales.

Your next question comes from the line of David Palmer from Evercore.

How much higher do you think To Go sales might be at your big 2 brands after the COVID crisis? And I'm wondering if you have any clues that you'd care to share in terms of informing that thinking, such as these To Go sales being new customers or perhaps how that off-premise mix fades in the reopened states as your on-premise rebuilds. And I have a follow-up.

Yes, David, my -- and I've got no empiric evidence to support this, but my theory is that once we open up the dining rooms and, say, we get back to a normal environment, where we have concerts and everybody's going to football games la-di-da, I actually think off-premise will dip down below where it was. I think there's going to be a huge surge for on-premise dining.

I think people are tired of this experience. They'll utilize this experience right now. But when I talk to people and when we do some research, people want to get back out and socialize. I do think then it comes back. It comes back higher than where we were. I think our thought process is it's a little bit higher, but not terribly higher. And it will continue to grow over time, as it has been.

But I don't think that this is some big change that we're going to wake up, and Olive Garden's going to be doing 35% off-premise if we're going to concerts and having football games.

Wow, that's an interesting take. I wonder, just on the -- on -- and how you communicate with consumers, you've obviously made a lot more connectivity digitally with those consumers. Are you going to advertise less on TV after this is all over? Is this a source of margin leverage for you going forward?

I think that we have to go back to -- and go back to what I said earlier. We have to understand what the competitive set is. We have to understand what the economic backdrop is. We'll have to analyze how well we can get to our consumer through television. We still believe that we can do that.

We participate -- still participating in the upfronts. We think it's a good mechanism for us. And that's part of our scale benefit with Olive Garden, right? We can advertise on a national platform, and we have some efficiencies. And I think that we will still use that in the near term, but it will all depend on what the competitive set is and the economic backdrop. If we pull enough restaurants out, we may not have to advertise for a while.

Your next question comes from the line of Chris O'Cull from Stifel.

This is Patrick on for Chris. I know you spoke briefly to lapping seasonal increases that really began after this coming quarter, but I was hoping you could provide a bit more color on just your base case thinking currently on how that plays out and what you're expecting to see based on customer behavior that you see today and the capacity constraints that are in place. And what levers do you think you can pull if you do see a much more muted seasonality in average weekly sales as you move into the back half of the year? And then I have one follow-up.

Yes, Patrick. I'll start with we've shown, week-to-week, we're continuing to build our average weekly sales. And as I mentioned earlier, Q2 is our lowest seasonal quarter, and Q3 is our highest. So it does take a lot of increase in average weekly sales to get the same comp level Q3 as Q2.

But what we are going to do and what we continue to do is evaluate the situation as restaurants open, as dining room capacity is open. I mean, as Gene mentioned, if dining room capacities don't continue to expand, we still have some levers to pull on the off-premise side.

So that's what we will do. We will continue to advertise off-premise if it's what we need to do to continue to build sales. But as long as we do that profitably, our intention is to grow our sales profitably from where we are today. And so that's what we'll do. We'll continue to focus on off-premise. Now if dining rooms reopen completely, we should see an increase in sales.

That's helpful. And forgive me if I missed this, but it sounds like menu simplification is -- it sounded relatively permanent. And so I was wondering if you could provide a bit more detail on exactly the margin improvement you're seeing from that initiative in particular. And then how do we think about, as sales normalize moving forward a little further into the future, should we expect to see some adding back to the menu and some additional complexity come back on? Or is this something you're thinking of just completely permanent even as sales normalize?

Well, the biggest driver of the cost savings is waste. And that's menu. That's lack of promotional activity. There's some other things that are influencing that.

I think that the challenge for the teams is if they need to add menu items to fulfill a need, can they do that without adding complexity? I think they have -- I think in their calculus prior to this, there wasn't enough weight put on the complexity of adding new menu items. There wasn't enough -- no one thought about that.

And I think, today, that's the part of the thought process as they think about adding something. How do we do this and make sure we maintain our productivity and don't increase our waste? So I think a better way to say that is as we do menu development, it's going through a better filter today that I think will have a long -- longer -- have a long-lasting impact on our ability to maintain these cost savings.

Your next question comes from the line of Peter Saleh from BTIG.

Great. Gene, can you just elaborate a little bit on where the cost savings are coming from for doing curbside versus the in-store pickup? Is it cheaper labor? Or is it just less spend on CapEx in the store to build out the area for pickup? Just trying to understand where the cost savings may be coming from.

Well, it's a technology that's creating it. It's no one taking the answer on the phone. We're dropping -- the consumers letting us know when they're in the parking lot, and we're just dropping the bag in their car. So there's just a lot less interaction there.

Just the cost is just purely productivity efficiency, thinking about a line of 5 or 6 people at a desk or at the bar top in a restaurant waiting to get To Go versus having someone just pull up through a car and put a bag in a trunk. That's where the efficiencies come, and technology's enabling all that.

Understood. Okay. And then just on fine -- the Fine Dining segment, I think this quarter, you guys mentioned that the weekends you saw strength. I think that was also similar to what you saw last quarter. Are you seeing any sort of change in consumer behavior in fine dining during the week? Or is it more of the same?

Well, I think that obviously, we're missing the business travel and those types of dinners. So I mean, that was a big part of capital growth. And especially in the essential business districts, you're always soft in your suburbia restaurant during the week, and you made up for on the weekends.

I think when you -- just another interesting tidbit is that when you look at capital growth comps, you're starting every week with over a $1 million shortfall just in the 3 restaurants in New York. We're doing $3,000 a day there with our 10 seats. Those restaurants do well over $1 million a week.

And so you just -- there's just so much geographical differences in those businesses. We have some capital growth that are performing fairly well, especially in suburbia. But I'm confident, as I see the sales volume on the weekends, I know we're turning away a lot of people. And as soon as we can get a few more tables, we can continue to grow that business. And I'm confident that they're -- I'm confident those businesses are going to be cash flow positive going forward.

Your next question comes from the line of Jeff Farmer from Gordon Haskett.

Just wanted to follow up on a couple of questions very quickly. So what level of same-store sales performance are you seeing in California? And if you don't want to get that specific, I'm just curious potentially what the headwind for Olive Garden consolidated same-store sales are related to the California partial closures.

Yes, Jeff. For the quarter, we were down somewhere around 50% in California. Now remember, they were open for a little bit of time, and then they reshutdown. But we are seeing some pretty good unit volumes in California, and I was talking to Olive Garden more than any other brand.

But -- and as Gene mentioned, Yard House is significantly impacted in California, but we were down. And if you take California out of Olive Garden, it's a 200 basis point swing for the quarter.

Okay. And then as a follow-up, I think this was touched on earlier, but I asked you this in late June, and I believe you guys said that there were about 10 to 15 restaurants that were posting positive same-store sales even with that 50% capacity constraint in place or limit in place. Where does that number stand now?

Yes. I would -- what I would say is, instead of getting into individual restaurants, let's talk about a couple of states. I mean, LongHorn was positive in Georgia. The entire system was positive in Georgia for the quarter.

We have a lot more restaurants that are positive now than we did going -- earlier. The last couple of weeks, it's been even better than that. So without getting into individual restaurants, we have it all contemplated in our guidance for Q2. And so I'd rather leave it at that.

Your next question comes from the line of Brett Levy from MKM Partners.

When you think about the great job you're doing right now in terms of managing the hourly labor, when you think about labor just overall, what are you seeing in terms of inflation, your ability to hire? And also the integration of all of the different tests you've talked about on the technology front. You've spent a lot of time talking about the customer facing, but what about on the operational side? And then just the managing of how you're balancing the in-store and the off-premise, is it the same servers? Is it the other front of house? You've had one of your competitors talk about how the off-premise transaction is an hourly as opposed to a tip. So I'll stop there for now.

Okay. Well, Brett, you've got a lot in there. And that -- first, if you've got more, I can't wait. But let's talk about hiring. Hiring is very local. There are different pockets of the country that are more stressed than others.

I will make a global comment. So I've been amazed at how well the hospitality workforce was absorbed in other areas during COVID. And so there hasn't been like this -- there's still stress in that environment. We're still seeing -- we still expect wages to rise somewhere between 3% and 5% for the year.

As far as technology, technology goes, and the adaptation is easy today, right? And we're doing that. We haven't done -- we haven't focused a lot on improving technology in restaurant. All of our stuff's really been -- all of our effort has been focused on the consumer right now.

We do have some -- we will get back to some projects that will or modernize some of our tools in restaurants that will hopefully help increase productivity. And as far as off-premise, I mean, we're using for -- off-premise for us are tipped employees. They've got a higher average weight, but they do collect some gratuities on their service.

Your next question comes from the line of Lauren Silberman from Credit Suisse.

A follow-up on your commentary regarding industry closures. Are you seeing any noticeable difference? Or do you expect to see any difference in the level of closures in states that reopened earlier or maybe urban versus suburban markets? And how is that informing your future development pipeline?

Well, I think that the markets that have had the tightest restrictions are going to have the most closures because I think that's where -- I think in some of these urban environments, they just don't have the capital to hang on. I don't think it changes our development philosophy at all. I mean, I think good trade areas are good trade areas.

I mean, we -- there's a lot of talk about migration out of some of the bigger cities. We'll see how that plays out. I think that -- I think, eventually, we're going to have some really good opportunities to do some work in Manhattan as an example.

I think that it was very difficult from a cost standpoint pre-COVID to justify building more restaurants there. But I think post-COVID, we might have some opportunities. So I don't think from a development standpoint it has a tremendous amount of impact.

We'll continue to look. We know where we have holes in each brand from trade areas, and we're going to try to fill them.

Great. And you touched on this a bit, but with regards to the Fine Dining brands and maybe the Yard House as well, to what extent are these brands driven by tourism or large business conventions? And how are you thinking about that recovery? And do you need some of these exogenous factors to return to a full sales recapture?

Absolutely. We've got a bunch of Yard Houses tied to baseball stadiums and football stadiums. And LA LIVE's our best Yard House in the system, and that's been decimated because of what's happening with sporting events.

So yes, I mean, there's a few of our brands that -- a few of our restaurants that are tied to that. And they'll come back. I'm a big believer that we know we're going to get back to normal. These are going to be great restaurants. But for the time being, we just have to run them as efficiently as we possibly can and do the best we can with what we have.

Your next question comes from the line of James Rutherford from Stephens.

So a quick question on the capacity bottlenecks at Olive Garden specifically. And it seems like it would be key to drive traffic at nonpeak times, and certain there's things you're doing around that, but are there any kind of incentives you can do to bring people in during those shoulder periods? Or is it a situation where you're really fully utilizing that capacity already during the off periods as well?

No. I mean, I think that's something we face pre-COVID with, how do you increase your capacity at certain downtimes of the day? I think that's a high-activity exercise with very low payout.

I think that one of the important things about our restaurant is that downtime to help you prepare for the break between lunch and dinner is important, so you can get ready for dinner. I mean, there's parts of us -- we have cycles in our business, and they're important.

I think we would -- I think that we've been very disciplined in this process to make sure that we're not chasing what I would call this low-return activity. And so I don't think there's a whole lot there.

I do think that what happens is as your business starts to improve, especially midweek or early week, is that your lunch lasts 15 minutes longer. Your dinner lasts 15, 20 minutes longer. That's important. Trying to drive people into your restaurant 2:00 in 30 years I found that to be a waste of time and money and effort.

Your next question comes from the line of Sara Senatore from Bernstein.

I had a sort of a related question on that, and quick on Cheddar's. But on the capacity, I guess, as I think about 50% capacity across the system, that seems pretty standard for a lot of restaurants. I mean, I appreciate California's 50 basis points. That's sort of helpful. How should I think about 50% capacity per se in Olive Garden versus maybe competitors? I guess I'm just sort of thinking, if you all go to this internal reviews, a higher -- you just have higher than some indiscernible] capacity reduce incentives than last year and maybe over 50% of the capacity begin. I guess do you have (inaudible) how we think of that (inaudible) being delivery that we all know historically used -- have been more at capacity than most of the other competition. I don't know if there are any numbers about that. And then, I guess, I'll get just have a quick follow-up on Cheddar's, please.

Sara, it's Rick. You were breaking up quite a bit. So let me see if I got the gist of your question. I think it was about most restaurants are at this 50% capacity level, but how does that impact Olive Garden versus competitors?

And I think the way I would frame it is just average unit volumes. Olive Garden last year was probably using a lot more of its capacity than some of our competitors were using at that time last year. And so as we think about AUVs and think about the comp differential maybe even between KNAPP-TRACK, we think that some of the impact is that while we're at 50% capacity today, and we were at 100% capacity last year, we were using much more of our capacity maybe than someone else.

I think that was the gist of your question, but it was really hard to hear. And if -- I think you also had a question on Cheddar's?

Yes. That was actually exactly my question, but I wasn't sure if you had any sense of what the average capacity might look like for the industry. Just to help us sort of think through that.

But the real question on Cheddar's is you talked about off-premise. That had been sort of slow to turn. I think we were starting to see some improvement in the comps, and then this -- the pandemic hit. Could you talk a little bit about any kind of metrics? And maybe in particular, I think that's where you've seen a lot of friction moving to. Is there any sense of, can you kind of quantify the (inaudible) 150 basis points. It's a pretty big (inaudible) just a little bit more color on that.

Yes, Sara. Breaking up again. I think I caught most of it until the end. I think you were asking about the impact for Cheddar's and how we've improved margins at Cheddar's versus maybe the rest.

And Gene mentioned -- I think that was your question. So Gene mentioned that Cheddar's had the biggest transformation in our business model. On an hourly labor basis, we said we had about 350 basis points for Darden improvement in hourly labor. Cheddar's was close to 3x that.

And so it was a very big improvement at Cheddar's in their margin structure because of the simplification they did and the work they have done, and the fact that they went from maybe less than 5% To Go sales to over 20% in a short period of time. And we think we'll continue to build that To Go volume, but Cheddar's did make the biggest transformation in their margin structure, and we think a lot of that will stick.

Your next question comes from the line of Gregory Francfort from Bank of America.

The question I had was back on the margin that is probably for Rick. I think you've talked in the past about margins at Olive Garden above 20% at the level at which you reinvest. And I think you were there -- right around there pre-COVID. And so as you think about the 100, 150 basis points of margin upside, is that going to be spread relatively similarly across brands? Or I mean, do you think it overweights to the LongHorn and other businesses, just given where the segment margins were pre-COVID?

Greg, yes, I think it overweights to other brands. I mean, we should still see a little bit of margin improvement at Olive Garden just because the environment's very different today than it was pre-COVID. I mean, I think a lot of brands are out there improving their margins in some way, shape or form with simplification. And we just want to make sure our gap to the rest of the industry doesn't grow significantly.

But we do believe that Olive Garden will see a little bit of margin improvement from where they were before. We just think that the improvement will come even greater in some of our other brands, Cheddar's and some of our other brands in the other segment.

Your next question comes from the line of John Ivankoe from JPMorgan.

Gene, your answer to David Palmer's questions on off-premise is -- I think it's going to be like one of the great discussed topics probably of this month. The question -- gosh, and thanks for the long call. It's helpful for all of us. It's -- I would imagine it's nearly impossible to get a staffing model right just kind of anticipating how customers are going to come back, what have you, especially with the amount of labor hours that you took out of the store. I just wanted to see like how honed in that model actually is.

I mean, what are you kind of seeing in terms of the variations of margins relative? So are you having too much labor at any point in time? So I can't imagine too little labor at any point in time where, gosh, you're just not zapping the amount of customers that for whatever reason decided to come in at 5:00 on a Tuesday that maybe could have led to some longer table times. They could have actually -- in some way, actually impaired your ability to drive the traffic that you could have until that labor model gets more fine-tuned.

Yes, John, I think for Olive Garden -- because we're not doing a lot of outdoor dining, we don't have the capability there. That business is a little bit easier to predict. We've been -- the leadership of all of our business is erring on the side of more labor than less. And we're tracking number of servers per restaurant per day, trying to understand as the business starts to grow, making sure that we have the appropriate staffing.

Where it gets more difficult is in some of the Yard Houses, where we have some -- a lot of outside dining that didn't have any covers. And if it starts to rain, if it doesn't rain, I mean, that's where life gets a little bit more difficult for our operators.

But I would say in the 2 big casual brands, they've gotten pretty good. And they need a -- what I would say, a change in what's happening in the environment. In other words, if we go from 25% to 50%, that's going to change the flow of mix. That's going to change what's on-premise, on-premise. And it takes them a few days to figure that out.

But we're erring on the side. Believe it or not, I know our labor results are really strong. But we're erring on the side of more labor, not less.

Your next question comes from the line of Matthew DiFrisco from Guggenheim.

My question is with respect to Georgia and the positive comps there. Could you -- I guess, it sounds like you were saying the consumer -- obviously, we've known this for a while. The consumer's a little different than New York. However, is that also a by-product of PPP sort of slowing down and having a lift? Or have we seen some closures happen there? I'm trying to get a picture of Georgia being a positive -- is it a positive market? Or is it just positive for Olive Garden and LongHorn?

Or is the entire -- or dollars up for restaurant spending in the State of Georgia year-over-year? Or is it just a smaller pie, and you've won, consolidated a lot of that share?

Well, a couple of things. First of all, the majority of the restaurants that are positive in Georgia are LongHorn, not Olive Garden. Olive Garden's performing well in Georgia, but nowhere near what Olive Garden -- I mean what LongHorn is.

And LongHorn has had a strong footprint. And we've got 45 restaurants in the City of Atlanta, where, every 3 miles, we've got a restaurant. And we've always done extremely well there. And the brand is beloved there. So the brand strength there is fantastic. That's one component.

The other component is that, especially when you get 15 miles outside of the city, life is pretty -- is normal there. It's not pretty normal. It's normal there. And I went in an airport the other day and not one person had a mask on.

I know -- I was in a hotel. I went up to a rooftop deck, and it was too deep at the bar. I mean -- so I mean, it's just a different life in Georgia. I know it's hard for you guys in New York to even imagine that, but you still can't get around Georgia. There's so much traffic around the City of Atlanta.

So I mean, in the city area, there's a little bit more. But I would tell you that -- and I think if you look at other parts of the country in different states, behavior is fairly normal.

So I guess, that would be then the industry on a year-over-year basis also for -- or the peers. It seems like it's a rising tide. They just haven't taken as much of a dip down?

Well, I think they haven't taken as much dip down. But I think LongHorn's significantly outperforming most people in that market. And they always have, John. I mean, they've always -- it's always been the core of that brand.

And one other thing. Remember, Georgia was one of the first to open, right? So they've been dealing with reopen for a long time, a lot longer than other states. So the longer a restaurant or a market is open, the more people start getting a little -- feeling a little bit more comfortable.

Okay. And just on that, I mentioned PPP also. Can you guys talk about sort of what inning we're in or how -- what your outlook is for the potential of amount of seats maybe to leave the casual dining market? So say, when we are in this time next year, how many seats might have exited?

We're comfortable and believe in somewhere between 5% and 15%. I think there's some other industry folks saying more than that. But I think 5% to 15%, I think you remember, once it's a restaurant, it's a restaurant. A lot of these will get recapitalized in the next few years, but I definitely believe that we'll be competing against less competition on the other side of this crisis.

Your next question comes from the line of Jake Bartlett from Truist Securities.

I really had 2 quick ones. And the first, on the menu simplification, can you quantify how many less items, for instance, that is? Just going to a have a sense as to the scale of the simplification.

And then, Gene, I'm not going to ask you about third-party delivery. I think I know the answer, but I'm curious about your experience with in-house delivery and lowering the minimum check or the minimum order, for instance. Is that something you want to lean into a little bit, maybe continue to lower that to increase your in-house delivery?

I think on -- the answer to the second one is that we'll continue to evaluate that. We don't -- but we don't see a big upside there. What was the first? Percent of menu simplification.

Each brand is very, very different. We range somewhere between 20% reduction to 40% reduction in one brand. The easiest thing to do is to go find the menus.

Your next question comes from the line of Brian Vaccaro from Raymond James.

Rick, could you just provide a little more color on the other OpEx line, obviously, down around 20% versus pre-COVID levels? Can you just walk through some of the more significant cost reductions have been and how you expect those costs to come back? And then would you be willing to provide the fiscal 1Q comps for the individual brands within the Fine Dining and Other Business segments?

Yes. On the restaurant expense line, I just want to give you a couple of tidbits. One, we talked about business interruption of $10 million. That was a proceed that we got. That hit our restaurant expense lines.

We did have some rent reductions in the quarter. Cash rent reductions were bigger than the P&L impact. The P&L impact was about $3 million. We had some -- most of our savings are in utilities, in smallwares and repairs and maintenance. And we would expect that as dining rooms start to reopen, as they get busy again, we'd have R&M start to increase as well as smallwares and utilities. Those savings are maybe not as permanent, right, because those are just because their volumes are down.

Another point to mention is we are spending money on PPE for masks for our masks for out teams, glove, chemicals, et cetera. And that's about $4 million to $5 million a quarter.

Okay. And then the comps for Fine Dining and Other Business segments?

Yes. On the comp side, we mentioned about a year ago that we were going to start providing comps only at a segment level. And this was our first quarter that, that was the case. And so we're going to continue with that.

Your last question comes from the line of Jared Garber from Goldman Sachs.

Just a quick one for me. As you think about longer-term capacity, maybe if we just focus on Olive Garden, is there a level of average weekly sales or AUVs, however you want to talk about it, that's sort of a limit for Olive Garden? Obviously, the off-premise business can be quite additive. But as you get back to sort of that 100% in-dining room capacity, how should we think about the longer-term sort of cap, if you will, on AUVs in that brand?

Well, I think there is no cap. I mean, I think that if you reached your -- if you start to reach your capacity for guest count, you have pricing power, and you can move your AUVs that way.

I think pre-COVID, we were getting close to over $5 million average unit volumes. So I think that we definitely -- hopefully, we can get back there and get past that.

I don't ever think of a cap for a concept. Now we know that when you start adding new units, they're not going to come on at the average. Usually, we can create a strong IRR with restaurants that come in a little bit below the average. And -- but over time, we've been able to get that average to a pretty good level at $5 million.

There are no further questions at this time. I'll turn the call back over to the presenters.

Thank you. That concludes our call. I'd like to remind you that we plan to release second quarter results on Friday, December 18, before the market opens with a conference call to follow. Thank you for participating in today's call.

This concludes today's conference call. You may now disconnect.