達登餐飲 (DRI) 2019 Q4 法說會逐字稿

Good morning.

Welcome to the Darden Fiscal Year 2019 Fourth Quarter Earnings Call.

(Operator Instructions) This conference is being recorded.

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

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

Thank you.

You may begin.

Thank you, Jill.

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 include certain non-GAAP measurements, and reconciliations of these measurements are included in the presentation.

We plan to release fiscal 2020 first quarter earnings on September 19 before the market opens, followed by a conference call.

This morning, Gene will discuss our fiscal year performance and quarterly business highlights and Rick will provide more detail on our financial results from both the fourth quarter and the full year before providing our initial outlook for fiscal 2020.

As a reminder, all references to the industry benchmark during today's call refer to estimated KNAPP-TRACK, excluding Darden.

During our fiscal fourth quarter, industry total sales growth was 0.7%, industry same-restaurant sales declined 0.3% and industry same-restaurant guest counts decreased 2.4%.

For the full fiscal year, industry total sales growth was 1.6%, industry same-restaurant sales grew 0.7% and industry same-restaurant guest counts decreased 1.2%.

Now I will turn the call over to Gene.

Thank you, Kevin, and good morning, everyone.

As you see from our press release this morning, the fourth quarter wrapped up a very strong fiscal 2019 for Darden.

Total sales from continuing operations for the year were $8.5 billion, an increase of 5.3%.

Same-restaurant sales for the year increased 2.5% and adjusted net earnings per share were $5.82, an increase of 21% from last year.

I want to start this morning by briefly talking about the industry dynamics we saw during the fourth quarter and also share some thoughts on the consumer.

As you know, the industry experienced sales volatility during the quarter.

After a good March, April was a challenging month.

But the industry bounced back in May.

A significant part of the volatility was due to the holiday shift, which helped March but hurt April.

Our business followed the same pattern.

And I was pleased to see that our traffic after the industry expanded each month throughout the quarter.

As we think about the consumer and look at the macro environment, the economy continues to be strong.

Unemployment is as its lowest levels in nearly 50 years, wages are growing at a healthy rate, outpacing inflation and consumer confidence remains high.

Turning to our brand highlights for the quarter.

Olive Garden had a good quarter, which resulted in its 19th consecutive quarter same-restaurant sales growth.

Total sales grew 3.7%, driven by same-restaurant sales growth of 2.4% and 1.3% growth from new restaurants.

Same-restaurant guest counts declined 0.4%.

But Olive Garden's gap to the industry expanded throughout the quarter even as they continued to reduce incentives.

If you adjust for lack of incentives, guest counts would have been positive during the quarter.

Check average increased by 2.8% this quarter, comprised of 1.6% pricing and 1.2% menu mix.

The reduction in menu mix compared to prior quarters was driven primarily by promotional offerings being similar to the prior year.

Olive Garden's results were driven by the team's focus on flawless execution, everyday value and their off-premise business.

During the quarter, the restaurant team's focus on flawless execution helped maintain all-time-high guest satisfaction ratings.

A great example of this focus was on Mother's Day, the busiest day of the year at Olive Garden, when they recorded the highest Mother's Day sales ever.

Olive Garden continued to strengthen their everyday value platform throughout the quarter.

They refreshed their 5 for $5 value drink platform and increased awareness on everyday value through secondary TV advertising, which highlighted their Lunch Duos starting at $6.99, everyday Early Dinner Duos starting at $8.99 and Cucina Mia!

starting at $9.99.

Finally, Olive Garden's off-premise sales increased 9%, representing 15% of total sales.

The team remains focused on improving To Go capabilities and executing at a high level while driving continued growth in their catering business.

Olive Garden had an excellent year.

They continue to gain share in casual dining market share as they grew total sales 5% to $4.3 billion, which outperformed the industry benchmark by 340 basis points.

And grew traffic for the fourth year in a row.

The business remained strong and the team is doing a great job of executing against the strategy to drive frequency among their most loyal guests while making the appropriate investments.

LongHorn Steakhouse had another strong quarter.

Total sales grew 5.7%, driven by 2.4% growth from new restaurants and same-restaurant sales growth of 3.3%, the 25th consecutive quarter same-restaurant sales growth.

Same-restaurant guest counts grew 0.3%.

The LongHorn team continues to successfully execute their long-term strategy of investing in the quality of the guest experience, simplifying operations to drive execution and leveraging a unique culture to increase team member engagement.

They remain focused on creating relevant promotions while leveraging their guest favorite core menu items.

Focusing on core items ensures their operators are able to execute at a very high level.

The LongHorn team also continued to do a great job of supporting these promotions by telling their quality story with multiple guest touch points.

Additionally, during the quarter, LongHorn launched a new beverage program that brought their focus on quality, simplicity and culture to life.

The program is focused on strengthening their growing beverage sales.

Initial guest feedback has been positive.

Finally, the LongHorn team has been focused on ensuring the To Go experience equals their in-restaurant experience for guests who choose this convenience.

They're enhancing their capabilities and have a dedicated To Go area in 40% of their restaurants.

This ongoing focus has resulted in improvement in overall experience with high guest satisfaction scores for order accuracy and timeliness.

I'm very pleased with LongHorn's performance this year.

They continue to take share of the casual dining market as they grew total sales 6.3% to $1.8 billion, which outperformed the industry benchmark by 470 basis points.

These results reflect their commitment to execute their long-term strategy.

Cheddar's Scratch Kitchen total sales increased 0.6% in the fourth quarter, driven by sales growth from new restaurants of 3.8% and offset by same-restaurant sales decline of 3.2%.

The magnitude of this decline was driven by the former franchise restaurants, which fell 6.1%.

The original company restaurants were down 1.5%.

I was encouraged to see a sequential improvement in guest count trends for Cheddar's from Q3 to Q4.

At the beginning of the fiscal year, the Cheddar's team established 3 strategic priorities: staff to win, master the tools and standardize and simplify, with the goal of repairing fundamental elements of the business and shifting momentum.

During the quarter, they continue to make progress against these priorities.

Overall staffing levels for both team members and managers are now on par with our standards.

This better enables the Cheddar's team to focus on execution.

And while turnover has improved, it is still significantly above the Darden norm.

In addition, the restaurant teams continue to build [acumen] with our systems and tools.

They improved the use of their guest count forecasting application, which is critical to running efficient shifts.

Finally, the Cheddar's team made progress with standardization and simplification by deploying new culinary processes during the quarter.

These improvements contributed to better execution, efficiency and productivity while enhancing speed of service.

Fiscal 2019 was a challenging year for Cheddar's, one that was filled with significant change.

However, the team made meaningful progress throughout the year that helped Cheddar's deliver double-digit profit growth this quarter.

And while I'm disappointed the work has yet to translate to top line sales growth, I am encouraged that we saw 180 basis point improvement in guest count trends from the first half of the year to the second half of the year.

These improvements indicate momentum is beginning to shift in the right direction.

There's still a lot of work left to be done, but I'm confident in the plan that Cheddar's team has in place and their ability to execute it.

Fiscal 2019 was a great year for Darden.

Our restaurant teams demonstrated their commitment to getting better every day as they execute our "Back to Basics" operating philosophy.

And we continue to make meaningful progress in strengthening our core competitive advantages.

I remain convinced that we have the right strategy in place, and we are well positioned to achieve our long-term value creation framework over time.

On behalf of our Board of Directors and senior leadership team, I want to thank our 185,000 team members for all they do to make our company successful.

Now I'll turn it over to Rick.

Thank you, Gene, and good morning, everyone.

We're pleased with our fourth quarter performance.

We grew total sales by 4.5% from the addition of 39 net new restaurants and same-restaurant sales growth of 1.6%.

Fourth quarter adjusted diluted net earnings per share from continuing operations was $1.76, an increase of 26.6% from last year.

This quarter, we paid $92 million in dividends and repurchased $42 million in shares, returning a total of a $134 million of capital to our shareholders.

Looking at the P&L.

Restaurant-level EBITDA margin was flat versus last year and adjusted EBIT margins expanded 10 basis points to 11% this quarter.

Food and beverage was flat to last year as pricing and cost savings offset inflation of just over 1% and unfavorable menu mix.

Restaurant labor of 32.2% was unfavorable 10 basis points driven by mark-to-market while the 120 basis points of unfavorability from continued wage inflation was offset by favorability from pricing leverage, incremental sales leverage from higher check mix and productivity improvements.

Both marketing and G&A were favorable 10 basis points driven by sales leverage.

Depreciation and amortization was unfavorable 20 basis points as we continued to invest in new restaurant growth, remodels and technology.

Impairments were favorable 20 basis points as we lapped $4.5 million of impairments last year for restaurants that were earmarked for closing as their leases expired.

Our effective tax rate for the quarter was 5.5%.

This rate was approximately 400 basis points lower than we anticipated in March.

Roughly half of this favorability was from a higher-than-anticipated benefit from stock option exercise and mark-to-market hedges.

The remainder was the result of strategic tax projects that were completed in Q4.

Turning to our segment performance.

All of our segments grew total sales and segment profit dollars again this quarter.

Segment profit margin held flat at both Olive Garden and LongHorn while the Fine Dining and other segments grew segment profit margins.

Of particular note in the other segment, as Gene mentioned, Cheddar's significantly grew segment profit this quarter even with negative same-restaurant sales as they focused on running more efficient food costs and labor.

Fiscal 2019 was another great year of performance as our brands continued to leverage Darden's scale and other competitive advantages.

Our strong operating model generates significant cash flows, and this year was no exception.

This year's strong top and bottom line performance drove approximately $1.2 billion in EBITDA from continuing operations.

We invested approximately $450 million of capital in the business and returned over $0.5 billion to shareholders, consisting of $371 million in dividends and $208 million in share repurchases.

In fact, since 2016, we've grown EBITDA 9% annually and returned over $0.5 billion to shareholders each year in the form of dividends and share repurchases.

Before I share our outlook for fiscal 2020, I want to reiterate our long-term value creation framework.

This framework calls for a 10% to 15% total shareholder return, which is meant to be achieved over time assuming a constant earnings multiple.

Our total shareholder -- our actual total shareholder returns have well exceeded our long-term framework since its introduction in 2015.

In fact, our annualized TSR over the 3-year fiscal period ended May 26 was approximately 25%.

To achieve our long-term framework, we anticipate earnings after tax growth of 7% to 10%, which is made up of total sales growth of between 3% to 6% and EBIT margin expansion between 10 to 30 basis points.

Additionally, we expect to return another 3% to 5% to shareholders in the form of a dividend payout ratio between 50% and 60% of our net income and share repurchases between $150 million and $250 million.

As I mentioned on last quarter's call, fiscal 2020 includes 2 unique items.

First, it's a 53-week year, and we anticipate a positive impact on diluted net earnings per share from continuing operations of roughly $0.15.

Second, in the first quarter of fiscal 2020, we are implementing ASC 842, the new accounting standard for leases.

We currently estimate this will negatively impact EPS by approximately $0.05.

Roughly 3/4 of this impact is in interest while the rest impacts EBIT.

Now turning to our full outlook for fiscal 2020.

We expect total sales growth of 5.3% to 6.3%, driven by approximately 2% from the addition of the 53rd week; same-restaurant sales growth of 1% to 2%; and approximately 44 net new restaurants; capital spending between $450 million and $500 million; total inflation of approximately 2.5% with commodities inflation of 1% to 2% and total labor inflation of 3.5%

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to 4.5%; an annual effective tax rate of 10% to 11%; and approximately 124 million diluted average shares outstanding for the year, all resulting in diluted net earnings per share between $6.30 and $6.45.

This morning, we also announced that our Board approved a 17% increase to our regular quarterly dividend to $0.88 per share, implying an annual dividend of $3.52, resulting in a yield of 3% based on yesterday's closing share price.

And with that, we'll take your questions.

(Operator Instructions) Our first question will be from Brian Bittner with Oppenheimer & Co.

This is actually Mike Tamas on for Brian.

You guys started about talking about a pretty healthy consumer environment.

So when you think about driving sales in 2020, is it -- is the playbook the same?

Is there anything you think you need to do differently, whether looking at the competitive environment?

Or how do you think about 2020 sales' drivers versus, say, the last 12 months, which is really healthy?

I think we stay focus on our "Back to Basics" philosophy.

I think it's getting more important than ever that we continue to ensure that our restaurants are staffed with the appropriate team members and that we're creating great dining experiences.

We think there's still opportunity with throughput, especially on the weekends in these high-demand days.

And we're continuing to focus on how do we simplify our operations, so our teams can execute at a higher level.

We're going to continue to win this at the 9 square feet.

We've got to do a better job than our competitors do taking care of our guests and providing offerings that our guests are excited about.

So I'd sum that up by saying our playbook's not changing, we're focused on the exact same things.

Got you.

And then just on the cost side of things, your total cost basket is up a little bit more in '20 versus '19.

So is there anything that you have to do a little differently there?

Or is there a little more productivity you need to kind of squeeze out of the mall?

Or how do you think about that?

Yes.

We are working on productivity every year.

We don't anticipate squeezing out a lot more than we did last year.

We still anticipate productivity enhancements.

But we also have a great supply chain team that will continue to look for cost savings to help offset any incremental inflation.

Our next question comes from David Tarantino with Baird.

Gene, just a question about the industry environment.

I appreciate your opening remarks.

But if I look at the last 3 or 4 months, it does look like traffic in the industry has softened relative to what we were running, I guess, the prior 12 months.

So wondering if you have some thoughts on why we've seen that softening trend even when you kind of normalize out for the calendar shift.

And then as you think about that trend, do you think you need to sort of normalize the value promotion or maybe tick back up the value promotion after maybe pulling back on some of the offers over the last 12 months or 24 months?

We've been trying to tease out the change in traffic trend.

I'll pivot just here just for 1 second to say what we're really pleased about is this, the industry traffic has softened a little bit, our gap has increased.

And that's been really reassuring.

We haven't been able to point to any particular thing that's causing this traffic softness in the industry.

And we've tried, we plan it from different angles.

Overall, I think our thought is that the consumer is still in a really good place.

And we don't see that changing here in the near term.

Obviously, we're living in a more volatile environment.

I will say one of the things that we do see is day-to-day, week-to-week, there's a little bit more volatility than it was -- there had been.

And again, hard for us to try to figure out what's driving that.

As far as value, I think that we'll continue to look for ways to add value to the consumer proposition.

I think as we think about incentives right now, we believe that we're still in the mode of withdrawing incentives based on the environment.

I'd rather continue to find ways to invest in what we call everyday value in the businesses.

But there's no doubt, we've taken a lot of currency out of the marketplace.

And we do have that available to put back in if we think that's the right thing to do.

And Gene, maybe a follow-up on that last comment.

What would you need to see to add back some of those incentives or get more aggressive on the value side?

Well, I think if our traffic started to go the other way against the industry, if the gap started to shrink, and I think then we have to consider what's going on with the business model.

I think one of the things that we focus on is protecting our business model and using our scale, not to make short-term decisions that may drive a few extra guests here and there but really aren't that profitable.

So I think as long as our gap to the industry is healthy from a traffic standpoint, we'll continue to be very cautious with that.

Our next question comes from David Palmer with Evercore ISI.

A question on just that polished casual dining side.

It does look like that's a little tougher than it has been in that segment.

Wondering if there's a reason or insight there, tax season, stock markets might impact that segment, and we're also regionally bigger on the West Coast.

And then separately on LongHorn.

Is that brand picking up steam?

Or was there in a way that feels like in the medium term that should -- is widening its gap to KNAPP or is there certain reasons within that quarter for that to happen?

David, great question on polished.

I think I'll sum that up as saying polished casual operates in some of the best retail trade areas across the country.

And I believe there's more good competition, smaller brands that are really good businesses that are expanding in those trade areas putting more pressure on our polished casual brands.

And I'll use, I think, a very good example.

I mean if you're going to grow True Foods, where are you going to put a True Foods today?

You're going to put it right on top of a Seasons 52.

And there are other brewery brands that are -- where are they going to put their businesses?

They're going to put them right on top of a Yard House.

And so those brands operate in very good trade areas.

And we're experiencing a little bit more competition there.

So I think you asked a good question.

But I think that's the insight there.

As far as LongHorn goes, we've been making, I think, since -- when Todd Burrowes came back, under his leadership, we've been making great investments in LongHorn.

And I think that there have been multiple-year investments.

And I think we're gaining a lot of momentum in that business.

We've increased the size of the steaks.

We've simplified the operation.

We've simplified the promotional constructs.

And our retention is incredibly high.

And we're executing at a really high level.

So I think there's a lot of good momentum in that business.

And the last thought on LongHorn is we had a pretty good growth curve there in really in the mid -- between 2010 and 2015, we broke into a lot of new territories.

And those new territories are really starting to mature nicely and we're getting good growth from them.

Going in and being the fourth or fifth steakhouse in a marketplace, it's really tough to break in and get into the consumer routines.

And over time, we know that LongHorn will build loyalty in those years in their 3- to 10-year cycle.

So there's a lot of momentum in that piece of the business also.

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

Gene, several of the bar and grill and mid-scale casual dining chains have been pretty aggressive with new promotional platforms.

And while Olive Garden clearly has the scale to compete, do some of the other smaller brands, like Cheddar's and Yard House, do they need to make any adjustments to their marketing strategy?

I think that they've got to always reexamine where they are from a value standpoint.

I would say that Cheddar's is the value leader.

Maybe there is some opportunity as we move forward to highlight that value differently and to bring that to life.

There's no doubt, and I've said it the last couple of calls, that the large casual dining brands are being much -- are much more effective and disciplined today and advertising very effectively and their share voice is up.

That's making it a little bit more difficult for a Cheddar's to compete effectively.

And we may have to think about how we go to market to highlight that great value that we have.

But your insight is relevant and it's a challenge that we face with the Cheddar's brand.

Is there any plans to test or introduce anything in the -- in the coming quarters?

Yes.

But I'm not going to talk about them.

Our next question is from Gregory Francfort with Bank of America Merrill Lynch.

I just had 2 quick questions.

The first one was just a follow-up to David's question on polished casual.

Is there any difference in terms of the store growth capacity adds that's happening at polished casual versus maybe casual dining more broadly?

Because my understanding was casual dining store growth might be swelling a little bit.

And a question just for Rick.

Just on the cash balance, and we're at the end of the quarter, I think the last time you ran a cash balance close to this high, you made a pretty big acquisition.

Is there a reason why maybe you're not deploying that cash for repurchases?

And as you think about acquisitions, how much does Cheddar's performance, the need to turn that, impact your thoughts on future acquisitions?

I'll go first.

On the polished growth, I think that it's an attractive space.

We have a lot of entrepreneurs out there that over the last decade have created some pretty good concepts that are starting to get to -- getting past that 10-unit area and starting to grow.

It's obviously an attractive marketplace, but it's also relatively small.

It just happens when we -- on our smaller polished brands, when we have increased competition, it has a bigger effect on the overall top line number.

What we do believe is that we can fight off that initial competition over 12 to 18 months, and our restaurants will get back to the sales levels they were prior to the competition coming in.

So it's just something that you have to -- I think you have to continue to operate really well and you don't make an adjustment in the short term for that increased competition.

You just go back to winning the 9 square feet and your business will get back to growth.

Yes.

As it relates to our cash balance, even though we have significantly more cash than we had last year, our teams are still focused on doing the things every day to continue to increase that cash balance.

And one of the things that we did in the fourth quarter was we significantly improved our working capital position and we also did a few more sale leasebacks.

So that helped increase our cash balance.

And it talks to the teams' ability to continue to find the best use of our cash and actually take as much cash in as we possibly can, even though we have some cash.

As it relates to what we're going to do with that, we continue to speak to our Board to determine what the best use of that cash is, whether it's through share buybacks or dividends.

And as you've heard earlier, we just increased our dividend by 17%.

And we will find the right times to either buy back shares or acquisitions if they come to play.

It has nothing to do with Cheddar's, whether we're doing an acquisition right now or not.

It just has to do with making sure that we have the right brands, et cetera, to target.

Our next question is from John Glass with Morgan Stanley.

I know Darden's position on delivery has been clear.

But Gene, do you see either one that delivery is helping the overall industry in any way?

It may not show up in traffic, but maybe it shows up in check, for example.

And two, do you think by not participating in delivery at this point that in any way has put you at a traffic or total sales disadvantage?

I don't -- I'll start with the second part of that.

I don't believe it's put us at a disadvantage at all.

I really like the way our off-premise business continues to grow.

I think we continue to remove friction from the process.

And we continue to offer great value without having to have any destruction to our overall margins.

And so I like where we're at.

I don't think we're missing out on anything.

I think it's -- this is still an immature business.

There's still lots to learn.

There's a lot of discussion around whether it's incremental, it's non-incremental.

Where I want us to focus and I want our teams to focus on is creating a compelling in-restaurant experience that people want to come and visit.

I think when you do that, that helps create the demand for the off-premise visit.

And we know convenience will continue to be important to the consumer.

But where our focus right now is to create a compelling off-premise -- in-restaurant experience that drives a compelling off-premise experience in which the consumer still wants to come and pick up -- will still come and pick up because the value and the quality of the offering is so strong.

And just to follow up, if I missed it, I'm sorry.

What was the Olive Garden off-premise business this quarter?

And how much it did grow?

And then just to the first part of my first question was simply do you see any evidence anyone is getting a real lift at delivery?

Or is this all talk and we haven't really seen the industry sales in fact benefit from this in total?

Yes.

Sorry I missed that part, John.

I think that -- I don't think I see any real growth from it.

I'm seeing margin destruction.

But that's just -- that's my opinion.

We've got tests going on and we're not -- it's not -- the results aren't compelling enough that we're running out and doing something with it.

I think with that, I think it really indicates how we're feeling about it.

Olive Garden To Go is 9% for the quarter, 2-year stack of almost 18%.

It's 14.5% of sales.

I'm just -- I'm really pleased with where we are with our off-premise business.

We continue to enhance those capabilities, which is really important.

And we continue to work with the adoption of digital because we think that's going to be a continued driver.

And we've got some other investments that we're continuing to make -- that we'll continue to make to remove some friction in the off-premise experience.

Our next question is from Matthew DiFrisco with Guggenheim.

Just had a follow-up then a question.

Specific to the Olive Garden, and I guess, what could be perceived as a slight shortfall versus what expectations were and then LongHorn's topping?

Did the Olive Garden brand, was that the only one that saw basically less incentives and had somewhat of a drag in the quarter?

Or did LongHorn experience some of that as well?

LongHorn didn't have the same drag as Olive Garden did.

There was much more reduction in incentives in Olive Garden than LongHorn for the quarter.

And where are we in that cycle of reductions.

Are we going to expect that to continue into the first half of '20?

Or are we starting to maybe now see more comparable year-over-year comparisons on incentives?

I think when we get to the middle of the second -- the middle of the -- beginning to the middle of the second quarter last year is when we started to start to really pull back.

We've still got a little bit more time before we wrap that.

Okay.

And then my last question.

You mentioned a lot about some of the competition coming in and where you would grow a store.

The obvious place would be sort of where a Capital Grille already sits or some other of your brands.

But as far as the real estate availability, say, for the next 3 to 5 years, what are you seeing out there for the potential for the Cheddar's brand and those brands that are lower -- that are positioned best for the lower-income consumer or the broader consumer base?

A lot has been said that there's not a lot of availability.

Do you feel the same?

Or do you think the brand is something that can fit into more locations maybe than some other brands that have commented about tight locations?

Well, I think we have a lot of green space, right?

So we're still relatively underpenetrated.

So that gives you a lot more opportunity.

It's obviously a lot easier for us to find sites for Cheddar's than it is for Olive Garden.

I don't see availability being an issue for Cheddar's long-term growth, whereas Olive Garden now, I mean everything that we do with Olive Garden we have to really figure out what the cannibalization is going to be versus we don't have that much of an issue with Cheddar's.

So I think it all depends on what's your size, what's your penetration level.

I don't see that as a burden as we move forward with Cheddar's.

Our next question is from Jeffrey Bernstein with Barclays.

Two questions.

One, just on the fiscal '20 guidance.

I'm just wondering if there was anything in the fiscal fourth quarter just ended, whether it will be slower or more volatile comps or maybe higher-than-expected costs.

Anything there that might have led you to temper your initial fiscal '20 guidance?

I know if you look at past years, it seemed like initial guidance was fairly conservative, allowing for a beat in raise which, Gene, I know that's a critical component is to guide conservatively.

But looking back to fiscal '19, you beat comp by 75 basis points.

You beat earnings growth by 700 percentage points.

So just wondering as you think about your initial guidance for '20, how that was impacted by the most recent trends in the industry.

And then I had one follow-up.

Jeff, this is Rick.

Yes, I'm assuming you're talking about our same-restaurant sales guidance of 1% to 2%.

As Gene mentioned, we did -- we are seeing a little bit more volatility in the industry.

And this is an annual guidance.

This 12 months ahead of time.

And so we want to make sure that we're prudent.

And being at the lower end of our 1% to 3% (sic) [2%] range makes sense.

We also have seen a little bit of a slowdown in the discretionary spending in this calendar year versus last calendar year.

So we feel like 1% to 2% is the right range at this time.

And from an earnings per share perspective, would you view that similarly in terms of a little bit more cautious to start the year?

I wouldn't say it's a little bit more cautious to start the year than we've been in the past.

We have a few things: one, our same-restaurant sales of 1% to 2% with a little bit more inflation that we've seen in the past; and also a big difference in tax rate year-over-year will impact our EPS.

Got it.

And my follow-up was just on the unit guidance for fiscal '20.

It seems like on a net basis, we're looking at roughly 2.5% growth.

I'm just wondering if you can give some color in terms of where Olive Garden and LongHorn fall into that and confidence in Cheddar's maybe accelerating.

Or is Cheddar's still in wait-and-see mode?

Yes.

First of all, in the broad picture, the total number of openings that we have this year will be very similar to last year.

The difference is the openings will fall a little bit later in the fiscal year than they did this year just because of construction and developers not necessarily meeting the timelines that they had originally.

So while our openings will be about the same, our timing will be a little bit different.

The total percent from Olive Garden and LongHorn is about a little bit over half of our total openings, which isn't that different than we've had this year.

Cheddar's will have about the same pace as last year.

Our next question is from Andrew Strelzik with BMO Capital Markets.

Two things for me.

First, a number of the casual diners that have pulled back on promotional activity are actually performing, from a same-store sales perspective, among the best in the group.

I'm just wondering, do you think the consumer sensitivity to discounting has maybe lessened a bit or it's less disruptive than it has been in the past with more everyday value on menus across the group?

That's first.

And second, the conversation on African swine fever has ticked up.

And I saw that you increased the commodity inflation relative to last year.

How did that play into your thinking?

How comfortable are you with that?

And how it may impact Darden?

Yes.

On the everyday value question and sensitivity promotions, I think there's been a lot of good work done in the industry over the last couple of years to put more everyday value in.

And we've been saying for a while that the consumer didn't want to be told what they had to do, what they had to buy to get that value.

And I think a lot of people have rotated to more everyday value.

And to be able to do that means that you have to be less promotional when you make that strategic choice.

So I think that there's not much more for me to add there, other than I believe we led the way with everyday value.

Others have followed.

I think it's the right thing to do and it tones down the promotional activity.

Rick will talk about the other question.

Yes.

As it relates to African swine flu, a couple of things.

One is pork represents approximately 2% of our total buy.

So it's really a small impact and it had very small impact on our guide.

It's going to take 18 to 36 months for this to work itself out.

We're currently not seeing a huge increase in pricing.

But we expect to see some more of that in the back half of the year.

And that's already contemplated in our inflation numbers.

Our next question is from Dennis Geiger with UBS.

Gene, I wanted to ask a bit about the strength of operational execution at Olive Garden, which you often identify as the biggest driver of the brand's success and probably the largest sales driver.

So just wondering if you could talk more about ops execution in the quarter, if it remained as strong as what you'd seen -- as what you've seen in recent quarters.

And then I guess just more importantly, if you could frame the run rate from here for operations and throughput, specifically to be a continued driver of outperformance as we look ahead through the balance of the year.

Yes.

The team continues to make progress on improving operational execution.

There's always pockets in a system the size of Olive Garden that has opportunities.

There's always opportunities day-to-day, week-to-week to improve your overall execution.

When you think about the size of Olive Garden and the number of servers that we have on each and every day, there is always -- we always break down a little bit.

So every day that we break down a little bit less, more guests have a better experience.

The keys to this long term are continued simplification.

And I believe that management and the operating team inside Olive Garden is really focused on taking it to -- simplification to the next level.

And that could drive even further improvement in overall execution for the next couple years.

Throughput will always continue to be an opportunity.

We're very effective from an advertising standpoint.

A lot of our advertising drives people on Friday and Saturday nights.

And we have long waits in our restaurants.

And that's -- we talk a lot about convenience.

And that's not very convenient.

And consequently, we've got to get better at making that experience more convenient for the consumer and we've got to get -- we have to get more people and guests through our restaurants each hour and shorten up those dining experiences.

So we're going to continue to focus on this and we think it's a big upside.

Great.

And then just if I could, just recognizing you've given a lot of the key guidance pieces, which is great, can you also just summarize your expectations thinking about EBIT margins for the year maybe relative to the long-term framework, if there's anything else you could add there specific to that item?

Yes, Dennis, this is Rick.

Our EBIT margin will be within our long-term framework.

And our long-term framework, as a reminder, is 10 to 30 basis points.

Our next question is from John Ivankoe with JPMorgan.

I wanted to go back to off-premise for Olive Garden.

Obviously, at 15% of sales, it's actually getting pretty big on a per store basis.

Gene, you mentioned enhancing capability, I think that was around off-premise.

How big do you think that can be on a per store basis?

How much would you want it to be, obviously considering that much of that business is going to come when you're already the busiest on a Friday or Saturday night?

Yes.

I think that's always going to depend on consumer demand.

I think improving our capabilities is going to be an important part of growing this.

We just opened a new prototype in Orlando that has a full dedicated off-premise area, where we're learning a lot from that.

We think that, that has tremendous upside for our higher-volume off-premise restaurants.

We have restaurants now doing well over $1 million off-premise.

A lot of this business comes in and is out the door before 11:30.

And again, a lot of the catering that we're starting to do now is really off -- it's pre the big meal period.

And so that's really helpful.

So we've got multiple projects going on today to improve our capabilities.

And then we think there's some attachment opportunities.

Can we attach additional sales to the normal off-premise experience?

An example, can we -- if we start building these takeout spaces, can we get some more beverage sale?

Can we get other attachments?

We're still in the infancy of thinking about that.

But we think it's a fairly big idea, which could grow that overall percentage over time.

I think that the way to summarize this is that we see tremendous opportunity in this space without sacrificing what we're really here to do, which is create a great in-restaurant experience.

And how big of a capital project would one of these dedicated takeout spaces be in existing restaurants?

John, it's too early to really talk about that.

But every restaurant -- we've got it figured out in the multiple -- in the different prototypes we have, where would we add it, it has to be added in a specific place where you can staff it in your downtimes without adding a lot of labor.

You want proximity to the kitchen.

You need to have the right heating and holding areas.

And so I don't want to put a price tag on it right yet.

We're still too early in that process.

Our next question is from Sarah Senatore with Bernstein.

I have a follow-up actually on Olive Garden and then a question on Cheddar's.

On Olive Garden, I know you have said that in the past, you were trying to reduce mix.

And also obviously, you talked about [pulling] some promotional activity.

I guess margins seem fairly flat versus last year.

So I was just trying to understand a little bit about how to think about the tradeoff between comp and margins or traffic and mix, however you think about the complexion of the comp and how that flows through to margin.

And then I have a question on Cheddar's, too.

I think the margin impact in the quarter had a lot more to do with the investment we made with the Chicken Alfredo, which ticked up our -- with the 50% more chicken, which ticked up our cost of sales.

And then we had a promotional construct that was pretty similar to last year at this same time.

We didn't have to trade-up opportunity that was driving a lot of mix.

I mean at the end of the day, when you look at that Olive Garden margin, there's no one out there in this space that has those types of margins.

And we're going to continue to invest in value, which may limit the upward mobility of that.

We don't expect margins to contract.

But I want to make sure that we're investing properly into that business.

Okay.

And then on Cheddar's, a couple of comments just about you talked about maybe having -- not having as much scale.

You also talked about how the franchise businesses continue to be a much bigger drag certainly than -- or the formerly franchised than the rest of them.

As you think about that just in going forward, one, is, I guess, to me Garden's scale was a big part of where the value creation could be with respect to Cheddar's.

So I'm just trying to understand how you think about scale in the context of a brand that's smaller but as a part of a very large system like Darden.

And then also do you contemplate -- would you ever contemplate doing something more drastic with the former franchise restaurants?

They seem they're still covering their cost of capital.

But at some point, does it ever make sense to close them or to think about them differently?

No.

I'll start with the latter part of that question.

These restaurants that are dragging the comp down are still extremely busy and they're high -- and most of them are very high volume restaurants that are leaking back down to a more of the system average.

So these are still great restaurants on average.

They still produce good returns.

They've been through the most change.

And that I think has created the most -- these have been the most disrupted restaurants.

And I think that's why we're seeing a lot of the same-restaurant sales decline come from those restaurants.

The destruction -- the big disruption has been total management change, total system change.

Everything that they do day in and day out has just changed there operationally and they've had some tough times adjusting.

But overall, these are great restaurants in great territories.

So there's no drastic, we're going to close these things.

I think when you look at it -- and Rick alluded to it and I talked about it, we made more money in Cheddar's this quarter than we did last quarter.

I think one of the things I'm really excited about in Cheddar's, when we literally look at it and dissect it, our guest counts improved Q3 to Q4 against the industry 160 basis points.

As the industry weakened, Cheddar's guest counts actually improved.

So we're making progress.

One more thing on Cheddar's that I didn't talk about in my prepared remarks.

But I think it's important to recognize is that we've been transforming these kitchens in the last year.

We've done approximately 100 of them.

We did 34 in the fourth quarter.

This is a very disruptive process.

And the majority that this transformation this quarter were done in formerly franchised restaurants.

This transformation allows us to really improve the efficiency and labor, improve the speed of service with the food coming out of the kitchen.

These were big, big moves.

This is behind us.

And we're really excited about this.

And we think that this is going to have a big impact.

One of the things that we do know is that there is a significant sales decline after we do transformation as the teams struggle with this new operating procedure.

But that works its way out.

As far as scale goes, I think my reference to scale was more about just the overall size of the brand and the future growth opportunities.

Today, Cheddar's is definitely benefiting from our scale.

It's plugged into our supply chain.

It's been a huge benefit for them.

It's allowed us to really continue to focus on value for the consumer.

And so I think scale is working for them on that side.

They're going to benefit from our data scale over time.

And most importantly, I think the thing that I continue to focus on is can we get these human resource metrics closer to our Darden norms?

I think when that happens, that's when we're going to see some really great growth.

Our last question is from Stephen Anderson with Maxim Group.

Wanted to ask about the rewards program you have in test.

It's about 130 restaurants or so.

I wanted to ask what progress you've seen, what you've learned from that experience and perhaps any plans to expand that program.

We continue to have the rewards program in test.

We continue to analyze what's happening there.

There's some really positive in that program.

There's some challenges with that program.

We're going to continue to observe this and figure out whether we can drive greater loyalty with it.

If not, we'll dissolve it.

And at this point in time, we have no plans to roll it out.

We have no plans to dissolve it.

We'll continue to observe the consumer behavior.

We do have a question from Brian Vaccaro with Raymond James.

I just wanted to -- I was hoping to circle back on third-party delivery.

Gene, we've seen some concepts that had been hesitant historically sort of recently announced their launch in delivery.

And it seems more broadly that the economics for restaurants, and maybe particularly those large chains, could be improving.

Would you agree with that?

And I heard your earlier comments.

But are we getting closer to the point where it makes sense to pursue that opportunity with the existing off-premise growth moderating here?

Well, no, I think that the economics are -- the burden of third-party delivery is being shifted to the company to the consumer.

People are -- what I'm seeing is brands moving that burden away from themselves and on to the consumer.

And at this point, I'm just a little uncomfortable with that, that what percentage is the consumer long term willing to pay of their overall check to have that convenience?

And that has to be proved out to me over time that, that's something that we want to do.

We're still in a value proposition.

And I'm just not sure.

I'm watching what everybody is -- we're watching what everybody's doing.

We continue to believe, especially in Olive Garden, that it's much better for us to focus on the catering and delivery part of this.

We've just made -- we've just changed how we think about that.

We took the -- the size, dollar size of the order now has moved from $100 to $75.

And we've moved from 24-hour notice to 5:00 the day before.

And we think that, that is a strong move.

And we are very interested in delivering ourselves for -- to people who want to have a food experience delivered over $75.

And again, the average order of that activity for us is well over $300.

It's a highly rated from a satisfaction standpoint event.

And we want to focus on that more so than trying to move a $15 entrée.

And so again, we're watching what's happening.

We don't think that the economic burden has changed that much.

We think it's just been shifted from the restaurant to the consumer.

Yes.

Understood.

That makes sense.

And just back to the changes you made on your existing off-premise, the pricing and the order time.

When was that put in place?

Was that literally like this quarter?

Or was that partially through fiscal 4Q?

It's just being put in place now.

I will now turn the conference back over to Kevin Kalicak for closing remarks.

All right.

Thanks, Jill.

With that, that concludes our call.

I want to remind everybody that we plan to release first quarter results on Thursday, September 19, before the market opens with the conference call to follow.

Thanks again for participating in today's call.

That does conclude today's conference call.

We thank you all for participating.

You may now disconnect and have a great rest of your day.