Darden Restaurants Inc Q1 FY2021 Earnings Call

Hello and welcome to Darden's Fiscal Year 2021 First Quarter Earnings Call. All lines have been muted until the question-and-answer session. I will now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin. Thank you very 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 app 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 four 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’ve made in these areas combined with our operating results gave us the confidence to repay the $270 million term loan and reinstate the quarterly dividend. Let me provide more detail on the four priorities. First, 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 am 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 experiences, whether that's in our dining rooms, outdoors on our patios, or in their homes. But it is 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, has reached 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 am 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 three 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 are 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 as sales trends improve. The first step in this process was to re-imagine 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 activity as the operating environment evolves. 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 strengthened 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 was closed for the majority of the quarter. In fact, restaurants that had some level of dining 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 a 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 the 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 three 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 digital guest experience. Off-premise sales grew by more than 240% representing 28% of total sales. Finally, LongHorn successfully opened two restaurants during the quarter. The brands in our Fine Dining segment are performing better than anticipated. While weekday sales continue to be impacted by 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 2021. 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, helped 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 food and beverage line, favorability from menu simplifications more than offset increased to-go packaging costs. However, these inflations of over 7%, primarily impacting LongHorn, drove food and beverage expense 20 basis points higher than last year for the company. Restaurant labor were 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 right-sized 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 2021. Approximately $10 million of this expense is non-cash 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 three quarters of these savings throughout the remainder of fiscal 2021. 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 open 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 took out in April. We ended the first quarter with $655 million in cash and another $750 million available in our untapped credit facility, giving us over $1.4 million 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 a 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 comparison 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 volumes. Our second quarter is typically our lowest averaging in 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 pre-COVID EBITDA dollars and approximately 90% of pre-COVID sales while still making appropriate investments in our business. And with that, we will take your questions.

Your first question comes from the line of Andrew Strelzik from BMO. Your line is open.

Hey good morning. Thanks for taking the question. 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 could 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 products 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 rooms. 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, hey 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 while 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 have also seen if you can comment on that it would be great? Thanks.

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've 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. Your line is open.

Yes, hey guys, 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 trying to find a level set on all those areas?

Let me work backward to your question, outdoor capacity is really minimal for us overall as the system. The good news is that we haven’t really been able to use a lot of our outdoor capacity in Florida, because it has been raining every single day here for the last six weeks. So we're going to start getting that back. As we lose outdoor capacity up north, we will pick up a lot more in Florida than we've been able to use. So, for that when we think about outdoor capacity, it is 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 their capacity from 25% to 50%. Once you get past 50% as long as the six-foot rule is in place, you still are not going to really be able to max out your dining rooms. In some areas we're getting our bar tops back which are important, which gives 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, and we’ll probably close to double what we have right now, which gives us six to seven extra tables per restaurant in the jurisdictions that allow us to do that, and 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 for our team members and guests. So, I would look at getting California back as 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 is pretty close. It is not like we have a lot of new restaurants coming into play, so it is within 100 basis points.

Marcella, we are ready for our next question.

Thank you, and good morning. When I look back to Slide 16 of the presentation, can you speak to the capacity in the first quarter? What was the average and 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 am wondering what kind of capacity mandates or restrictions you are 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 six-foot rule, etcetera, we're probably at the 50% capacity range even at the end of the quarter.

Okay, okay, super. And then it is not lost on us when you talk about the back to basics and I think there is obviously no one better than your team efforts and it is a power to teams. So if you think about roles and the functions for me like the six feet office rule comes to mind. How are you really resourcing your team to be effective right now? Can you give us some concrete examples?

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 think how we held the situation with emergency pay and taking care and thinking of our people and staying 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 are doing. And so, and we've got this 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 team members that I'd never thought I would see in this industry. I've been working in this 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 or bring them back, our most productive and our most dedicated team members. So I think the spirit is high in our restaurant. I think people are excited to be out there, they're making money. I think they're bringing happiness to people that come into our restaurants, and I think that energy is – in this very difficult time is transferring between the guest and the team member, and I'm in the 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.

Thanks, I appreciate the commentary.

Your next question comes from the line of Brian Bittner from Oppenheimer. Your line is open. Brian, your line is open.

Sorry, I was on mute. Good morning guys. 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 versus pre-COVID?

Well, Brian, I think on the G&A side, we talked about the 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 etcetera. 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 investment will be back in the restaurant. Our G&A, we would hope, our G&A would be at least below 5% for the foreseeable future.

Okay. And would you describe all of LongHorn's outperformance relative to Olive Garden, is that all due to geographical mix in the six feet rule, or is there anything else that you'd point out as it relates to LongHorn's performance relative to Olive Garden?

I think the majority of it is geographic and I think the brand strength in Georgia has 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, their performance is impressive without a doubt, but it's being driven by Georgia, I mean it is being driven a lot by their footprint.

Thanks Gene, and my last question just with Olive Garden, we talked a lot last earnings call about the capacity restraints related to the six 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 six feet rule that we should know about?

The team is exploring ways to rearrange tables in the dining room to enhance overall capacity. They're actively working on modifications. When considering Olive Garden, it's important to focus on the overall sales volume. We’re seeing $75,000 per week, indicating strong business performance. The off-premise sales segment is performing well, and we plan to allocate some marketing funds to that area, aiming specifically at driving off-premise sales rather than on-premise. We're assessing the optimal timing for our investment in this aspect. Additionally, it's hard to believe, but we have a restaurant in Times Square that negatively impacts our comparable store sales by 50 basis points. Each week, we start $300,000 behind in terms of comp sales there. We’re expecting a 25% increase in capacity in Times Square soon, but we still face that ongoing deficit daily. It's our leading restaurant, generating $50 million annually, though we're currently averaging just $2,500 a day. We're dealing with some unique circumstances. Recovering operations in California will be significant for us, as it’s a major market with higher sales volumes. We’re beginning to regain some counties there, and we're noticing the positive effects on a daily and weekly basis.

Thanks Gene.

Your next question comes from the line of Andrew Charles from Cowen & Co. Your line is open.

Thank you. I have a question for Rick and one for Gene. Rick, I found the sales levels in the labor line to be quite impressive during the quarter. I would like to know how you distinguish between what you consider permanent savings from the transition to online pickup and more efficient kitchen operations versus any temporary improvements that might continue into the second quarter from volumes that are lower than peak levels? Gene, you briefly addressed this regarding the hundred partitions implemented last quarter to enhance seating capacity. You mentioned that you doubled the capacity, but I'm curious about the insights gained from that experience. How does this contribute to your strategy during the reopening phase, or is it just a minor adjustment? Thank you.

Okay, Andrew. On the labor line, remember we've got two 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 whether it gets to at 100%, and that 100 to 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 six to eight more tables, and you know, most of those will be four tops and the average party is 2.3. So I mean, I wouldn't say it's not de minimis, but sounds meaningful. I mean, you're getting, especially on the weekends you're getting another two seatings on those tables. So every little bit helps, because we have the demand for those tables, but it's not going to it's not going to move the top-line significantly.

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

Hey, thanks, good morning. Just on the promotional schedule, I think that I think we're all sad to see that maybe never any possible is not being run this year and I'm just curious. You know what needs to happen from a capacity standpoint, restriction standpoint for that promotion to make sense, and there are limited that whether it be 25%, 50%, or 75% worth of diners reopened where it makes sense to have traffic driving promotions at 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 feel we have to feel comfortable that we got pretty much 100% capacity unless the promotion, we are speaking about 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 is 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 this is a terrible thing that we're going through, but we're trying to find, okay we're trying to find the positives in this to really rethink, and rethink how we go to market with our businesses. And this is fortunate, it's a once in a lifetime opportunity to be able to do things that we probably couldn't do, where we were pre-COVID. So you know, 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 re-imagine and revisit some of those promotional options to our guests so that we can maybe do it at a higher margin rate, but 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 was a moving target. Can you really dig into that a little bit more, and talk about what sort of the cannibalization rate looks like as dining was reopened, or maybe what happens when restrictions are put back in place?

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 that volume just switches from off-premise to on-premise, in other markets it doesn't. It depends on 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 is 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, your line is open.

Hi, good morning. I have two 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 first 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% of average weekly sales from quarter one. 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 low where we are running today, but it does take into effect the 100 basis point swing from Thanksgiving.

Great, thank you for that. 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?

I would take, I want both, I want a simple operating model, and I want higher sales, and I think that we're setting up for that because I think 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 this simplified operations will help us improve execution, and we will get better throughput and so we think there's a pathway to both, higher sales and 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. I think Rick is 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. Your line is open.

Great, thank you very much. 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 re-infection. 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? I'm 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, as you know so far Jeff, we have seen no change in demand based on COVID levels in a market, unless capacity restrictions change. So, if you're 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 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 I just think about the independents and the crisis, we are all going through, but 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 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 that's going to benefit us in the short term and in 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 and what we can acquire real estate, I thought that being one of the only bidders out there, that we would see the 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 through what we think the property's worth versus what the REIT or the landlord thinks the property is worth. And so 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 Jake Bartlett from Truist Securities. Your line is open.

Great, thanks for taking the questions. I had really had two quick ones. In the first, on the menu simplification, can you quantify how many less items for instance, that is just going to have a sensitivity 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, to lower that to increase your in-house delivery?

I think we will continue to assess that, but we don't anticipate a significant benefit. Regarding the first point about the percentage of menu simplification, each brand has its own unique characteristics. We see reductions ranging from 20% to 40% in one brand. The simplest approach is to look at the menus.

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

Hey, thanks, guys. And thanks for the extra time. Rick, could you just provide a little more color on the other OpEx line, obviously, down around 20% versus pre-COVID levels. Just walk through some of the more significant cost reductions that 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? Thank you.

Yes, on the restaurant expense line, just want to give you a couple of titbits when 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 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 small wares in utilities. Those savings are maybe not as permanent, right? Because those are just because their volumes are down. And another point to mention is, we are spending money on PPE for masks for our team gloves, chemicals, etcetera. And that's about $4 million to $5 million a quarter.

Okay. And then the comps for Fine Dining and other big 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 was the case. And so we're going to continue with that.

Your next question comes from the line of Jared Garber from Goldman Sachs. Your line is open.

Good Morning. Thank you for taking the question. Just a quick one for me. As you think about longer term capacity, maybe if you just focus on Olive Garden. Is there a level of average weekly sales or AUVs, how are you going to talk about it? That sort of a limit for Olive Garden, obviously, the off-premise business can be quite additive. But as you get back to sort of 100% in dining room capacity, how should we think about the longer term sort of cap, if you will, on AUVs in that brand? Thanks.

I believe there is no limit. When you start to reach your capacity, you gain pricing power, which allows you to increase your average unit volumes. Before COVID, we were nearing an average of over $5 million in unit volumes. I’m optimistic that we can return to that level and exceed it. I don't think in terms of a cap for the concept. However, we recognize that new units won’t typically perform at the average from the outset. We can still achieve a strong internal rate of return with restaurants that initially operate slightly below the average, and over time, we've managed to elevate that average to a solid $5 million.

Your last question comes from the line of Matthew DiFrisco from Guggenheim Partners Your line is open.

Thank you very much. My question is about Georgia and the positive comparisons there. You mentioned that the consumer in Georgia is different from New York. Is this difference partly due to the slowdown of PPP, or have there been some closures? I'm looking to understand if Georgia is showing overall positive growth or if it's just positive for Olive Garden and LongHorn. Are restaurant spending dollars in Georgia up year-over-year, or is it just a smaller market where you've captured a larger share? Thank you.

There are a couple of points to mention. First, most of the restaurants that are seeing positive results in Georgia are Longhorn, not Olive Garden. While Olive Garden has performed well in Georgia, it hasn't come close to the performance of LongHorn. LongHorn has a strong presence with 45 restaurants in Atlanta, with a location every three miles, and we have historically done very well there; the brand is highly regarded. That's one aspect. The other aspect is that especially when you go 15 miles outside the city, life is quite normal. I recently arrived at the Atlanta airport and noticed no one was wearing a mask. I visited a hotel and went up to a rooftop bar that was packed. It's just a different lifestyle in Georgia, which might be hard for those in New York to grasp. However, it's important to note that traffic in Atlanta can be quite heavy. While things might be a bit more challenging in the city, I believe that in various regions of the country and different states, behaviors are generally 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.

I believe they haven't experienced much of a decline. LongHorn is significantly outperforming many others in that market, as has always been the case. Remember, Georgia was one of the first states to reopen, so they've been navigating that for quite some time, longer than many other states. The longer a restaurant or market remains open, the more comfortable people tend to feel.

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 18th 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.