Welcome to the Darden Fiscal Year 2022 First Quarter Earnings Call. Operator provided instructions. I will now turn the call over to Mr. Kevin Kalicak. You may begin.

Thank you. Good morning, everyone and thank you for participating on today’s call. Joining me on the call today are Gene Lee, Darden’s Chairman and CEO; Rick Cardenas, President and COO; and Raj Vennam, 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 the presentation during this call, which is posted in the Investor Relations section of our website at darden.com. Today’s discussion and presentation will include certain non-GAAP measurements and reconciliations of these measurements are included in the presentation. Any reference to pre-COVID, when discussing first quarter performance is a comparison to the first quarter of fiscal 2020. This is because last year’s results are not meaningful due to the pandemic’s impact on the business and the limited capacity environment that we operated in during the first quarter of fiscal ’21. We plan to release fiscal 2022 second quarter earnings on Friday, December 17 before the market opens followed by a conference call. This morning, Gene will share some brief remarks on the first quarter results; Rick will give an update on our operating performance; and Raj will provide more detail on our financial results and an update of our fiscal ’22 financial outlook. Now, I will turn the call over to Gene.

Thank you and good morning everyone. As you saw from our release this morning, we had a very good quarter. Our teams continue to operate effectively in a challenging environment and I am proud of their focus and ability to deliver another quarter of strong sales and profitability. All of our segments delivered record first quarter profit. Our ability to drive profitable sales growth is a testament to the strength of our business model and our continued adherence to the strategy we implemented six years ago. Our brands remain laser focused on executing our back-to-basics operating philosophy anchored in food, service and atmosphere, while at the Darden level, we concentrate on strengthening and leveraging our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning and our results-oriented culture. Our first quarter sales trends started strong as momentum carried over from the fourth quarter and they further strengthened and peaked in July. However, in August, sales slowed due to the impact of the Delta variant, but remained positive relative to pre-COVID levels. For the first quarter, sales per operating week were up 4.8% relative to pre-COVID. And through the first three weeks in September, sales per operating week were up approximately 7% relative to pre-COVID. Regardless of the operating environment, our unwavering commitment to our strategy ensures we will stay focused on what we do best, providing exceptional guest experiences. Throughout this unique period, our operators have shown tremendous flexibility while remaining focused on the fundamentals of running great restaurants. At the same time, our focus helps us continue to find ways to make our competitive advantages work even harder for us. One of the ways we do this is by leveraging our ability to open value-creating new restaurants. We opened seven new restaurants during the quarter, all of which are exceeding our expectations. And we remain on track to open approximately 35 to 40 new restaurants this fiscal year. Our long-term framework calls for 2% to 3% sales growth from new restaurants. Given our stronger unit economics, our development team is working hard to build out a pipeline of locations for fiscal ’23 and beyond that would put us at or above the higher end of our framework. Before I turn it over to Rick, I want to thank our team members in our restaurants and our support center. As I visit our restaurants and talk with our teams, I am constantly reminded why our people are our greatest competitive advantage. Their passion for being of service to our guests and each other fuels our success.

Thank you, Gene and good morning everyone. Our success this quarter was driven by the work we have done to simplify our processes and our menus to drive execution at the highest level. We also paused any new initiatives in order to further eliminate distractions for our restaurant teams and allow them to focus on what it takes to run 14 great shifts a week. In addition, To Go sales continue to benefit from the ongoing evolution of our digital platform. This platform makes it simpler for our guests to visit, order, pay and pick up, all while making it easier for our teams to execute at the highest level, both in the dining room and off-premise. This served our teams well as To Go sales remained high through the quarter. For the quarter, off-premise sales accounted for 27% of total sales at Olive Garden and 15% of total sales at LongHorn Steakhouse. Digital transactions accounted for 60% of all off-premise sales during the quarter and guest satisfaction metrics for off-premise experiences remain strong. As we navigate short-term external pressures, our focus is simple. We must continue to win when it comes to our people and product. From a people perspective, the employment environment is challenging. That’s why our top priority during the quarter was staffing our restaurants. Our operators and HR teams have done a great job sourcing talent. We recently launched a new talent acquisition system that helps increase our pool of candidates by allowing applicants to apply and schedule an interview in five minutes or less. Additionally, our brands are successfully utilizing their digital platforms, including social media, to promote our employment proposition and drive applications. As a result, we are netting more than 1,000 new team members per week and our team member count is approximately 90% of our pre-COVID levels. The biggest operational challenge we have been dealing with is the temporary exclusion of team members identified through contact tracing. Given our commitment to health and safety, we are diligent about exclusions, but they create sudden staffing disruptions for our operators. Despite being appropriately staffed in the majority of our restaurants, these exclusions reduced the number of available team members with little notice for our operators to prepare. This volatility can negatively impact sales in these restaurants for the duration of the exclusion period. Getting and staying staffed also requires a strong focus on training. As we continue to hire, it is critical that we have the right training in place to ensure we continue to execute at a high level. That’s why our operations leaders are validating the quality of our training during their restaurant visits, ensuring new team members receive the appropriate amount of training and successfully complete the required assessments. Our team members are the heart and soul of our business and we are constantly focused on our employment proposition. The investments we have made and continue to make in our people are helping us retain and attract top talent and I am confident in our ability to address our staffing needs. When it comes to product, our significant scale, including our dedicated distribution capabilities, enables us to manage through the challenges affecting the global supply chain and maintain continuity for our restaurants. Our supply chain team continues to work hard to ensure we successfully manage through any spot outages we encounter and our restaurants have the key products they need to serve our guests. During the quarter, we had to secure more product than usual on the spot market, because our brands exceeded sales expectations and some of our suppliers experienced capacity challenges. Raj will share more details in a moment, but these higher sales volumes as well as freight costs have contributed to higher-than-expected inflation. Our scale advantage provides the opportunity for us to price below our competition and below inflation, which is a strategy we have executed successfully. Our competitive advantage of extensive data and insights allows us to be surgical in our pricing approach positioning us well to deal with these higher costs and maintain our value leadership. The rich insights we gather from our analytics help us find the right opportunities to price in ways that minimize impact to traffic over time. We still expect pricing to be well below the rate of inflation for the year, further strengthening our value proposition. Ensuring our restaurants are appropriately staffed and our supply chain continues to avoid significant disruptions will be the most important factors of our continued success in the short-term. To wrap up, I also want to recognize our outstanding team. I am inspired by the dedication and winning spirit that our leaders and team members both in our restaurants and in our support center continue to demonstrate. Thanks to each of you for all that you do to continue to create exceptional experiences for our guests. Now, I will turn it over to Raj.

Thank you, Rick and good morning everyone. Total sales for the first quarter were $2.3 billion, 51% higher than last year, driven by 47.5% same-restaurant sales growth and the addition of 34 net new restaurants. Diluted net earnings per share from continuing operations were $1.76. We returned approximately $330 million to our shareholders this quarter, paying $144 million in dividends and repurchasing $186 million in shares. We had strong performance this quarter despite increased inflationary pressures, with EBITDA of $370 million and EBITDA margin of 16%, 250 basis points higher than pre-COVID. Our sales results were better than expected, requiring us to go out and purchase more product on the spot market. In particular, proteins, as our LongHorn and Fine Dining segments had the largest sales outperformance versus our expectations. The market for proteins this quarter was very strong with spot premiums as high as 30% above our contracted rates. This resulted in higher average cost per pound for our proteins, contributing to total commodities inflation for the quarter of approximately 5.5%. Given the heightened attention on inflation, I want to clarify that we use a conventional approach to calculating the rate of inflation. We are only measuring change in average price, holding product mix and usage constant. We follow the same approach for calculating wage inflation rate in which we keep the hours and job mix constant and only look at change in wage. While we expect higher rates of inflation to persist for the remainder of the year versus what we initially planned, we believe our scale and recent enhancements to our business model enable us to deliver significant margin expansion, while still adhering to our strategy of pricing below inflation. Now, looking at the P&L for the first quarter of 2022, we are providing a comparison against pre-COVID results in the first quarter of 2020 which we believe is a more comparable to normal business operations and with how we have been talking about our margin expansion. For the first quarter, food and beverage expenses were 150 basis points higher driven by investments in both food quality and pricing significantly below inflation. Restaurant labor was 110 basis points lower, driven primarily by hourly labor improvement due to efficiencies gained from operational simplifications and was partially offset by elevated wage pressures. Restaurant expenses were also 110 basis points lower due to sales leverage. Marketing spend was $45 million lower, resulting in 220 basis points of favorability. As a result, restaurant level EBITDA margin for Darden was 20.9%, 290 basis points better than pre-COVID levels. G&A expense was 30 basis points higher, driven primarily by approximately $10 million of stock compensation expenses related to the immediate expensing of equity awards for retirement-eligible employees. Additionally, we had approximately $5 million of expense related to mark-to-market on our deferred compensation. As a reminder, due to the way we hedge this expense, it’s largely offset on the tax line. These impacts were partially offset by savings from corporate restructuring implemented in fiscal 2021. Our effective tax rate for the quarter was 12.6%, which benefited from the deferred compensation hedge I just mentioned. Excluding this benefit, our effective tax rate would have been closer to the top end of our guidance range for the year. Turning to our segment performance, first quarter sales at Olive Garden were flat to pre-COVID, while segment profit margin increased 220 basis points. This was strong performance despite elevated inflation and two-year check growth of only 2.4%. LongHorn had the best sales performance across our segments with sales increasing by 26% versus pre-COVID, while growing segment profit margin by 250 basis points. Sales at our Fine Dining segment increased 24% versus pre-COVID in what’s traditionally their slowest quarter from a seasonal perspective. Segment profit margin grew by 490 basis points, driven by strong sales leverage and operational efficiencies, which more than offset double-digit commodity inflation. Our other segment grew sales by nearly 5% and segment profit margin by 360 basis points. We continue to be excited about the long-term prospects of this segment as it’s driving the strongest underlying business model improvement of all our segments. Finally, turning to our financial outlook for fiscal 2022, based on our performance this quarter and expected performance for the remainder of the year, we increased our outlook for the full year. We now expect total sales of $9.4 billion to $9.6 billion, representing growth of 7% to 9% from pre-COVID levels; same restaurant sales growth of 27% to 30% and 35 to 40 new restaurants; capital spending of $375 million to $425 million; total inflation of approximately 4% with commodities inflation of 4.5% and total restaurant labor inflation of 5.5%, which includes hourly wage inflation of about 7%; EBITDA of $1.54 billion to $1.6 billion; an annual effective tax rate of 13% to 14%; and approximately 131 million diluted average shares outstanding for the year, all resulting in diluted net earnings per share between $7.25 and $7.60. This outlook implies EBITDA margin growth versus pre-COVID in line with our previous outlook as higher sales are helping offset elevated inflation. Before we open it up for questions, I want to remind you about a calendar shift next quarter. Thanksgiving falls in our fiscal second quarter this year, whereas it was in the fiscal third quarter pre-COVID. This will be a net negative to second quarter from its sales perspective. Now, we will take your questions.

Operator provided instructions. And our first question today comes from John Glass of Morgan Stanley.

Thanks. Good morning. Gene or whoever, could you please first just talk about the impact of the reduction of couponing at Olive Garden? I think that probably has adversely impacted sales. It obviously has a huge positive impact on margin. But can you just sort of quantify what you think the foregone sales were for that so as we think about that brand versus peers, we have the right context?

Yes. Let me take a stab at this a little broader, John and just the coupons, because I am not sure we can get right to the number that you are looking for. I think the coupon number probably was about 1% of sales. And so trying to say, okay, what’s that driving guest count? I think that’s a little bit harder to get at. When I look at that line in the P&L, it was about 1%. Let me just put Olive Garden’s performance in context for everybody. Obviously, I am thrilled with their performance. We only have 2.5% check growth in the business over the last two years. That’s compared to a little over 5% for the industry. That’s a strategic choice that we continue to make and we think it’s the right choice. And if you just assume that the marketing was breakeven, you’d have to add another 10 points to the sales. So basically, they are flattish and you take out that marketing, that’s a big number. The other thing and Rick alluded to this in his script is we are still struggling from a staffing standpoint, primarily because of the exclusions. If you think about that, that’s limiting our sales. It’s just another form of capacity limitation. On average, we have one or two sections closed in most of our restaurants most nights. So we are losing six to eight tables. Especially in Olive Garden, that’s putting a cap on what we can do for sales. So, when I sum up Olive Garden’s performance, I just think that we are doing unbelievable. We have got 23.2% restaurant-level earnings percentage. Our profit grew $25 million over pre-COVID. This is an impressive business. We are reevaluating over time how we are going to take this business to market when we think about couponing, promotional activity and full marketing.

Thank you for that. And if I can just ask one follow-up, Raj, on your commodity comments, it sounds like you would still expect maybe better commodity inflation later in the year. Do you have better visibility than you did before? What would prevent you from having to go to the spot market more often if sales continue to go? How much visibility do you have on that inflation for the full year now versus last quarter?

Sure, John. Let me start by saying we increased our forecast for sales, so that gives us a little bit less need to have to go back into the spot market than what we were anticipating. Some of that increased sales impact is baked into our estimate. As we look at Q2 and Q3, we have more visibility into Q2 and decent visibility into Q3. Q4 is one where we will have to see how things shake out, but we did have higher inflation last year in Q4. For Q1, we had about 5.5% inflation. We have about 80% contracted for Q2 based on the updated volume. For Q3, we have around 60% contracted. So, we feel pretty good about that. Could there be some movement? Absolutely. But I think that’s where we showed you in the first quarter how we have the ability to manage through that. The business model improvements and other levers at our disposal help us manage through that fairly well.

And our next question comes from Andrew Charles of Cowen.

Great. Rick, I appreciate the commentary on the labor and staffing challenges. What have you seen over the last two weeks since that $300 a week supplemental unemployment insurance expired? Has this been as large of a tailwind as you previously anticipated and perhaps you can speak to what you are seeing in states that curtailed benefits earlier this summer as a leading indicator? And then I have a follow-up. Thanks.

Hey, Andrew. Thanks for the question. We have done a lot of things to help increase applicant flow, including the new system I mentioned. We haven’t really seen a dramatic change in staffing flow when that system was put in place to when the unemployment benefit started to expire. So we think we were getting staffing flow even before that happened. We have staffing challenges that are more acute in certain parts of the country, but not necessarily driven by unemployment benefits. It’s driven by when markets have opened versus not. We are not worried about getting great applicants because we are getting them right now.

Yes. And then my follow-up question is that you have called out prior to the pandemic that Olive Garden could reach 20% of sales off-premise. With the rebound in dine-in business, you are seeing that off-premise mix come down a bit but still sticky at about 27% of brand sales. Do you think this is a fair mix you can sustainably see going forward or is it likely to further come down as staffing challenges ultimately ease and you can fulfill more on-premise dining?

Andrew, I still think the off-premise mix will come down at Olive Garden and at LongHorn as dining rooms continue to fill and people feel more comfortable dining out. We were starting to see that as COVID was winding down before the Delta variant spike. Then the Delta spike raised the off-prem mix back up. We don’t believe 27% is where we will be in the long-term after COVID. We still think somewhere in the 20s, but that depends. We have made great investments in our technology and made it easier for our teams to handle all of the orders. We believe To Go as a percent of sales will be greater than we expected before COVID because many guests who never did To Go before have tried it and are getting a great experience.

And our next question comes from Jared Garber of Goldman Sachs.

Thanks for taking the question. Obviously, the LongHorn trends remain very robust and it was encouraging to see the Fine Dining segment turned positive this quarter. Can you talk about what you are seeing in terms of pent-up demand and consumer trade-up? The steak category seems to remain really strong, maybe even relative to some of the other brands. I wonder if some of that trade-up is not benefiting Olive Garden as much despite some of the reduced promotional activities in that brand?

I think that might be overthinking it slightly. The steakhouse category has been strengthening even pre-COVID and through COVID. LongHorn has benefited from its geographic footprint—heavy in Georgia and Florida—and from investments made over the last five or six years. Operating smaller footprints has been a little easier through COVID, we need fewer employees to run a LongHorn. We are basically fully staffed in that business. For Fine Dining, we were thrilled with sales this summer. There is still a heavy drag in major cities; we are still down about 40% in Manhattan locations, slightly less in other major cities. But suburbia has seen a big uptick, which is fantastic. People not traveling for business as much are using Fine Dining restaurants more on weekends. Sundays have become a legitimate sales day in Fine Dining, which operationally required adjustments.

Thanks. And I wanted to follow up on the unit growth commentary. It was encouraging to hear you'll likely be at or above the higher end of the 2% to 3% framework in ’23. Can you talk about adjustments or impacts you've seen in the other segment and some of the opportunities coming out of the pandemic for the restaurants within there?

The biggest impact is we transformed those business models, notably Cheddar’s, Bahama Breeze, and work in Yard House and Seasons. We’ve made investments and these models are in a better place, which gives us more confidence to invest new capital. Real estate options have improved because we can place different brands on a piece of property where we already have an Olive Garden or LongHorn and still get a good return. That gives our real estate and development team more flexibility and confidence to grow.

The next question comes from Jake Bartlett of Truist Securities.

Great. Thanks for taking the question. My question is on the limited menu at Olive Garden. Do you have any concern that that is impacting the recovery pace at Olive Garden? I know it’s been great for margins. In the context of that, there has been commentary from some distributors that independents are re-expanding menus. Is there a concern that as others re-expand, you might be missing on sales? And I have a follow-up.

Jake, I don’t think the limited menu is impacting Olive Garden. If you use breakeven on the advertising, we’d be up double digits. We don’t advertise to break even. The recovery in Olive Garden, measured by profitability, has been stronger than most. I am very pleased with the profitability. I don’t think the limited menu is hurting our ability to drive top line. If independents want to add menu items, more power to them. We’re comfortable where we are with our menus.

Great. I appreciate that. Following up, selling expense has been about 1% of sales for the last three quarters. Is that the right level to think about for the rest of the year? And any thoughts on longer term marketing as a percentage of sales versus historical?

In the short-term, you won't see us change our marketing tactics. Long-term, we are waiting to determine where equilibrium lies—what is on-premise versus off-premise and what the competitive set looks like. This COVID additional ramp-up is stressing restaurants and there may be more closures; we don’t know. Once we reach equilibrium, we will develop a strategy and tactics to position our brands to grow profitably. It would be a mistake to speculate now because we don’t know the future operating environment.

The next question comes from Jeffrey Bernstein of Barclays.

Great. Two questions. One, Gene, you mentioned in your prepared remarks that in August trend slowed versus June and July but still up versus pre-COVID. How much of that do you attribute to staffing shortages versus the Delta variant spike? Also, you said September was up about 7% per operating week versus a first quarter increase of 4.8%. What is your assumption for the rest of fiscal Q2 relative to the September comment? And one follow-up.

I’m not going to comment on forward-looking sales. As COVID picked up, especially in the Southeast where we have a large footprint, you had the Delta impact and back-to-school in many territories at that time. It's hard to tease out seasonality versus the variant effect. That’s why we won't habitually give quarter-to-date sales on these calls, but we noted the change in sales that improved in September after falling in August. Some of that is COVID, some may be less seasonality. Many variables are impacting week-to-week and month-to-month right now, making it difficult to isolate causes. We aim to be transparent about what we see, but we will stick to our guidance for the year.

Understood. As a follow-up, broadly on inflation, many industries are raising prices and not seeing much pushback. How does this end for the industry or Darden, in terms of inflation versus pricing and the need to manage traffic?

Good question. Lower-income consumers will be disproportionately impacted by inflation and they are a large part of our casual brands' guest mix. We are focused on longer-term consumer pushback, not just the short term. Eventually there will be pushback. We are being strategic and cautious with pricing in Olive Garden and Cheddar’s to ensure the consumers we serve continue to feel they receive great value. Those who manage through this prudently and take a long-term view should fare well. Those who pass through a lot of price increases without effectively managing costs could price their consumers out of casual dining. We are concerned about that and are positioning Darden accordingly.

Next question comes from David Tarantino of Baird.

Hi, good morning. Gene, regarding Olive Garden performance, are the headwinds you mentioned for the quarter likely to ease as the year goes on, or are you assuming they continue? How are you thinking about that?

One thing I didn't mention was two years ago we were running a buy-one-take-one promotion which was a significant traffic driver and affects comparables. I don’t know how these factors will evolve. We are focusing on Olive Garden’s bottom line more than top line right now. It doesn’t make sense to heavily advertise when we aren't assured we are 100% fully staffed to provide a great dining experience every day without dealing with exclusions. Until we have certainty on staffing and exclusions, we won’t push people into restaurants. We continue to exceed expectations on profitability and will remain cautious on marketing until the operating environment stabilizes.

Understood. On staffing levels, you mentioned being around 90% of pre-COVID. What is the target level? How does that compare to what would be optimal given efficiency gains?

This is Rick. I said about 90% of pre-COVID staffing levels, assuming current volumes. Volume drives staffing needs. We probably need somewhere in the single-digit additional team members in some restaurants, though it varies by location. Most restaurants are fairly well staffed. With our operational improvements we likely need fewer people than before at the same volume. Another factor is new team members sometimes can’t work as many hours, so headcount isn't the best sole indicator. Productivity has increased, so the same number of hours and guest count would require fewer people today.

Next question is from Brett Levy of MKM Partners.

Thanks. Can you parse out more on the competitive landscape, regionality and whether you gained market share in the quarter? Also, where do you see margins hitting a ceiling, either consolidated or at LongHorn and Olive Garden specifically?

On regionality, California has come back strongly since mid-July, which was better than we expected. We felt pressure in Georgia and Florida due to the Delta variant over the last six to eight weeks. Texas didn't have much impact and tends to be its own market. The Northeast has not fully rebounded. There are pockets with COVID heat maps causing temporary sales problems. Regarding margins, we expect to eventually return to our framework where we see potential for margin expansion consistent with our previous outlook. We don't want to put a definitive ceiling on margins today. We've made strategic choices and efficiencies over the last few years and will not give those up. If we continue to drive the top line, we can sustain improved margins.

Next question is from Eric Gonzalez of KeyBanc Capital Markets.

Hi, thanks. On the quarter-to-date commentary, did you see acceleration across all major brands or specific ones? Also, regarding off-premise, recognizing you don’t want to overwhelm staff by drawing traffic with advertising, is there an opportunity to push harder on off-premise promotions given that channel likely requires less labor?

I won't comment further on quarter-to-date numbers. Regarding off-premise promotions, it’s difficult to drive that business without discounting, and we do not want to discount. Exclusions impact off-premise as well because it still requires kitchen labor to produce orders. We do some things off-premise without discounting and on weekends we have to throttle off-premise—control how many orders we take in a 15-minute window. Each brand and restaurant can throttle differently, and average throttling is one way we manage excess demand while servicing dine-in guests.

From a margin perspective, the exclusion pay—can you comment on whether there is an expense impact from paying labor that’s not present?

It’s not a meaningful impact on the P&L.

Next question is from Brian Bittner of Oppenheimer & Company.

Thanks. Regarding staffing, you noted Olive Garden is constrained. Are you seeing similar staffing issues at LongHorn? If so, why are the outcomes different?

Hey Brian, LongHorn has a smaller total team than Olive Garden and was in parts of the country that opened up faster. Their staffing challenges aren’t nearly where Olive Garden’s are. Right now, they have more team members than pre-COVID, but are doing more volume. Exclusions impact both, but because LongHorn has fewer total team members and a smaller footprint, an exclusion isn’t as big an impact. LongHorn’s staffing challenges are mostly limited to exclusions and aren't as acute overall.

Okay. With Olive Garden, aside from staffing, how should we think about your ability to proactively drive the business in the future with more marketing and promotions? Are you comfortable with the new profitability profile as the base case, or do you have unused weapons to deploy?

Think of the current posture as the base business. Once we reach equilibrium, we'll develop strategy and tactics to grow profitably. We could put back marketing dollars, but we want to focus on value—especially during inflation—so that the consumers we serve still view us as a great value. We will promote again, but differently and with careful consideration of opportunity cost and table value when extremely busy. We don’t want to discount our value platform. We have contingency plans and are watching the competitive and economic backdrop.

Next question is from Lauren Silberman of Credit Suisse.

Thanks. Looking at two-year comps, comps accelerated from the fourth quarter for LongHorn, Fine Dining and the other business, but were reasonably flat for Olive Garden. From a sequential perspective, are the dynamics the same? Why is there no change for Olive Garden?

Lauren, can you repeat the question to ensure we have it exactly?

Sure. I’m asking whether the sequential dynamics from Q4 to Q1 that show acceleration for other brands but flat for Olive Garden reflect the same factors you discussed or if there's something else at play?

A couple of things: the 'other' business got Yard House mostly back in the quarter, Fine Dining got more full capacity back in the quarter, and the steakhouse segment has just done extremely well. Those are the big changes driving the sequential differences.

Also, the starting points differ. Olive Garden had a strong promotion two years ago which makes the comparable more difficult. That promotion and marketing drove a significant lift then, so when you compare two years ago, it biases the appearance of acceleration. That’s why you see volatility when looking at the two-year comps by brand.

Next question is from Dennis Geiger of UBS.

Thanks. Raj, can you quantify the impact of the Thanksgiving calendar shift on the quarter by chance?

At a high level, think of it as about a 1% impact on a two-year basis, since we're comparing to pre-COVID periods.

Great. On the technology front, what additional opportunities exist to support off-premise or dining top line and margin efficiency? You mentioned geo-fencing; how close is that and any other tech opportunities?

Our goal is to implement technology that reduces friction across the value chain and responds to guests' desire for choice and personalization. In Q1 we added Apple Pay and Google Pay to olivegarden.com and PayPal is already a large part of mobile payments—over 25% of our mobile app transactions are paid via PayPal and other wallets. We updated the curbside 'I’m here' experience and have started A/B testing online recommendations for Olive Garden. Geo-fencing is coming. We continue to invest in the digital platform. Our aim is to lead the full-service restaurant space in guest-facing technology and make it relevant and convenient for our guests.

Next question is from Nicole Miller of Piper Sandler.

Thanks. For off-premise, can you talk about catering trends? Also, on Fine Dining, what is a fair assessment of social or corporate gatherings coming up for the holiday season?

We haven’t seen a big pickup in catering yet. During COVID we saw more catering to homes than businesses. Since business spending and office return are still limited, we haven't seen a dramatic recovery in catering. We’ll watch the holiday season. Right now, some growth but not huge.

For the holiday season, it depends on the variant and local infection levels. I expect a robust holiday season if the variant is under control. Consumers remain fairly healthy financially. Over the past six to eight weeks we’ve seen an increase in cancellations of larger parties in fine dining as people are less comfortable gathering in big groups. We will have a better view in the next six to eight weeks as bookings evolve.

Next question is from Jeff Farmer of Gordon Haskett.

Good morning. Two quick ones: Raj, you mentioned menu pricing sits at roughly 1.5% last quarter. Where might menu pricing go this quarter and over the balance of the year considering inflation has ticked up?

Hi Jeff. For the year, our guidance contemplates pricing just under 2%. So with total inflation around 4% in our outlook, pricing embedded in our guidance is just under 2%.

Okay, helpful. Second, peers have been increasing delivery menu premiums, improving delivery margin. Does that change your view on pursuing delivery given that a better margin profile exists?

No.

Next question is from Brian Mullan of Deutsche Bank.

Hi. Regarding Olive Garden unit potential, you previously said you were less worried about cannibalization and more optimistic on unit count. Can you give updated thinking—could there be 1,000 restaurants or more?

I won’t state a precise target, but I will say more than 1,000 is realistic and there is a pathway to get there. Convenience matters; we need restaurants closer to where people live and in more remote trade areas with large 60-mile trade areas. We’re consistently amazed by new Olive Garden volumes and returns, so we believe we can get over 1,000 fairly easily.

Next question is from Chris O’Cull of Stifel.

Thanks. Gene, what do you think is driving the industry labor shortage and how can the industry create a stronger employee proposition to attract talent?

The labor shortage is a national problem, not just restaurants. We see it with vendors and other industries. Restaurant team members want to work in a well-run environment, want flexibility and growth opportunities. Many roles are transitional for people. We must continue improving the employment proposition. I’m proud of how many hourly employees we move into management—about 500 in the last three to four months. Scale helps; companies with more resources to create strong employment propositions will attract people. Ultimately it often comes down to the restaurant manager and whether they create an environment where people want to work. Where we have our best leadership, we do not have people problems.

One thing you didn't mention was pay. If you continue increasing pay at healthier rates, will that address the employment issue?

You need competitive pay, and that’s one aspect of the employment proposition. Wage pressure existed before COVID and will continue. But the solution isn't only pay; other factors matter as well. Paying more alone won't solve all industry labor challenges.

Next question is from David Palmer of Evercore ISI.

Thanks. Restaurant expense was down 110 basis points on a two-year basis in the quarter with comps up 5% over that time. How are you achieving that and how much of it is sustainable?

Restaurant expenses per operating week were slightly below pre-COVID on an absolute basis. We found efficiencies on contract services and R&M. Some costs may come back a bit, but we expect that line to remain a source of leverage versus pre-COVID. It depends on sales levels, but we’ve managed that line well and kept it slightly below pre-COVID.

Follow-up: what specific things are driving this? Also, marketing—do you expect marketing spend to return to fiscal ’19 levels in fiscal ’23?

Specific items include contract services and some R&M. On marketing, we do not expect to return to fiscal ’19 levels for now. There are various small items across lines—music, services—and multiple places where we found efficiencies.

Next question is from Andy Barish of Jefferies.

Thanks. On the September numbers you referenced, can you give a sense of the noise in the quarter so far? I know there was a Labor Day shift and some weather factors; what can you tease out?

We don’t have a Labor Day shift in our fiscal comps because of the 53-week year in fiscal ’19; we have apples-to-apples for Labor Day. There was clearly some impact from Hurricane Dorian two years ago that affected the first few weeks, maybe about a point or so in the quarter.

On margins sequentially, Q2 is usually a quarter with a decline in margins due to seasonality. Is that predictable this year or too tough to tell?

Q2 typically has the lowest volumes and margins to begin with; we expect some improvement versus a typical quarter, but Q2 is also where we expect the highest inflation for the year compared to Q1. So it’s a mix—some operating leverage potential, but also higher inflation headwinds.

Next question is from John Ivankoe of JPMorgan.

Hi. You mentioned adding about 1,000 net new employees per week. Can you talk about quits rate and turnover overall? Given hires and training, how are real-time operating metrics versus standards? If metrics are lower, how quickly can you ramp back up?

John, turnover is improving dramatically from during and just after COVID. We’re still better than the casual dining industry on turnover, especially first 90-day turnover. It’s higher than pre-COVID but improving. That reflects training and hiring improvements. Regarding productivity, a higher percentage of team members are in their first 90 days, so they are less productive than those with a year of tenure. We are investing more in training. Our guest satisfaction metrics remain at similar levels over the last three to four months even with new team members.

Thanks. On operations, with so many new hires, are operating metrics meaningfully below pre-COVID standards and how quickly do you expect to improve?

New hires require more training and initially show lower productivity. We are spending more on training to accelerate competency. Over time as new team members complete training and gain experience, productivity improves. It’s a matter of weeks to months depending on the role and complexity.

Next question is from Jon Tower of Wells Fargo.

Thanks. Raj, did you quantify the headwind that exclusions had on Olive Garden sales during the quarter? Also, given your scale advantages and strong performance, has appetite for adding brands to the portfolio grown over the past six months?

We did not quantify the sales impact of exclusions; we don't have a reliable methodology to do that. On M&A, we are a platform company and management and the Board continually evaluate options. Right now we are focused on growing our existing brands. Opening our own restaurants is the best way to create value for shareholders at this time.

Next question is from Brian Vaccaro of Raymond James.

Thanks. On the quarter-to-date, did average weekly sales volumes improve sequentially? Was the percent increase more driven by lapping an easier seasonal comparison? And Raj, what level of G&A is bedded in your fiscal ’22 guidance?

For September quarter-to-date, the numbers referenced are versus pre-COVID. There is seasonality as September is generally the lowest month for us and the casual industry. On G&A, if you take out about $15 million of unique items from this quarter, that would be a good run rate to use going forward.

Next question is from Andrew Strelzik of BMO Capital Markets.

Thanks. On real estate, are you seeing competition for sites and price pressure as other brands look to accelerate unit growth? And why is 3% unit growth the right level for Darden?

Acquiring sites is as hard as before COVID, and competition is not just restaurants—retailers and banks also compete for space. Construction costs have started to moderate, and being an investment-grade credit helps with landlords; how we behaved through the crisis and paying rent is remembered. Regarding the 2% to 3% framework, it’s largely about people and management bandwidth. Opening a restaurant requires significant leadership and each restaurant opening can stress human resources because you are often moving existing managers into new roles and backfilling others. For Darden, a 3% growth rate maximizes our human resources capacity to open restaurants properly. If you open incorrectly, those restaurants can be problematic for years; we prefer to do it right.

Next question is from Chris Carril of RBC Capital Markets.

Hi. Can you talk about investing in technology that helps with labor—hiring, scheduling, in-restaurant operations? Any additional detail on labor-focused tech would be helpful. Also, regarding competitor closures, have you observed benefits in markets where more closures occurred?

We implement restaurant-facing technology to improve productivity and simplify processes. We have a world-class scheduling system to turn forecasts into schedules, but we’re improving the manager user interface to save manager time. We’re investing in kitchen and To Go technology, machine learning and AI for better forecasting, inventory and receiving, and making it easier for managers to operate so they can spend more time with guests and training. We won’t let technology override the guest experience but aim to improve kitchen productivity and To Go performance.

On competitor closures, any observations on market-level benefits where closures were more prevalent?

Closures occur more in tertiary and secondary trade areas; Tier 1 trade areas rarely see closures unless rent is unsustainable. Some independent fine-dining closures in Tier 1 are likely to be recapitalized and come back. The most closures are in tertiary locations where independents and smaller chains struggled.

That concludes the question-and-answer session. I will turn the conference back to Mr. Kevin Kalicak for closing remarks.

Thanks. That concludes our call. I would like to remind everyone that we plan to release second quarter results on Friday, December 17th, before the market opens with a conference call to follow. Thanks, and have a great day.

Ladies and gentlemen, that concludes today’s conference call. We thank you for your participation. You may now disconnect.