Welcome to the Darden Fiscal Year 2022 Third Quarter Earnings Call. Your lines are muted until the question-and-answer session. The conference is being recorded. If you have any objections, please disconnect now. I will now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin. Thank you, Jess, and 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 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. Any reference to pre-COVID when discussing third quarter performance is a comparison to the third 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 third quarter of fiscal 2021. We plan to release fiscal 2022 fourth quarter earnings on Thursday, June 23, before the market opens, followed by a conference call. This morning, Gene will share some brief remarks, Rick will give an update on our operating performance, Raj will provide more detail on our financial results and an update to our fiscal 2022 financial outlook, and then Gene will have some closing comments. Now, I'll turn the call over to Gene.

Thank you, Kevin, and good morning, everyone. Our third quarter was one of stark contrast, and I'm pleased with our performance in this highly volatile environment. Our team did a great job controlling what they could control. In fiscal December, we achieved record sales while meeting our internal profit expectations that were contemplated in the guidance we provided in December. However, in fiscal January, which is a high-volume period for us, the Omicron variant significantly impacted consumer demand, restaurant staffing and operating expenses. We also experienced substantial weather impacts, all of which resulted in significantly lower sales and earnings than our internal expectations. Finally, as COVID cases declined and the operating environment normalized, sales improved throughout fiscal February, and we had strong results that exceeded our internal expectations. Sales strength has continued into March. Quarter-to-date, our average weekly sales are slightly ahead of our February actuals, and these trends are incorporated in our guidance. When we talked last in December, we could not have predicted the impacts Omicron would have on our business. In fact, the dramatic spike in cases created the most difficult operating environment since the initial onset of COVID two years ago. Rick will provide more details on the impact it had on our staffing levels in a moment. Omicron also created additional pressure on expenses at the restaurant level as we saw higher levels of sick pay and we incurred significant overtime costs due to staffing shortages caused by exclusions. The January spike also caused further supply chain disruptions, and we now expect inflation to be higher in Q4 than when we talked in December. We have implemented pricing actions to mitigate the impacts of rising costs, and Raj will provide more detail in his remarks. We recognize that all of us in the industry faced additional risk due to the current geopolitical environment such as higher inflation and further supply chain disruptions. However, I'm confident that Darden can compete effectively in any operating environment. We have a strong balance sheet and the right strategy in place, driven by our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning, and our results-oriented culture. And our brands are relentlessly focused on executing our back-to-basics operating philosophy anchored in food, service, and atmosphere. Now, I'll turn it over to Rick.

Thanks, Gene, and good morning, everyone. Our restaurant teams are focused on executing at the highest level in creating exceptional experiences for every one of our guests. That's why we are committed to doing what it takes to have the people we need and the products our guests expect when they choose to dine with us. From a people perspective, we are seeing positive momentum in applicant numbers, and we feel much better about where we are now in terms of overall staffing. Our focus will continue to be on hiring and more importantly, training our new team members to reach the productivity level required to enable us to operate at optimum staffing levels. Our biggest staffing challenge during the quarter was managing the impacts of team member and manager exclusions due to Omicron. To provide some context, at the peak, team member exclusions in January were three times higher than the monthly peak we experienced with Delta. While we did get some help as the CDC guidelines for exclusion were reduced from 10 to 5 days, 8% of our total workforce was excluded at some point during January. To put a finer point on this, in the month of January, we had over 13,000 team members excluded for a total of more than 65,000 exclusion days. I am really proud of how our teams managed through the impacts of Omicron. As it moved across the country, we had some restaurants that were down as much as 40% of their staff and others that needed to limit their hours or were temporarily moved to takeout only in order to operate effectively. As Omicron began to fade, our teams kept the same level of focus on staffing and training to provide a great guest experience, which resulted in record sales for fiscal February. Valentine's Day was strong across all our brands, and that is a testament to the excellent job our operators are doing to ensure their restaurants are staffed and ready to serve our guests. In fact, on Valentine's Day, Olive Garden served more than 1 million guests with approximately 35% of sales off-premise. On the product side, our supply chain team is working hard leveraging our scale to ensure our restaurants have the products they need to serve our guests. Our inventory levels remained strong and some of the logistical challenges we had been dealing with began to improve in December. However, Omicron impacted staffing for our supply chain partners in January as well. For labor-intensive food production, this resulted in reduced supply and increased cost at a time when protein prices typically shift down from the heavy holiday buying season. Our distribution partners also experienced warehouse staffing challenges and driver shortages. Thus, we had expedited shipping costs and utilized more spot rate haulers in the quarter. Between those impacts and dealing with back-to-back winter storms, our team did an admirable job of maintaining supply continuity for our restaurants. Together, all of these factors increased our expected annual inflation, and Raj will provide more color on that in a moment. To Go sales remained strong during the quarter as our brand and our guests continue to benefit from the strength of our digital platform. Off-premise sales accounted for 30% of total sales at Olive Garden and 16% of total sales at Longhorn Steakhouse. Digital transactions accounted for 63% of all off-premise sales during the quarter and 12% of Darden's total sales. Before I turn it over to Raj, I want to thank all of our team members who have shown tremendous resiliency and dedication in the face of constant change. Two years ago, we closed our dining room and did not know when we would be able to reopen them. Since then, we have dealt with multiple COVID waves, and our teams continue to demonstrate incredible flexibility and perseverance while creating exceptional guest experiences. Today, we are hopeful that we are near the end of COVID-19 as a pandemic and that we will be able to live with like we do with other viruses. As I visit our restaurants and talk with our team members, they say each day feels a little more normal, and they are invigorated by the energy that has returned to our dining room. Our team members are the best in the business. I'm inspired by their winning spirit and confident that Darden's best days are ahead of us. Now I'll turn it over to Raj.

Thank you, Rick, and good morning, everyone. Before discussing our quarterly results, I want to elaborate on the comments made by Gene and Rick about the effects of Omicron and winter weather on our third quarter performance. In examining the fiscal months, actual sales in December and February were nearly in line with our internal expectations from the financial outlook we shared in December. We achieved our profitability goals in December and surpassed them in February. However, in fiscal January, we fell significantly short of our sales and profitability targets due to a surge in COVID cases, which led to staffing shortages and diminished demand. Additionally, we faced more severe winter weather than usual, which negatively impacted sales by over $100 million. This slowdown, combined with extra expenses for sick pay, overtime, and rising inflation, reduced our earnings per share by approximately $0.30 and adversely affected EBITDA margins by more than 100 basis points for the quarter. Now moving on to our detailed results for the quarter. Total sales for the third quarter reached $2.4 billion, marking a 41% increase from last year, driven by a 38% same-restaurant sales growth and the addition of 33 net new restaurants. Diluted net earnings per share from continuing operations stood at $1.93. Total EBITDA was $395 million, resulting in an EBITDA margin of 16.1%, which is 50 basis points better than pre-COVID levels. We continued to return substantial cash to our shareholders, with $141 million paid in dividends and $382 million spent on share repurchases, totaling over $520 million returned to investors during the quarter. We ended the quarter with $555 million in cash on our balance sheet. We are experiencing increasing cost pressures due to inflation, with total inflation for the quarter at 7%, which exceeded our earlier estimates. As I mentioned last quarter, we began implementing additional pricing measures in the third quarter and have taken further actions to strengthen our business model while balancing impacts on our guests. For the third quarter, total pricing increased by 3.7%, and for the fourth quarter, we anticipate pricing to be around 6% compared to last year. Consequently, we now forecast pricing to slightly exceed 3% for the full fiscal year, which is below our adjusted total inflation expectations of 6% for the year, as we aim to maintain our competitive pricing strategy. Turning to our profit and loss statement and segment performance for the third quarter, we are comparing results with pre-COVID performance from the third quarter of 2020, which we find more representative of typical operations and our margin expansion opportunities. For the third quarter, food and beverage costs were 270 basis points higher, impacted by rising commodity prices and investments in food quality, portion sizes, and pricing that remains significantly below inflation. Our commodity inflation for this quarter was 11%. Restaurant labor costs rose by 50 basis points due to wage inflation and increased sick pay and overtime costs resulting from Omicron, with hourly wage inflation exceeding 9%. In fiscal December and February, labor as a percentage of sales improved compared to pre-COVID levels, as these months were not significantly impacted by Omicron. Restaurant expenses were down by 80 basis points, with our teams effectively managing controllable costs. Marketing expenses were $44 million less, resulting in a favorable 190 basis points. Consequently, the restaurant-level EBITDA margin for Darden was 19.4%, which is 50 basis points lower than pre-COVID levels for the quarter. However, both December and February saw restaurant-level EBITDA margins increase by nearly 100 basis points compared to pre-COVID. General and administrative expenses were 90 basis points lower due to savings from corporate restructuring in fiscal 2021, lower mark-to-market expenses, reduced travel costs, and sales leverage. Regarding segment performance, sales and profit margins improved significantly for all segments compared to last year. When compared to pre-COVID performance, all segments except Olive Garden saw sales growth. Olive Garden's sales were slightly decreased due to its higher sensitivity to COVID case counts, arising from its geographic footprint and customer demographics. Additionally, Olive Garden has less marketing and promotional activity, which negatively impacts sales growth when compared to pre-COVID. The Omicron-related impact in January affected all segments, resulting in lower segment profit margins relative to pre-COVID comparisons. Looking at our financial outlook for fiscal 2022, we have updated our full-year expectations based on year-to-date performance and anticipated fourth-quarter results. We now project total sales between $9.55 billion and $9.62 billion, attributed to same-restaurant sales growth of 29% to 30% and around 35 new restaurants. We estimate capital expenditures of approximately $425 million and anticipate total inflation around 6%, with commodity inflation at about 9% and total restaurant labor inflation ranging from 6% to 6.5%, including nearing 9% hourly wage inflation. We expect EBITDA between $1.53 billion and $1.55 billion, an effective tax rate of around 13.5%, and about 129 million diluted average shares outstanding for the year, culminating in diluted earnings per share of between $7.30 and $7.45. This outlook projects a full-year EBITDA margin increase of roughly 200 basis points compared to pre-COVID levels, staying within our prior expectations. It also implies fourth-quarter sales between $2.52 billion and $2.59 billion and EPS between $2.13 and $2.28, exceeding our previous December outlook. As mentioned by Gene, our average weekly sales so far in the quarter are slightly ahead of February, which is factored into this guidance. Looking ahead to fiscal 2023, we are offering preliminary guidance for several items, including the opening of approximately 60 new units and total capital expenditures projected between $500 million and $550 million. We expect an effective tax rate of about 14% for fiscal 2023. Now, I will turn it back to Gene.

Thanks, Raj. This morning marked my 31st and final earnings call in my years leading Darden. So all the analysts who support us, thank you for believing us, our vision and our ability to execute. And for those of you who didn't always believe in us, thank you as well. You motivated me more than you will ever know. I want to thank our shareholders for the trust they have shown us and by investing in Darden. I will miss our time together, whether it's a one-on-one meeting, a group meeting or one of the many dinners we shared over the years. And finally, thank you to all the team members in our restaurants and our support center for being the lifeblood of our company. I look forward to seeing you in our restaurants in my new role as Chair. I began this journey 45 years ago as a high school kid busting tables. I've learned a lot of lessons throughout my career, but two in particular have served as guiding principles for me. First, when it comes to making decisions, you have to make sure both your guests and team members win. When those two critical stakeholders win, it's a good decision. Second, this is a simple business. Malcolm Nance said it best: The restaurant business is simple, but simple is hard. To be successful in the restaurant industry, you must have great people who consistently serve outstanding food in an engaging atmosphere. So I may have bored you with my back-to-basics operating philosophy; running great restaurants will always require intense focus on the fundamentals. As I transition into my new role as Chair, I'm confident Darden is set up for success. Rick is ready to lead the company, and he and his team will do a great job. Now, we'll open it up for questions.

Thank you. We'll take our first question from David Tarantino with Baird. Your line is open, please go ahead.

Hi, good morning. My question is about the margin outlook given the inflation environment you're facing. And I think you had previously guided to 200 to 250 basis points of margin expansion relative to pre-COVID levels. And it looks like you're going to comment in on that range for the fiscal year. But as you think about the forward-looking outlook, beyond this year, do you think that is still in play as you think about the inflation as you move into fiscal 2023, or do you think that needs to change?

Hi David. Good morning, this is Raj. So, let me just step back and talk about margins. When we began the year, obviously, things have changed quite a bit from the environment today relative to how we started the year is very different. We started the year with a 3% inflation assumption and pricing closer to 1.5%. And here we are, three quarters in, we're looking at 6% total inflation, and our pricing has only gone up by about 1.5%. So we started with 1.5%, and now we're just over 3% for the full year and still are able to get to that 200 basis points. So we really feel good about where we are getting to by the end of this year. We'll share more details in June call in terms of how we're thinking about fiscal 2023. But I think in the current environment, considering the situation we're in, we feel good about where we expect to be for this fiscal year.

Got it. Just a follow-up on that. It seems you are focusing more on pricing with the fourth quarter seeing an increase of 6%. How did you come to the decision to implement such a significant price increase? And what is your perspective on consumers' ability to handle that price level?

We have consistently taken very little pricing over the past few quarters and years, aiming to maintain flexibility and approach pricing cautiously. Currently, we are at a 6% increase, which may seem high compared to our historical pricing, but given the current environment and the fact that this pricing is based on two years of considerations, we believe it is reasonable. We are actively seeking opportunities to price below inflation. This year, we are pricing below inflation, and as inflation rises, we will need to manage it through a combination of pricing adjustments and productivity initiatives.

Great. Thank you. And Gene, congrats again on a great run as CEO.

Thank you, David.

We'll go next to Brian Bittner with Oppenheimer & Company. Your line is open. Please go ahead.

Thank you. Good morning. Congratulations, Gene. We seem to be sitting here at a point in time when operators and investors are increasingly concerned about lapping stimulus and doing so at a time when gas prices are surging, and this does not seem to be impacting your outlook based on your comments around March and based on the implied 4Q revenue guidance, which implies very strong trends. So, can you just comment on the environment out there? And maybe why Darden seems to not be prone to it.

I believe one key point is that our confidence in raising prices to 6% stems from the fact that wage rates at the lower end are increasing at a higher rate. We're seeing nearly double-digit growth in our direct labor costs. We think wage inflation is rising quickly across the country, and we believe consumers can manage this increase based on current conditions. While the situation can change rapidly, consumer demand is remaining relatively strong. This environment is noticeably different from previous ones where we faced significant challenges with consumers, particularly as wages rise swiftly, especially for lower-income workers.

Yes, Brian. I’ll add some thoughts on the current situation. As we consider the ongoing conflict in Ukraine, our thoughts are with the people there, but the duration of the conflict remains uncertain. Consequently, we cannot predict how long it will impact the environment. We are concentrating on what we can control and are confident in our ability to manage our business effectively in any setting. Additionally, restaurant supply is down about 13 to 14 percent compared to pre-COVID levels. This leads to fewer options for those wanting to dine out, and we believe we are an excellent choice for them. Lastly, you may notice that our guidance range is somewhat wider than usual for this quarter due to the current uncertainty. However, we feel positive about the guidance we provided, despite the larger range reflecting our current circumstances.

Great. Thank you Gene and Rick.

We'll go next to Brett Levy, MKM Partners. Your line is open. Please go ahead.

Thank you for the question. Gene, your insights will certainly be missed in the coming years as we navigate these challenging times. Considering your operating model amid inflation, labor shortages, and increasing pressures on consumers, how should we approach the implementation of technology? How cautious do you plan to be regarding new menu items over the next two to six quarters? Additionally, how do you intend to manage the controllable factors to enhance productivity while remaining proactive? Thank you.

Hey, Brett, it's Rick. Regarding your question, on the technology side, our goal remains to implement solutions that minimize friction throughout the value chain and address the increasing demand for personalization from our guests. We don’t plan to use technology to eliminate human roles in our full-service restaurant, as we believe customers value personal interaction. Concerning the menu, we appreciate the benefits of our streamlined selection, which allows us to offer high-value dishes that guests desire while making it easier for our teams to prepare them. We will continue to improve by adding new items and removing others, keeping our menus stable with only minor adjustments. In terms of controllable costs, we expect some expenses to increase over time. However, looking ahead, while we anticipate some productivity gains, we don't foresee significant changes in margins from current levels. We will provide further insights in June regarding our fiscal 2023 outlook. Our historical framework indicated a margin improvement of 10 to 30 basis points, and we've achieved seven years' worth of improvement in just two years. It’s essential for us to manage this progress carefully given the improvements we've seen recently.

And then just one quick follow-up. When you think about the mix of your consumers right now shifting either to a higher-value product for the pursuit of value, have you seen any material movement in the mix, I guess, by Olive Garden, by LongHorn and then just across the consolidated?

No, Brett, we haven't seen any movement.

We'll move next to John Glass with Morgan Stanley. Your line is open. Please go ahead.

Hi, thanks. Good morning, Gene. I don’t think you bored any of us; in fact, you taught us all a lot about the industry, so thank you for that. Raj, regarding commodities specifically, I know you've shared some insights in the deck about through May. Do you have any information on the contract beyond that, or do you believe it’s too early given the volatility? Do you have any visibility into 2023 on that expense item?

John, we are clearly starting to have conversations. Compared to historical situations, we are probably less contracted, and we are working through those over the next few months. We will have more to share in June. However, the forward premiums are currently too high to contract that far.

Thank you for that. And then just related to your comments about pricing and the consumer can tolerate that pricing, how are you thinking about your promotional tactics in '23? Do you start to come up with alternative plans if the consumer is weaker than you expect? Are you starting to revisit your thoughts about the marketing spend in the business? How are you preparing if, in fact, consumer demand starts to weaken? And what are some of the tactics just broadly that you think you could employ to continue the sales momentum?

Hey, John, it's Rick. Thanks for the question. I will say we're not going to talk too much about 2023. But I will say, we've got contingency plans for anything. If the economy slows down, we've got some plans. We won't talk about what they are. If the economy stays strong, then we'll continue what we're doing. And so until we see what that is and where it is, we don't really want to comment on what we would do.

We'll go next to Brian Mullan at Deutsche Bank. Your line is open. Please go ahead.

Hey, thank you. Thanks for the development color on fiscal 2023. Just wondering if you could speak to how that pipeline is building beyond that on a multiyear basis. And it would be great to hear your thoughts on what you're seeing from a competition for site perspective. Are you seeing other large chain casual diners out there looking at these same sites? Just anything different or notable that force going out versus how the environment was prior to COVID when there were more restaurants.

Hey, Brian, we're continuing to build our pipeline for fiscal 2024 and beyond. And as we've said before, we'd like to get closer to the higher end of our long-term framework in the future. As we're seeing competition for sites, we aren't seeing as many people competing for sites, but there are still brands that are out there growing and competing for sites. I will say, add to that, we are taking over some sites and building some restaurant and converting some to our brands at an economical rate. And they're really great sites. Those brands just didn't stay through. So we'll continue to build our pipeline. We still have some cost inflation in there, but our business model has improved so much that is offsetting that by more than enough. And we feel good that we'll continue to build our pipeline.

We'll go next to Peter Saleh of BTIG. Your line is open. Please go ahead.

Thank you for the question and congratulations again, Gene. A few quarters ago, you mentioned that casual dining was down about 10% in unit sales compared to pre-pandemic levels. There seemed to be a lot of speculation in that category with new restaurant openings. Are you still observing that trend? Is the development landscape still quite competitive, or have inflationary pressures dampened that somewhat?

Yes. Looking back, what I meant to convey was that there has been considerable speculation, particularly from some major REITs willing to acquire real estate and leave it unoccupied for a period, as the carrying costs are lower. We haven't noticed any significant change in that situation. As I expect interest rates to rise, speculation in the real estate market will likely decrease, and landlords will be less inclined to let their buildings remain vacant. As Rick previously mentioned, we are actively building our pipeline. There's competition, although not many chain restaurants are vying for space; instead, numerous smaller regional players are competing. Ultimately, most landlords prefer to have a Darden guarantee on their property. We get to review most of the real estate available in the United States first, and if we can make a deal work, we will sign a lease and aim to establish the right brand to enhance the opportunity.

Thank you for that. And then, just on the development for 2023, can you give us a sense on how much of that development is coming from Cheddar's?

Yes. It's going to be somewhere in the low single digits, maybe as much as 10, but lower single digits to as much as 10.

We'll go next to Jeffrey Bernstein at Barclays. Your line is open. Please go ahead.

Great. Thank you. Gene, thank you for your steady leadership and friendship over the years and for setting an example for the industry to follow. So a question on the off-premise business. It seems like it's stickier than we would have thought, I think you said 30% at Olive Garden, 16% at LongHorn. Just wondering if you can maybe share the split between delivery and pickup within that current truck sales and maybe where you think that's going to settle? I mean it just seems like a lot of this is here to stay. I'm just wondering whether there's any chance you guys would reconsider opening up to maybe third-party delivery aggregators. It seems like the consumer expects it and the consistencies improve, the fees are eased. I don't want to see you guys lose out if this is kind of where the future is going. So any thoughts on that would be great. Thank you.

Hey, Jeff, this is Gene. I thought you'd wait until I leave the room to ask about third-party delivery. I'll let Rick take that.

Hey Jeff, thanks for the question. Gene and I are in the same place on what we believe with third-party delivery. We still don't like that model. We don't think it's the right thing for having someone get in between us and our guests, and a couple of points. Olive Garden has grown their To Go business significantly. And in many ways, faster than others have grown it with third-party delivery without that margin hit. Now, our takeout sales increased in Q3 from Q2, partly because of the influx of Omicron. And so people shifted again back to a To Go experience. We're seeing a little bit of a shift back to on-premise in Q4. We don't know where equilibrium is going to be. And when we get there, it will probably be higher than where we were before COVID, but it's not going to be at the levels they are today. And so we'll continue to make investments that we need to take the friction out of the order, pick up and pay experience so that people don't consider getting delivered. Now, you did ask about our delivery. We do have large-party delivery for Olive Garden, and that's a good business for us. It's a minimum order size. It gives us enough time to prep the order and deliver it to our guests and actually do a little bit more of a setup for it. I mean, so we really feel good about that business, but we never say never, but the likelihood of us getting into third-party delivery anytime soon is pretty low.

Thank you. Gene, best wishes on your well-deserved retirement, and good luck to you, Rick, in your new role. This quarter, the percentage of digital sales in off-premise increased to 63%, up from 60% previously. Rick, you mentioned that the ceiling for the off-premise mix is uncertain compared to the earlier target of over 20%, but is there a specific limit for how high the digital portion of off-premise sales can reach? I have a follow-up question.

Yes, I don't think there's a limiter of how high the digital mix will go other than 100%. But there are still people that want to call in and dial in and pick up their order. They may not be as comfortable with the technology. We're trying to make it as seamless and smooth as possible. But we're even making that experience better for the people that dial in, how do they pay and how do they pick up. So, we're doing things on the technology front that maybe they don't see as much, but that we can get better so that they can still do the dial-ins for us. We would like to see the digital percentage continue to grow as part of off-premise. It just simplifies the operation in the restaurant. There's fewer things that the team members have to do to pick up the phone, et cetera. But there are some long-standing guests that just like to call, and we'll continue to offer that service to them. We will not eliminate dial-in to get the percentages up. These percentages have grown because of the investments that we've made and will continue to make. And hopefully, they'll continue to grow.

Great. And then just relatedly, can we expect to see a higher mix of digital marketing in 2023 versus 2022 to drive a higher digital off-premise mix and help increase data collection, or will the focus of the 2023 marketing message pivot back to driving more dine-in sales?

Andrew, we're not going to talk as much about what's going on in 2023. I will say that whatever the environment looks like, whether we need to drive more dine-in sales versus off-premise, we'll do. We don't really do a lot of digital marketing on the off-premise, so most of our marketing is for on-premise. And so if we do any off-premise marketing, it will be an increase. So pretty much most of our marketing is on-premise.

Thank you. And Gene, I also echo everyone's comments about your leadership. So on the accelerating commodity pressures, beyond additional price, can you talk about any other levers you're looking at in the supply chain to help offset some of the commodity pressures, any flexibility in some of ingredients and sourcing?

We are very satisfied with our current menu and the quality of our food, so we do not anticipate making significant changes to our ingredients to address some of these costs. We will keep collaborating with our suppliers to secure the best prices possible for our products. As mentioned earlier, we are committed to providing the products that our customers value and expect when they dine with us. We are optimistic that the inflation situation will improve over time, but we believe we can remain competitive in any market conditions.

We'll go next to Chris Carril at RBC Capital Markets. Your line is open. Please go ahead.

Thanks and good morning. Gene, congratulations and wish you all the best going forward. So just on the additional pricing you'll take beginning this quarter, can you provide any further detail on how you're planning to implement this additional pricing across the portfolio, maybe specifically at your largest brands versus your higher-end brands?

I think, Chris, we've discussed before that our approach is typically to keep prices lower in casual dining, although this can fluctuate from quarter to quarter. I don't want to go into the exact details since these figures change frequently based on various factors. However, generally, there's a lot of analysis involved in our pricing strategy, and it includes a mix of analytical data and the intuition we've developed from our long experience in the industry.

Got it. And then, I guess, as a follow-up, Raj. You mentioned productivity initiatives to also help offset these incremental cost pressures that you're seeing. So can you expand maybe on what some of these productivity initiatives look like? Is this just more related to new employee training?

I believe it relates partly to our actions during COVID, but primarily it is about our ongoing efforts in simplification. We are continuously identifying chances to simplify our processes. As Rick mentioned in his remarks, when we bring in new team members, our emphasis is on training them to enhance their productivity. Currently, we have many new employees in our system, and we want to ensure they reach their full potential, which requires time.

We'll go next to John Ivankoe with JPMorgan. Your line is open. Please go ahead.

Hi. The question was about staffing and the profiles of applicants in 2022 compared to 2019. It's encouraging to see that your overall turnover rates are improving annually. How would you characterize your productivity and the hospitality skills of your employees? Do you expect to return to the hospitality levels of fiscal 2019, or have there been changes, such as your menu simplification, that might enable the workforce in 2022 and beyond to perform better than in the past due to the adjustments you've made?

Yes, John, to answer the question directly, I think we can get better, continue to get better with this class because of the menu simplification we've made. When reducing our menus the way we did has made it a lot easier to run a restaurant. The managers spend a little less time on individual items and teaching people on these items that we didn't produce very often. I mean we just get better at producing the same things over and over again, which are the things that our guests want. We've had a couple of things that have happened through COVID that have been good for us. One is we've hired some folks that maybe we wouldn't have looked at before, maybe it's their first job. But giving someone their first job and teaching them to do the things the way we do it is a good thing for us. Maybe in the past, we would have said, 'You needed to have a lot of experience in a restaurant before you come to work for ours.' But we're seeing that some of these folks that we're hiring that are new to work, we're teaching them how to work the way we want them to work and it's actually working out for us pretty well. We also have seen a lot of rehires. A lot of people are coming back to work for us that have left us over time. And a lot of our managers are rehires. And so while people may have left the industry during COVID, a lot of them are coming back, and we feel really good about the fact that they're coming back to work for us.

We'll go next to David Palmer with Evercore ISI. Your line is open. Please go ahead.

Thanks. Congrats, Gene, on a heck of a career. All the best to you in retirement. I have a question about Cheddar's and Darden’s acquisition strategy going forward. Cheddar's has gone through a lot of change before COVID. I think some of that was more painful and slow than you would have expected, but it seemed to have reached pretty transformational levels with labor productivity during COVID. So could you talk about Cheddar's new unit returns today? And what that unit growth could possibly look like going forward for that brand? How fast can it ramp? And I have a quick follow-up on this.

I want to express how proud I am of John Wilkerson and his team for their work during COVID and for significantly transforming Cheddar's business model to make it a more attractive investment for us. As mentioned earlier, we anticipate opening a range of new units from low single digits up to 10, which would be more than we've opened since acquiring them. We will keep building that pipeline as we strengthen the team. They have successfully prepared the team to open restaurants, which was not in place when we acquired them. While I can't specify how large Cheddar's will become, they do have a significant addressable market. The value they offer to consumers and the quality of their food indicate that many more Cheddar's restaurants can be established. However, I cannot provide an exact number until we open more locations. I can say that the restaurants we opened during COVID have performed exceptionally well for us, and we feel optimistic about our ability to open more Cheddar's.

Do you want to revisit the topic of unit returns? Additionally, I have a follow-up question regarding your focus on acquisitions as you move past Cheddar's. It’s important to highlight how unusual it would be for Darden to achieve an acquisition premium in the current landscape, given the limited number of companies where an acquisition strategy would yield significant returns reflected in their multiples. Could you share your thoughts on that capability and how much emphasis it will have for you moving forward? Thank you.

Yes, David. If you think about our acquisition strategy, we've made four big acquisitions since 2007. And that should still be part of our strategy going forward. We've proven that we can get synergies. And we've proven over time, it takes a while that we get these brands up and running and ready to go and grow. But our management team and Board regularly evaluate that, and nothing is going to change as we go forward. We believe Darden is a platform, a platform that can add brands that help Darden grow and continue to build our biggest advantage, which is scale.

We'll go next to Jared Garber with Goldman Sachs. Your line is open. Please, go ahead.

Hi. Thanks for taking the question. And, certainly, appreciate all the great color on the quarter, and I think on the consumer as we think, I think, ahead for the rest of the year. Many of the questions have certainly been asked and answered, but I wanted to get a sense of maybe some other strategies that you're thinking about in terms of making the consumer value proposition stronger outside of the price dynamic. So wondering if you can comment on how loyalty plays into your thinking here, whether that's a brand-specific program or something across the platform. Or are there any other, sort of, strategies that you're thinking through that might improve that value proposition outside of just stronger menu and sort of better value pricing?

Hi, Jared. When we consider our strategy and value proposition, it aligns with our long-standing operating philosophy focused on food, service, and atmosphere. We will keep investing in food to enhance its quality and consistency with every visit to our restaurants. We will also improve our service and ensure our atmospheres are inviting. Regarding pricing, our expectation is to stay below our competitors and inflation, as we believe this approach builds value. We have previously examined loyalty and may revisit it, but I'm not convinced that offering discounts to our core customers is the solution. Our objective is to encourage additional visits from our core consumers, which we've achieved without discounts by providing what they desire at a price they find fair and valuable. We plan to maintain this approach moving forward.

We'll go next to Jake Bartlett with Truist Securities. Your line is open, please go ahead.

Great. Thank you for including me. Gene, congratulations, I want to echo everyone's sentiments. My question pertains to the pent-up demand following COVID, not limited to just Omicron. Considering how data-driven you are, could you share any insights on the return of consumers who haven't visited in a couple of years? How significant is this trend, and are you noticing a shift in consumer behavior in the post-COVID era? Additionally, I have a question regarding regional impacts. With concerns from investors about rising gas prices and their effects on consumers, particularly in regions like the West Coast, have you detected any significant near-term effects on your quarter-to-date performance? Is there much variability in this regard?

In terms of the pent-up demand related to COVID and Omicron, we are noticing that some consumers who haven't visited us in a couple of years are returning to our dining rooms. There is still a portion of people who haven't felt comfortable dining out, even when the Delta variant was declining and there was a perception that COVID was largely over. We continue to see guests coming back, and it’s likely that even more will return. However, our demographic mix still skews a bit lower in the over 65 age group, as they have been more hesitant to go out, although this is improving. I forgot to mention the second part of your question.

Geography.

Yes, regarding geography, I don’t believe we can provide detailed information after just three weeks into the quarter. I will note that the geographic effects in Q3 were primarily influenced by Omicron, and varied depending on regional attitudes towards COVID. However, discussing gas prices in such a short timeframe is challenging since they have fluctuated somewhat over those three weeks.

We'll take our final question from Nick Setyan with Wedbush Securities. Your line is open. Please go ahead.

Thank you, and thank you Gene, for all of your wisdom throughout the years. My question is specifically on just lead costs, given the importance of pasta and bread. It would be just very helpful if you could frame your exposure in some way, whether it's a percentage of the food basket or this is the pricing we would need to take to offset it. Is there any way you can frame your exposure if we should be worried about it?

Yeah. Nick, maybe I'll just dimensionalize it for you. When you look at our food basket, wheat makes up about 7%; call it, 2% to 3% is pasta related; and then the rest is bakery and bread. So that's really where the exposure to wheat directly is. We're continuing to see what happens in that market, and we'll work with our vendors to just make sure we get the best price we can in the environment we're in.

And with no other questions holding, Mr. Kalicak, I'll turn the conference back to you for any additional or closing comments. Thank you, Jess. That concludes our call. And I'd like to remind you that we plan to release fourth quarter results on Thursday, June 23rd, before the market opens, with a conference call to follow. Thank you all for participating in today's call. Ladies and gentlemen, that will conclude today's conference. We thank you for your participation. You may disconnect at this time.