Please standby, we are about to begin. Welcome to the Darden Fiscal Year 2023 First Quarter Earnings Conference Call. Your lines have been placed on listen-only until the question-and-answer session. This conference is being recorded. I will now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin.

Thank you, Jake. Good morning, everyone, and thank you for participating on today's call. Joining me today are Rick Cardenas, Darden's President and CEO; 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 include certain non-GAAP measurements, and reconciliations of these measurements are included in the presentation. Looking ahead, we plan to release fiscal 2023 second quarter earnings on Friday, December 16, before the market opens, followed by a conference call. During today's call, any reference to pre-COVID is when discussing first quarter performance as a comparison to the first quarter of fiscal 2020. This morning, Rick will share some brief remarks on the quarter and our focus moving forward and Raj will provide details on our financial results. Now, I will turn the call over to Rick.

Thanks, Kevin, and good morning, everyone. As you saw from our press release, we had a solid quarter in what continues to be a challenging inflationary and uncertain macroeconomic environment. This was also the first quarter where we began to see the industry return to normal seasonal patterns. I'm proud of the way our restaurant teams are performing. Our brands remain focused on executing our Back-to-Basics operating philosophy, anchored in food, service and atmosphere, while at the Darden level, we continue to 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 people bring our brands to life every day, and our restaurant teams continue to execute at a high level, even with a lot of new team members as our staffing has returned to normal levels. Our team's ability to be brilliant with the basics is driving strong guest satisfaction across our brands. These satisfaction measures at Olive Garden are at or near all-time highs, and steaks grilled correctly scores at LongHorn Steakhouse are the highest in their history. We remain focused on creating great learning environments for new team members to ensure they are fully trained and execute to our standards. Further, our ongoing investments in our team members help reinforce our strong employment proposition. This focus takes on added significance as we open value-creating new restaurants, which further strengthens our scale advantage. During the quarter, we successfully staffed and opened nine new restaurants and we remain on track to open 55 to 60 new restaurants this fiscal year. We also continue to invest in our digital platform and To Go sales benefited from these investments during the quarter. To Go sales accounted for 24% of total sales at Olive Garden, 14% at LongHorn Steakhouse and 13% at Cheddar's Scratch Kitchen. Digital transactions accounted for 32% of all off-premise sales during the quarter and 10% of Darden's total sales. Our technology investments have created an infrastructure that reduces friction for our guests and our operators, and we will continue to invest in technology that benefits both off-premise and in-restaurant dining occasions. We are also leveraging our scale to help mitigate the impact of heightened inflation. During the quarter, we continued to experience significant commodities cost pressure, and our supply chain team did an excellent job of working with the suppliers to minimize or offset cost increases to the extent possible. Inflation remains a headwind for consumers as well, particularly those in households making less than $50,000 a year. Olive Garden and Cheddar's have more direct exposure to these guests. Looking at guest behavior across our entire portfolio, we are seeing softness with these consumers, while conversely, we are seeing strength with guests in higher-income households. Even in this environment, our brands are committed to our strategy to price below their competitors. Since we emerged from the height of the pandemic, you have heard us talk about the search for equilibrium or more normal business trends. During the quarter, we saw a return to historical seasonal patterns which we did not experience last year. As we have discussed in recent calls, finding that equilibrium will inform our brands' marketing strategies. As we execute our plans, we will be very selective in bringing any promotional activity back. Any promotional activity we introduce should be evaluated with the following filters. First, it needs to elevate brand equity by bringing the brand's competitive advantages to life. Second, it should be simple to execute. We will not jeopardize all the work we have done to simplify operations, which allows our teams to consistently deliver exceptional guest experiences. And finally, it will not be at a deep discount. We are focused on providing great value to our guests, but doing that in a way that drives profitable sales growth. As an example, Olive Garden's unique competitive advantage is never-ending abundant craveable Italian food. That is why the television advertising progressed from spots that feature their never-ending first course to those that are now focused on their made-from-scratch sauces, and anything they do going forward should continue to elevate this core brand equity. I am pleased with the progress our teams made executing against their strategic priorities during the quarter. Our strategy is working, enabling us to grow sales, increase market share and invest in our people and our brands all while continuing to return capital to our shareholders. Last month, we held our annual leadership conferences, which provide a powerful way for us to engage with every general manager and managing partner across all 1,875 restaurants. These restaurant leaders hold the most influential role in our company and the opportunity to interact with them and listen to those closest to the action is invaluable. Our leaders return to their restaurants aligned to their brands' operational priorities and motivated to continue winning. In order to win, we must stay focused on executing our Back-to-Basics operating philosophy and leveraging our four competitive advantages as we continue working in pursuit of our higher purpose to nourish and delight everyone we serve: our guests, our team members and the communities where we operate. One of the ways we serve our communities is by fighting hunger. Once again this year, Darden is helping Feeding America add refrigerated trucks for 10 member food banks to support mobile pantry programs and food distribution in communities with the highest need. With the addition of these new trucks, 25 different food banks have received a truck since January of last year. Of course, our philanthropic giving would not be possible without the passion our restaurant teams have for nourishing and delighting our guests. On behalf of our leadership team and our Board of Directors, I want to thank our 180,000 team members for everything you do to serve our guests and communities. Now, I will turn it over to Raj.

Thank you, Rick. Good morning, everyone. We had strong absolute results in the first quarter and continue to be pleased with the efforts of our restaurant and support center teams to drive sales, effectively manage spending and navigate a challenging environment. We're lapping record first quarter performance from last year, which was driven by a resurgence in demand, more efficient labor with staffing levels below our standards and many other costs that had yet to be reintroduced into the business as we recovered from the impacts of the pandemic. Total sales for the first quarter were $2.4 billion, 6.1% higher than last year and driven by 4.2% same-restaurant sales growth and the addition of 34 net new restaurants. Diluted net earnings per share from continuing operations were $1.56. Total EBITDA was $340 million, and we paid $150 million in dividends and repurchased $199 million in shares, returning a total of $349 million of cash to our shareholders this quarter. In the first quarter, total inflation was roughly 9.5% and total pricing was approximately 6.5%, almost 300 basis points below inflation. We expect total inflation and our gap between pricing and inflation to have peaked in the first quarter. We also expect inflation to moderate throughout the remainder of the year while our pricing gap should narrow in both the second and third quarters and then revert in the fourth quarter. And while we have commodities inflation risk in the back half of the year, we have pricing plans ready to put into action, which will help preserve our targeted gap to inflation for the year if we see inflation higher than our expectations. Consistent with what we expected and communicated in the June call, the significant level of pricing below inflation pressured all aspects of our P&L in the first quarter and drove margins well below last year. As we look to the second quarter, we expect margins to decline less than they did in the first quarter and then grow versus last year in the back half. Now looking at the details of the P&L compared to last year, food and beverage expenses were 280 basis points higher, driven by commodities inflation of 15%. Restaurant labor was 50 basis points above last year, driven by hourly wage inflation of just over 9% and wrapping on last year's elevated productivity. Total restaurant labor inflation was 7.5%. Restaurant expenses were 10 basis points above last year, driven by higher repairs and maintenance expense due to supply chain challenges and utilities inflation of 16%. Marketing spend was 20 basis points higher as we increased testing of both digital and television marketing. G&A expense was 130 basis points below last year, driven primarily by two factors. First, mark-to-market expense on our deferred compensation plans was lower by about $7 million and as a reminder, due to the way we hedge this expense, this favorability is largely offset on the tax line. Second, equity compensation expense related to retirement-eligible individuals and our incentive accrual, while both in line with our plan, were significantly less than last year. Operating income margin of 10% was 220 basis points below last year, but 60 basis points above pre-COVID levels. Our effective tax rate for the quarter was 13.7%, and we ended the quarter with earnings from continuing operations of $194 million. Now looking at our segments. All of our segments outperformed their respective industry benchmarks on both traffic and sales. And as Rick mentioned, we began seeing a return to normal seasonal sales patterns. This was evident in our monthly same-restaurant sales compared to last year when we did not experience typical seasonal softness. Same-restaurant sales for June were in the mid-3% range. July was in the low 1% range, and they were approximately 8% in August. Sales at Olive Garden were 3.7% above last year, and average weekly sales were 101% of the pre-COVID level despite the significant reduction in promotional activity and couponing versus that time period. As we talked about in the past, we believe the pre-COVID marketing and promotional activities historically drove double-digit traffic. And when we look at our average weekly traffic at Olive Garden, we're retaining over 90% of pre-COVID, indicating that traffic trends are flat to above pre-COVID levels when considering historical marketing activities. LongHorn sales were 6.6% above last year, and average weekly sales were 126% of the pre-COVID level. Sales in our Fine Dining segment were 8.6% above last year, and average weekly sales were 120% of the pre-COVID levels. Our other segment sales were 9.9% above last year, and average weekly sales were 109% of the pre-COVID levels. Despite all of our segments having higher sales above last year, the high levels of inflation and wrapping on last year's inflated earnings when many costs had not fully returned to the business pressured segment profit margin below last year for all the segments. Turning to our financial outlook for fiscal 2023. We reiterated all aspects of our guidance in this morning's press release, culminating in diluted net earnings per share between $7.40 and $8 for the year. Finally, looking at the second quarter, we've seen continued strength in our sales trends with quarter-to-date sales above the high end of our annual same-restaurant sales outlook range. We also expect commodities inflation close to 13%, pressuring the second quarter EPS to be flat to slightly below last year. In what continues to be an unpredictable year, we're confident with the underlying strength of our business model and in our team's ability to effectively manage through it. And with that, we'll open it up for questions.

We'll begin with Brian Mullan with Deutsche Bank. Please go ahead. This quarter, we've seen continued strength in our sales trends, with quarter-to-date sales above the high end of our annual same-restaurant sales outlook range. We also expect commodities inflation close to 13 percent, pressuring second-quarter EPS to be flat to slightly below last year. In what continues to be an unpredictable year, we're confident in the underlying strength of our business model and in our team's ability to effectively manage through it. And with that, we'll open it up for questions.

Hey. Thank you. Rick, in the prepared remarks, you referenced seeing some continued softness with the lower-income consumers with the most exposure at Cheddar's and Olive Garden. Just to the degree you'd be able to comment, is that consumer feeling incrementally more pressure than they were when we heard from you three months ago or does it feel more stable to you right now? It would just be helpful to hear your thoughts given all the crosscurrents.

Hey, Brian. Thanks for the question. The consumer at below $50,000 is feeling a little bit worse than maybe before, but gas prices are helping. If you think about that consumer at $50,000 a year and below, gas prices make up a big portion of their income. That consumer spends more money on gas per person than any other income group above them. So as gas prices came down, they started feeling a little bit better, but we'll see what happens with gas prices going forward. And if I can clarify one other thing that I mentioned in the prepared remarks, I said that To Go sales were 32%—I'm sorry, digital sales were 32% of To Go off-premise. They were actually 62%. Sorry about that.

Okay. Thanks. And then just a follow-up question on marketing. You did touch on how you'll approach it from here, if you were to bring it back. But if you could just maybe elaborate a little bit on how you will approach that. I know the goal is to make sure you're driving restaurant profit dollars for the organization. But maybe from a capability perspective or from how you measure ROI, is there anything different going forward than maybe how you would have done this three or four years ago as you bring it back—if you do bring it back?

I'm not going to get into detail on whether we're bringing it back. As I said in the prepared remarks, if and when they introduce promotional activity, it should elevate brand equity, which we've been doing for the last year or so at Olive Garden; it should be simple to execute and not be a deep discount. Our goal with anything we do—promotional activity or otherwise—to drive sales is profitable sales growth and we have ways to measure ROI. The things that we learned through COVID—and we knew before—when LongHorn started to reduce their limited-time-offer price point, deep discounted promotions involved a lot of work in getting items that we don't usually have in the restaurant through the supply chain, plus training. So there were a lot of costs. As we think about future potential communication methods and ways we promote, anything we do will avoid making operations more complicated, will focus on our brand equities and will not be a deep discount.

We'll now move to our next question, which will come from Jeffrey Bernstein with Barclays.

Great. Thank you very much. Two questions. One, just on the near-term results. I'm just wondering how did the actual comp and earnings compare to internal expectation for the first quarter. And as you think about fiscal 2023, I know the guidance was unchanged, but it would seem like the lower end is more likely in a slowing macro. I'm just wondering whether we're missing something in terms of your expectation for a comp reacceleration or more significant inflation easing or more cost savings. Just trying to get a sense for the first quarter relative to the rest of the year?

Hi, Jeff. When we think about our plan and our actual internal expectations and our estimate, we're basically back on plan. We're really in line with our internal expectations. As we look specifically at the quarter, was there a little bit of a miss on the sales side? Yes, but not as big as you might think. Overall profitability was in line and actually slightly ahead. But again, quarter-to-quarter, there is some volatility. As the year started, we began to see seasonality return to normal and that was one of the things that changed how we thought about the business. If you look at versus pre-COVID, how we trended, the traffic retention was actually pretty similar in Q1 to the way it was in Q4. There's a lot of noise when you look at year-over-year because of the reopening last year and especially if you think about California that reopened in the middle or late June, that helped Olive Garden and, to some extent, Yard House; you're wrapping on those levels. That's why there's a lot of noise year-over-year. The best way to look at it is versus pre-COVID. When we look through that lens, Q1 was actually pretty consistent with the performance we had in Q4.

Understood. And then just to follow up, the comps. I think you mentioned in August you were running roughly 8%. That seems like a significant acceleration versus June and July, and I think you said in September you're running above the 4% to 6% range that you guided for the full year. So I'm just wondering if you can share any thoughts in terms of why you saw such a sharp reacceleration versus maybe June and July. I didn't know if it's just all due to the compares on a multi-year basis or maybe gas price easing is helping. Just trying to get your thoughts on the reacceleration and your directional assumption for the rest of the year. Thank you.

I would again go back to referencing pre-COVID. If you look at it through that lens, you'll find that August, while year-over-year was higher, it wasn't a big increase versus pre-COVID. Is there a movement of a point or two month-to-month when you look at it versus pre-COVID? Yes. But in general we're actually fairly consistent. I know it's hard because it's three years ago, but that's really the baseline you have to look at. If you look at it through that lens, our cadence looks reasonable. It doesn't look like there's a huge acceleration. There are some specific things related to unique promotional activity for a brand that affects pre-COVID comparisons. We take that into consideration as we estimate the business, and that's where you see retention vary month-to-month because of promotional activity we might be wrapping on versus pre-COVID. Excluding that, it's been fairly consistent and our estimate assumes that going forward.

We'll now move to our next question, which will come from John Glass with Morgan Stanley.

Thanks very much, and good morning. Rick, first of all, can you just talk about competitive intensity and promotional intensity in the industry? Everyone presumably is seeing the same pressure on the low-end consumer. So are you seeing more competitive activity versus I heard some competitors talk about reducing promotional activity just to repair margins. How do you perceive what's going on in the industry from a competitive intensity standpoint right now?

We aren't seeing a lot of significant promotional activity. Other than a couple out there—one brand doing an all-you-can-eat promotion at the same price point as before COVID, and another doing an all-you-can-eat promotion at a much higher price point than pre-COVID—most competitors face pressured margins. Their ability to do deep discounted promotions to drive traffic may be limited. If food costs come way down, they might start promotions, but current margins versus pre-COVID make it harder for them to do significant deep discounting.

That's great. And then you talked about your own low-end consumer, particularly at Olive Garden being under pressure. Do you intend to target those consumers to stimulate the return to your restaurants or do you view this as they are not dining out as much and so no matter what you do, it doesn't really change their outlook on dining? How do you think about recapturing those visits?

Let's not read into it that we're seeing a huge reduction. We're seeing a little change in behavior from that consumer, but not huge. We don't want to change what we do just to capture a segment. We want to continue to focus on earning one more visit from our loyal guests. Our loyal guests span many income levels. Anything we do will drive more loyalty from existing guests, whether below $50,000 or above. The $50,000 income consumers make up a portion of Olive Garden but not a majority. A majority of our consumers are above that, and guests above $100,000 are doing very well.

We'll now take a question from Jared Garber with Goldman Sachs.

Great. Thank you for the question. Raj, I wanted to ask about commodity inflation and the outlook for the next three to six months. I think you said there's some risk in the back half of the year. It seems like the second quarter inflation guide is a bit higher than we've been expecting based on recent commentary. So I wanted to get a sense of what you're seeing and how you're contracting forward, and when we can start expecting some inflation easing, particularly on beef. I think we've seen some easing in some costs. How are you planning for that to flow through throughout the year? Thanks.

Jared, remember commodities inflation is a function of what we purchased last year at what price. For example, we had a great chicken contract and were buying boneless chicken breast in the mid-$1 range; over two to three months ago that was as much as $3.50, and this week it's come down to almost $1.80 to $1.85. It's come down a lot. Directionally, things are moving in the right direction, consistent with what we expected, maybe not quite as fast as we thought. Our commodities inflation for the year—we guided around 7% at the beginning of the year—we're probably closer to 7.5%, but that's not a huge change given market volatility. As we get to the back half, we wrap on some elevated costs. Quarter-to-quarter, we expect Q3 to be more in the mid-single-digit range and Q4 probably close to flat to slightly deflationary year-over-year. Coverage is still hard to get far out; we have about 50% coverage over the next six months, just over 70% for the next three months, and then closer to 30% after that. Forward premiums are still high and when things are coming down we don't want to lock ourselves and lose optionality. As I said earlier, if it's a little higher, we have headroom in pricing to deal with that.

We'll now move to Chris O'Cull with Stifel. Go ahead, please.

Thanks. Good morning, guys. Raj, I was hoping you could just level set us for the second quarter. The comps you said were above the 4% to 6% range quarter-to-date. But if the comps relative to pre-COVID are pretty steady for the rest of the quarter, would that imply much variation?

If you mean month-to-month variation within the quarter, yes, there is some because of promotional activity that affects the baseline versus pre-COVID. When we look at pre-COVID we tease out promotions and compare; excluding that, it's fairly consistent. We're seeing versus pre-COVID a little bit better September-to-date but not meaningful enough to call a trend change.

Okay. I was just trying to figure out if October, November comparisons relative to COVID or pre-COVID or relative to last year even are much different from what you have in September, you're wrapping in September.

I don't believe so. The only possible change could be a holiday shift in November, but I don't think there's any material change.

Okay. And then assuming the holiday follows a more normal seasonal pattern this year, which of your brands do you expect to be impacted the most on a year-over-year basis? For example, I would think fine dining's performance might accelerate if we have a normal holiday season, but I wasn't sure how all the brands might be impacted.

By the time we got to the holiday season last year, Omicron was a factor that started to kick in late into the holidays, and we expect the third quarter to be an outperformer on the comp side because of wrapping on that. Outside of that, I don't know that there's anything unique this year that would cause segments to be different from pre-COVID. Last year, December was a record sales month for us; Omicron impact was essentially the last week of December into January.

We'll now move to our next question from Dennis Geiger with UBS.

Great. Thanks for the details and the commentary on pricing. Just wondering if you could speak to what you've seen to-date as far as customer response to pricing and how that impacts your go-forward thoughts, obviously marrying that up with how you spoke to inflation.

Generally, pricing flow-through is consistent with what we would expect. Rick mentioned that among lower-income guests there is a little erosion on add-ons, but not meaningful enough to say there's pushback on pricing. We're pricing a lot less than our competitors. In the first quarter, our pricing was roughly 6.5% compared to full-service CPI of about 9%. Over a two-year basis we priced 7.5% versus FSR near 14%, which gives you a sense we may not be seeing what others are seeing because we haven't taken the same levels of pricing the industry has.

Right. Appreciate that. And then just wondering if you could speak to dining room traffic levels currently. Where that stands? What kind of runway you may still have within the dining room and the benefits there if To Go stays elevated? Thank you.

There's not a huge difference in profitability between dining room versus off-premise; the margin differential is de minimis across the portfolio though it varies by brand. So changes in mix don't change margin much. For two quarters in a row we've seen consistent off-premise levels. We'll see how it plays out, but I don't expect margin to change materially based on mix changes.

We will now hear from David Tarantino with Baird.

Hi. Good morning. Raj, I just want to clarify a couple of comments you made on the underlying sales trends. My question is specific to Olive Garden and how you're viewing the performance for the first quarter relative to what you were seeing prior to the first quarter. It sounds like maybe you aren't viewing it that differently, but I just wanted to clarify the way we would calculate multi-year comps. It did look like a slowdown, but you did have that promotional activity pre-COVID. So when you make all the adjustments you're making for Olive Garden specifically, how are you viewing the performance of that brand in the first quarter?

We're very pleased with Olive Garden. Looking at guest count retention, Q4 Olive Garden guest count retention was in the low 90s, roughly 91%, and in Q1 they were basically in that range—within about 0.5 points of Q4. Year-over-year noise makes comparisons confusing. When you compare to the pre-COVID quarter, the quarter we're comparing to included buy-one-take-one for eight or nine weeks and a big promotional launch with high TRPs and couponing. When you exclude that noise, Olive Garden was in a great place and performance was fairly consistent.

Great. That's helpful. And then on the quarter-to-date number, I think you said last year you were doing comps versus pre-COVID around 7%. So if you're north of 6% versus that number, it would imply a pretty big acceleration versus the first quarter. It didn't sound like you were viewing it that way. Could you reconcile that math for us in your comments that maybe you haven't seen an inflection?

You have to consider pricing differences over the three-year period. When you look at traffic, there is a little increase versus pre-COVID, but when you take out the impact from promotions three years ago, it's not a huge step change. That's another factor in how we look at it.

Now moving to a question from Peter Saleh with BTIG.

Great. Thanks. Appreciate all the color. I wanted to come back to the guest count consistency at Olive Garden and pair that with commentary on Cheddar's and the lower-income consumer. How is this manifesting right now in these two brands? Is it more traffic declines or check management? Just trying to understand that in the context of guest count retention at Olive Garden.

We're proud of what Olive Garden and Dan and the team have done over the last couple years to simplify operations and improve margins. They outperformed the industry this quarter in both sales and traffic. Within our portfolio, Olive Garden has more consumers below $50,000, but we're not seeing a large move in traffic from that segment. We've seen a little check management, maybe a bit more at Cheddar's, but it's not significant. There are many reasons for performance differences across brands, and overall we haven't seen much check management.

Understood. And then just on marketing expense for the full year, you indicated previously it might be up about 10 basis points. In Q1 it was up about 20 basis points. Are you still on track for a modest increase this year or will you maybe take that up slightly given trends so far?

This is not driven by first quarter trends. We remain in the 10 to 20 basis points range for the year; quarter-to-quarter it may vary—some quarters at 20 bps, some at 10 bps—but that's still what we expect for the year.

We will now hear from Brian Bittner with Oppenheimer.

Thanks. I think there may be some confusion in how you're talking about trends relative to pre-COVID because we as analysts have no way to strip out impacts of promotions like you do when you speak to your underlying trend excluding promotions; it's apples versus oranges to our models. For instance, if you hold near this 6% comp for 2Q, it would suggest a 400 basis point acceleration in the pre-COVID trend from where you were in the first quarter. So is something more positive happening in the business recently than you're letting on, or conversely should we expect that one-year trend to come down a lot moving forward to keep the multi-year trend intact?

I understand the concern, but there's so much uncertainty now that we can't assume that what we saw in the last three to four weeks is the new run rate. Over the last six months, there's movement week-to-week, but over a larger period—six to eight weeks—it's pretty consistent. That's the lens we're using. Regarding promotions, you don't have full visibility to all that activity, but if you just look at absolute numbers, Q4 was around 91% and Q1 was around 91% for Olive Garden, so it's consistent at the quarter level. Month-to-month there's more volatility.

Okay. And going back to the first quarter at Olive Garden, I know you were happy with its performance, but it did slow materially versus pre-COVID while other segments held steadier. Does Olive Garden have a bigger return-to-seasonality factor and what percentage of Olive Garden is exposed to that under $50,000 consumer relative to other brands?

Olive Garden did not have a different seasonal pattern than our other brands; seasonality was consistent across brands. The pre-COVID three-year difference was driven by promotions we ran in 2019, like buy-one-take-one in the first quarter, which created a roughly two-point swing. Cheddar's and Olive Garden have a somewhat higher portion of below-$50,000 consumers than LongHorn, but it's not the majority.

Andrew Charles with Cowen has the next question. Go ahead.

Given the return of seasonality in the industry that could weigh on Olive Garden seasonally like fiscal Q2, within the reiterated revenue guidance though, what gives you confidence that you'll see the benefit of seasonality in fiscal Q3 and Q4—the strongest seasonal quarters for the business—as the consumer backdrop, particularly at the low end, is a bit shaky here?

When we talk about return to seasonality, it's based on the current consumer backdrop. If something changes dramatically, seasonal patterns could shift, but generally you'll see the same month-to-month flows. Compared to last year, we will have the Omicron wrap that occurred in January which should help versus last year in Q3. Our seasonal comments are about consumers returning to more normal behavior based on COVID, not macroeconomics. If the economy weakens, that might reduce inflation, which could help us. We estimate that a 1% decrease in total inflation has roughly the same impact as a 2% change in guest count.

Lauren Silberman with Credit Suisse has the next question. Go ahead, please.

Thank you. Quick follow-up on Olive Garden. It seems the reduction in discounting had an outsized impact in Q1 given the promotions three years ago. To be clear, excluding promotions, were three-year trends closer to positive mid-single-digit and is that what you'd expect for the rest of the year?

On a three-year sales basis, we would be positive versus pre-COVID right now. On traffic, our marketing activity and spending pre-COVID was around a 10% impact to traffic. Raj mentioned in Q4 and Q1 Olive Garden guest count retention was in the low 90s, driven by prior media and couponing. Total sales would be higher and guest count would be higher if we were in the same marketing mix as before.

Understood. Then on on-premise traffic across the industry, it's still down despite closures. Any perspective on why that might be and which occasions haven't recovered, especially entering a challenging consumer environment?

Off-premise experiences have improved broadly, giving guests more ways to get casual dining food. Some consumers still prefer not to dine out. Many closures were in independents and urban markets; suburban markets fared better. Our margins are similar on off-premise and on-premise because we don't have delivery charges that reduce margin significantly. We want dining rooms to be fuller and are seeing them fill up. Not all brands are back to pre-COVID levels, but LongHorn's traffic is above pre-COVID. If dining rooms aren't fully back, we have capacity, which is an opportunity to grow as guests return.

Moving to Jeff Farmer with Gordon Haskett.

Thanks. Quick follow-up. Can you update us on where you see G&A dollars for the full year considering what we saw in Q1?

For the full year, we're probably still close to $400 million, which is around the level we were at before COVID. Three years of inflation and growth costs offset corporate restructuring savings of over $25 million.

Okay. And the magnitude of sales headwind from Omicron last year in January and February—any color?

Last year it impacted sales by about $90 million to $100 million, which is the tailwind when you look year-over-year.

We'll now move to Jon Tower with Citi.

Great. Thanks. First, Rick, you mentioned promotional activity only coming back if profitable. Does that mean we may see historical promos show up again but priced at levels more profitable to Darden—for example, Never-Ending Pasta at Olive Garden?

We're not going to discuss specific plans for competitive reasons. But as we've said, anything we do should emphasize brand equity and be more profitable than before.

Okay. And following up on higher-income household strength: how is that showing up—higher traffic growth or check growth—and is it across brands or within brands?

You can see it in Fine Dining and in other brands like Yard House and Seasons 52 performing well. Fine Dining did very well even when urban markets hadn't fully reopened. LongHorn caters to a higher-income consumer, and their sales and traffic remain strong versus pre-COVID. We're benefiting across the portfolio because different brands target different income segments, so strength in higher-income households helps offset softness elsewhere.

Next is Eric Gonzalez with KeyBanc.

Hey, thanks. Just about guidance: encouraging to see you reiterate all components. Raj, last quarter you commented guidance implies full-year margin in 2023 will exceed pre-COVID levels. If Q1 margins were below Q1 2020, do you still expect store-level margin to exceed pre-COVID levels for the full year? And can you give more color on how you expect margin to progress and levers outside pricing to bring it back up?

We focus on operating profit or EBITDA margin for the full P&L. First quarter was higher than pre-COVID by about 60 basis points at operating profit level and about 40 basis points at EBITDA level. We still expect restaurant-level margins to be better than pre-COVID across the year—that's embedded in our guidance. Cadence: last year the first and second quarters had most improvement versus pre-COVID so you saw a year-over-year decline in Q1; we expect that to narrow in Q2 and then be higher than last year in the back half. That is part of the plan, driven by the shrinking gap between pricing and inflation. This was planful as we went into the year and we expect it to play out that way.

Our next question comes from Andrew Strelzik with BMO.

Great. Good morning. Given potential deflationary commodity environment, if food costs pull back, how do you think about promoting value across brands? Could casual dining end up offside from a value perspective relative to others? How do you think about the levers in that scenario?

If commodity costs deflate more than our estimates, that gives us flexibility. We don't plan to change messaging to be a pure value play; our brands have everyday value based on food and service. Marketing will focus on brand equities. Olive Garden emphasizes never-ending craveable Italian food; LongHorn emphasizes quality; Cheddar's emphasizes value and would naturally talk about value in their communications. We will market based on strategy, not solely on food cost movements.

Thanks. And an update on staffing: you said staffing levels recovered. What's turnover and applicant flow look like now?

Applicant flow is strong. We have a new talent management system allowing applicants to schedule interviews and it's worked well—so well that managers are busy with interviews. Restaurants opened this quarter were fully staffed with great people. Manager retention is close to pre-COVID levels and well better than industry average. Team member retention is above industry but not quite back to pre-COVID levels. We're focused on onboarding and training to reduce 90-day turnover and improve retention.

Next question is David Palmer with Evercore ISI.

Thanks. You said traffic at Olive Garden is down about 9% versus pre-COVID. If To Go mix was up 9 points since then, dining room traffic could be down mid-teens. How much of that gap is an opportunity to invest against with good ROI versus traffic that was simply not profitable and not worth chasing with TV or LTOs because of a healthy reset from COVID?

Your numbers are right. That does present an opportunity in the dining room, but we'll approach it sustainably. Over the last three years we've underpriced inflation. Olive Garden's pricing over three years is about 10% while full-service CPI is about 17.5%. We've significantly underpriced relative to the industry. We believe building back guests through sustained, profitable actions is the right way. It will take time, and we think we're starting to see some results, but it's not an overnight fix.

You mentioned satisfaction measures near highs. That seems striking given industry satisfaction has been under pressure. Are you seeing a dramatic gap to peers and is that part of why you can keep marketing low?

We specifically mentioned Olive Garden at or near record highs and LongHorn steaks grilled correctly at record highs. Cheddar's has record-high satisfaction since we acquired it, with the lowest dissatisfaction. Seasons 52 satisfaction is high as well. We've bucked the general decline in consumer satisfaction because of our investments in consistency, food improvements and training. That improved satisfaction may reduce the need for broad marketing, and if we do turn on media we expect strong execution and guest response.

Bank of America, Sara Senatore is on the line.

Thank you. Two follow-ups. One, you noted your gap between pricing and full-service CPI has been wide, but you also said you expect that gap to narrow. Is there a target ratio you keep, or how do you think about maintaining that wide gap while allowing it to narrow a bit? Second, on margins versus pre-COVID, can you give guidance across segments—Olive Garden, LongHorn, Fine Dining, Other—on normalized earnings by segment?

On the pricing gap, the comment was specific to quarter-to-quarter movement. For the year we're targeting roughly a 100 basis point gap to our inflation. I don't anticipate our gap to full-service CPI shrinking materially; maybe 50 basis points but not a lot. We had planned around 6% inflation and roughly 5% pricing; the first quarter was the peak gap. As commodities come down, the gap narrows and might even reverse in one quarter. On margins, our guidance implies margins will be less than last year but still higher than pre-COVID—roughly 40 to 50 basis points lower than last year for the full year but about 150 basis points higher than pre-COVID. We don't want to provide specific targets by segment; the portfolio approach gives us flexibility to react and invest where needed.

Next is Danilo Gargiulo with Bernstein.

Thanks. What markers are you looking for for marketing to accelerate as a percent of sales? If it's not additional softness in traffic, what are the markets you're watching?

This year we expect marketing to be 10 to 20 basis points above last year. Specific markers to significantly increase marketing include better test results from digital and other media on ROI, improved turnover and continued strong guest experience. There's not one single marker we'll disclose for competitive reasons. We'll turn on media when testing shows attractive ROI.

And on unit growth, Fine Dining had a net reduction of three units. Is that a change in portfolio composition or a temporary quarterly fluctuation?

One of our restaurants had a fire and temporarily closed. We moved Capital Burger into the Other segment previously; there are three Capital Burgers. We opened a restaurant in Fine Dining and had one closure. Our total openings for the year remain consistent with what we said in June.

Now we will hear from Brian Vaccaro with Raymond James.

Good morning. On labor, you said staffing is less of an issue and guest metrics are strong, but retention, training and rebuilding teams are challenging industry-wide. How are you navigating these challenges, what changes have you made, and where are opportunities to improve?

When we hired many people to refill restaurants after COVID, that increased training needs. We have a strong employment proposition and are rebuilding our certified trainer ranks. We're focused on onboarding and ensuring new hires complete full training rather than being thrown into operations due to short staffing. Most turnover happens in the first 90 days, so getting new hires properly trained reduces turnover costs. Our restaurants are generally not short staffed, allowing time for training. If we can return to pre-COVID retention levels, that will save the P&L significant money.

Raj, you noted hourly wage inflation was just over 9% in the quarter. With staffing levels recovered, how much do you expect hourly inflation to moderate over the next few quarters?

We expect full-year hourly wage inflation to be around 8%. We started with a little over 9% in Q1, but last year had step-ups in the back half that we'll wrap on, so we don't expect those elevated levels to persist.

Thanks. Last one: path to sustaining higher margins post-COVID—beyond COGS, what line item dynamics do you need to play out to achieve higher margins? Olive Garden store margins ran a couple hundred bps below pre-COVID for the first time.

Olive Garden faced the highest inflation this quarter—chicken, wheat and cheese were significant contributors. That drove greater margin pressure at Olive Garden. Over time, as food costs normalize, cost of sales should move back toward prior levels. We made investments during COVID, shifting some spend from marketing to cost of sales at brands like LongHorn and Olive Garden. Over the next few years we expect cost of sales to normalize; it's not a one-year change.

Near-term from a margin perspective we expect food cost to be higher, but other line items should be better than pre-COVID: restaurant labor is better due to productivity improvements, restaurant expenses are better, marketing is better, and G&A is better. These help fund the higher inflation and investments in the plate. As inflation normalizes, we'll have more room to balance back over time.

Now we'll hear from John Ivankoe with JPMorgan.

Hi. Rick, at the beginning of the call you mentioned technology investments that could influence both on- and off-premise experiences. Could you elaborate—are these employee-facing improvements to drive efficiencies or customer-facing initiatives to increase off-premise sales? How do you see opportunities near- and medium-term?

We have a strong IT team focused on guest and team-member experiences. Over the past years we've invested in the To Go experience and will continue to do so; we have tests underway to improve off-premise guest experience. We're also working on tools to make restaurant managers' jobs easier, which allows managers to spend more time training and coaching teams. We have guest-facing improvements—simpler wait-list processes, easier check-in, easier payment flows—and we can test in one brand and scale across the portfolio leveraging our scale.

Next is Chris Carril with RBC Capital Markets.

Thanks. On off-premise, the roughly 10-point swing in Olive Garden mix versus pre-COVID—how does that impact check or mix versus pre-COVID? As you think about the balance of the year, does guidance assume off-premise mix stays steady from here?

Pre-COVID Olive Garden off-premise was about 15% to 16%, so a roughly 8-point increase versus current levels. That doesn't change check meaningfully—there's a little less beverage but other add-ons. Catering can impact check, and we've seen some resurgence in catering. Over the last two quarters Olive Garden's total off-premise was stable at 24% but with more catering and a bit less individual To Go. Our guidance does not assume a big change in off-premise; if there is a change, we expect dine-in to offset it. Also note Q3 is typically higher off-premise due to catering and parties.

Got it. And total labor inflation outlook including productivity?

Total labor is expected to be around 6% to 6.5% year-over-year, including indirect labor and manager salaries. Last year we had elevated productivity that we wrapped on; we don't expect significant incremental productivity year-over-year now.

Next is Nick Setyan with Wedbush Securities.

Thank you. Could you tell us what pricing at Olive Garden is and what it's expected to be for the full year versus LongHorn? Also, was month-to-month volatility in the quarter largely driven by Olive Garden or similar across brands?

Month-to-month volatility was across all brands; there wasn't one brand driving it. I won't provide brand-specific forward pricing, but over three years Olive Garden's pricing has been about 10% and Darden overall is roughly 10.2%, so Darden's number represents Olive Garden closely given its size in the portfolio.

Ladies and gentlemen, this concludes our question-and-answer session. I'll turn the call back over to Kevin for closing remarks.

Thanks, Jake. That concludes our call. I'd like to remind you, we plan to release second quarter results on Friday, December 16, before the market opens with the conference call to follow. Thank you all for participating in today's call.

And once again, ladies and gentlemen, this does conclude your conference. Thank you for your participation. You may now disconnect.