Hello, and welcome to the Darden Fiscal Year 2024 Third Quarter Earnings Call. Your lines have been placed on a listen-only mode until the question-and-answer session. This conference is being recorded. If you have any objections, please disconnect at this time. I'll now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin, Kevin.

Thank you, Kevin. Good morning, everyone, and thank you for participating in today's call. Joining me today are Rick Cardenas, Darden's President and CEO; and Raj Vennam, CFO. As a reminder, comments made during the 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. Looking ahead, we plan to release fiscal 2024 fourth quarter earnings on Thursday, June 20, before the market opens, followed by a conference call. During today's call, any reference to pre-COVID when discussing third-quarter performance is a comparison to the third quarter of fiscal 2020. Additionally, all references to industry results during today's call refer to Black Box Intelligence, casual dining benchmark, excluding Darden, specifically Olive Garden, LongHorn Steakhouse, and Cheddar's Scratch Kitchen. During our fiscal third quarter, industry same-restaurant sales decreased 4.2%, and industry same-restaurant guest counts decreased 6.5%. This morning, Rick will share some brief remarks on the quarter, and Raj will provide details on our financial results and an update to our fiscal 2024 financial outlook. Now, I'll turn the call over to Rick.

Thank you, Kevin. Good morning, everyone. I'm proud of our results this quarter. Each one of our segments grew total sales and profit in an operating environment that was tougher than we anticipated. We continued to outperform the industry benchmarks for same-restaurant sales and traffic. Total sales were $3 billion, an increase of 6.8%, and adjusted diluted net earnings per share were $2.62, which was in line with our expectations. We opened 16 restaurants during this quarter. Fiscal year-to-date, we have opened 43 restaurants in 22 states, seven of which were reopenings. The quarter started well with strong holiday performance in December, but unfavorable winter weather negatively impacted January traffic. And while February results improved, we experienced some underlying softness we had not seen in the months leading up to January. The lower-income consumer does appear to be pulling back, and the mix of guests based on income is now in line with pre-COVID. I am proud that even as industry traffic trends weakened, we were able to gain share. We continue to focus on controlling what we can control, leveraging and strengthening our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning, and our results-oriented culture, and executing our back-to-basics operating philosophy anchored in food, service, and atmosphere. Our restaurant teams continue to perform at their best, especially during our busiest times. In December, the Capital Grille set their all-time total monthly sales record. In February, Eddie V’s set their all-time total weekly sales record, and Olive Garden established a new sales record for Valentine's Day. Our internal guest satisfaction metrics reflect our team's focus on being brilliant with the basics. All of our brands remained at or near all-time highs for overall guest satisfaction during the quarter. Additionally, within the casual dining, polished casual, and fine dining segments of Technomic's industry tracking tool, the Darden brand was ranked number one for overall experience. The brands were LongHorn Steakhouse, Seasons 52, and Ruth's Chris Steak House. Our team's ability to execute at a high level is driven by strong leadership and team member engagement across our brands. We work hard to ensure our results-oriented culture is a competitive advantage for us, and our industry-leading retention rates confirm it is an area of strength. During the quarter, we completed our biannual engagement survey, and the result showed that our overall level of engagement is at an all-time high. Also, during the quarter, three of our brands were recognized as industry leaders in Black Box Intelligence; LongHorn, the Capital Grille, and Seasons 52 each received the Employer of Choice Award. Now let me provide a quick update on Ruth Chris. We are in the final stage of integration and remain on track to complete major changes by the end of the fiscal year. We successfully completed the migration onto our HR platform at the end of December, and all restaurants have now successfully transitioned to our distribution network. Currently, we are halfway through converting the restaurants over to our point of sale system, and we are on track to complete that work by the end of May. This is the most challenging part of integration, and I'm really proud of the focus the Ruth’s Chris team continues to have on delivering exceptional guest experiences. This can be seen in the fact that Ruth's Chris was named America's favorite chain restaurant in Technomic's annual survey that was released during the quarter. The survey measures perceptions of service and hospitality, unit appearance and ambiance, food and beverage, convenience, and value. In addition to Ruth's Chris, Seasons 52, Bahama Breeze, LongHorn, and the Capital Grille were all ranked in the top 10. Overall, I am pleased with our performance this quarter. We continue to manage the business for the long-term by executing against our strategy and controlling what we can control. We also continue to work in pursuit of our shared purpose to nourish and delight everyone we serve. One of the ways we do this for our team members and their families is through our Next Course Scholarship program. Earlier this month, the Darden Foundation awarded more than 100 post-secondary education scholarships worth $3,000 each to children of Darden team members. Education is one of the greatest equalizers in our country, and I'm thrilled that we can create a lasting impact on the lives of our team members' families through this program. Finally, I want to thank our 190,000 team members for everything you do to create exceptional experiences for our guests. You are the reason brands continue to be recognized as great places to work and top dining destinations. Now, I will turn it over to Raj.

Thank you, Rick, and good morning, everyone. Third-quarter earnings were in line with our expectations, although our sales were softer than we anticipated. We were pleased with December's strong holiday performance as the month's same-restaurant sales were in line with our second-quarter results. However, winter weather in January negatively impacted traffic results by approximately 100 basis points for the quarter. As we moved into February, sales trends improved, but were below our expectations, exposing some underlying consumer weakness. Despite the unexpected variability in our sales trends, our teams did a great job managing their businesses. In the third quarter, we generated $3 billion of total sales, 6.8% higher than last year, driven by the acquisition of Ruth's Chris Steak House and 55 net new restaurants, which was partially offset by negative same-restaurant sales of 1%. We outperformed the industry again this quarter with same-restaurant sales that were 320 basis points better than the industry and same-restaurant guest counts that were 270 basis points better. And on a two-year basis, we have outperformed on same-restaurant sales by 770 basis points and by 970 basis points on same-restaurant guest counts. Our focus on managing the business and controlling costs resulted in adjusted diluted net earnings per share from continuing operations of $2.62 in the quarter, an increase of 12% from last year's reported earnings per share. We generated $512 million of adjusted EBITDA and returned approximately $190 million of capital to our shareholders through $157 million in dividends and $33 million of share repurchases. Now looking at our adjusted margin analysis, compared to last year, food and beverage expenses were 90 basis points better, driven by pricing leverage. Total commodities inflation of approximately 1.5% was below our total pricing of approximately 3.5%. Restaurant labor was 10 basis points unfavorable to last year due to total labor inflation of approximately 4.5%, partially offset by pricing and productivity improvements at our brand. Restaurant expenses were 10 basis points higher as sales deal average was partially offset by strong cost management by our teams. Marketing expenses were 10 basis points higher than last year, consistent with our expectations. All of this resulted in restaurant-level EBITDA of 20.6%, 70 basis points better than last year. G&A as a percent of sales was 40 basis points lower than last year, and total expense was slightly favorable to our previous guidance related to lower incentive compensation and ongoing synergies from the integration of Ruth's Chris. Interest expense increased 50 basis points versus last year due to the financing expenses related to the Ruth's Chris acquisition. For the quarter, adjusted earnings from continuing operations was 10.6% of sales, 30 basis points better than last year. Looking at our segments, Olive Garden increased total sales by 0.7%, driven by new restaurant growth, partially offset by negative same-restaurant sales of 1.8%. Olive Garden same-restaurant sales outperformed the industry benchmark by 240 basis points, and their traffic outperformed the industry by 270 basis points. Despite the negative same-restaurant sales, Olive Garden segment profit margin of 22.5% was flat to last year. At LongHorn, total sales increased 5.1%, driven by new restaurant growth and same-restaurant sales growth of 2.3%. LongHorn same-restaurant sales outperformed the industry by 650 basis points. Segment profit margin of 18.7% was 130 basis points above last year, driven by pricing leverage and improved labor productivity. Total sales at the fine dining segment increased with the addition of Ruth's Chris company-owned restaurants. Same-restaurant sales at both Capital Grille and Eddie V’s were negative as the fine dining category continued to be challenged year-over-year. Fine dining segment profit margin was flat year-over-year at 21.8%. The other business segment sales increased with the addition of Ruth's Chris franchise and managed location revenue, but was partially offset by combined negative same-restaurant sales of 2.6% for the brands in the other segment. However, this was still 160 basis points above the industry benchmark. Segment profit margin of 14.9% was 90 basis points better than last year, driven by the additional royalty revenues and higher overall pricing relative to inflation. Turning to our financial outlook for fiscal 2024, we have updated our guidance to reflect our year-to-date results and expectations for the fourth quarter. We now expect total sales of approximately $11.4 billion, same-restaurant sales growth of 1.5% to 2%, 50 to 55 new restaurants, capital spending of approximately $600 million, total inflation of approximately 3%, including commodities inflation of approximately 1.5%, an annual effective tax rate of 12% to 12.5%, and approximately 121 million diluted average shares outstanding for the year. This results in an increased adjusted diluted net earnings per share outlook of $8.80 to $8.90, which excludes approximately $55 million of pre-tax transaction and integration-related costs. For the fourth quarter specifically, our annual outlook implies sales of $2.95 billion to $2.99 billion, same-restaurant sales between negative 0.5% and positive 1%, and adjusted diluted net earnings per share between $2.58 and $2.68. Now looking forward into fiscal 2025, we plan on opening between 45 and 50 new restaurants and spending between $250 million and $300 million of capital for those new restaurants. Additionally, we anticipate approximately $300 million of capital spending related to ongoing restaurant maintenance, refresh, and technology. Finally, we anticipate an effective tax rate of approximately 13% for fiscal 2025. And now I'd like to close by saying that we continue to be very proud of how our teams are managing their businesses to deliver strong results in this dynamic environment.

Thank you. We'll now be conducting a question-and-answer session. Our first question today is coming from Eric Gonzalez from KeyBanc Capital Markets. Your line is now live.

Hey, thanks for taking the question. Maybe if you could unpack the comments about the low-income consumer pulling back? And maybe specifically talking about what behaviors you're seeing that lead you to that conclusion? And how the brands are differing from all of Darden Cheddar’s to maybe some of the higher-end brands, how that low-income consumer is changing their usage of those brands? Thanks.

Hey, Eric. We're clearly seeing consumer behavior shifts. Our data shows we're essentially back to our normal pre-COVID mix across all income groups. But specifically your question, for the third quarter, transactions from households with incomes above $150,000 were higher than last year. Transactions from incomes below $75,000 were much lower than last year. And at every brand, transactions fell from incomes below $50,000. Similar to Q2, this shift was most pronounced in our fine dining segment.

Great. And then maybe just a follow-up, if you could just talk about from a margin perspective, this year has been pretty strong. I'm wondering if you could maybe tease out how much that margin improvement is related to commodities versus what you've achieved from a productivity perspective? And if you look to next year, do you see that being a year of additional productivity gains or is some of that pulled forward into this year?

Hey Eric, this is Raj. From a margin perspective, at the beginning of the year, we had pricing slightly above inflation. As the year continued, inflation turned out to be better than we anticipated for both commodities and labor. This, combined with our team’s effective cost management and improved labor productivity, contributed to our margin improvement. Additionally, we saw some favorable changes in the trading mix of our items. Looking ahead to next year, we will provide more details in June, but as we plan, we will adhere to our long-term framework to guide our strategy. It's worth noting that over the past four years, we were often underpriced.

Thank you. Our next question is coming from Brian Bittner from Oppenheimer. Your line is now live.

Thank you. Good morning. I wanted to follow up on the lowering consumer and your comments about this cohort pulling back because it was a pretty pronounced commentary there. I know you talked to Eric's question about what you're seeing, but I think this is reflected in your 4Q same-store sales outlook? But do you anticipate this dynamic that you're seeing with the low-end consumer to be powerful enough to impact industry sales throughout the rest of the calendar year? And if so, how are you thinking about updating your strategy to deal with this?

Hey, Brian. Yes, we can't say for sure if this will affect the rest of the year. What I can tell you is that the impact on low-end consumers was a year-over-year issue. We're now back to our pre-COVID customer mix. When you compare our guest demographics now to before COVID, the percentages of guests below $50,000 and below 75% are almost identical to what they were before the pandemic. This reassures us that we know how to navigate this environment. Additionally, looking at Black Box data, every segment in the industry, including QSR and others, experienced negative same-restaurant traffic in our third quarter, which was also a year-over-year trend. We will keep an eye on consumer behavior and the low-end market, but we're glad to see things have returned to our normal pre-COVID levels. In terms of marketing, as we have frequently discussed, our focus is on profitable sales growth. All our brands and segments showed improved sales and profits year-over-year this quarter. Even with increased competition, we outperformed industry traffic by 270 basis points, building on a 700 basis point advantage from last year, resulting in nearly a 1,000-point gap over two years. We will maintain our strategy of providing everyday value to our guests and will continue to assess our marketing activities. Whether that means adjusting our spending in a quarter, we will adapt as needed, but we will remain committed to our strategy for as long as we can. Thanks.

And just as my follow-up, as it relates to the third quarter specifically, your ability to manage the margins was very impressive despite where the comps shook out. Can you just talk a little more specifically about how you nimbly manage that labor and other operating expense line? And just, Raj, as we look to 4Q, I think you had previously said you expect to underprice inflation by about 150 to 200 basis points in the fourth quarter? Is that still kind of the range you want us thinking about pricing versus inflation for 4Q? Thanks.

Brian, I'll start with how we manage labor and productivity, and then I'll let Raj answer the question on the pricing. So if you think about what we've been doing over the years, we've been improving our technology on guest count forecasting by using machine learning and AI tools to help the brands write better schedules and manage their business better and we're able to react quicker to impacts that we see in our restaurants, but we're also continuing to find ways to improve productivity. And one of the ways and the benefit that we had this quarter is continued improvement in turnover. And so we've had less training expense for new team members. And we've got better retention, team members know how to do their job better. In the turnover ranks, where we are today across Darden, our turnover went down by about 20 percentage points versus last year and almost 30 percentage points better than the industry. And now our turnover is much closer to pre-COVID levels, except for Yard House and Cheddar's, which actually we believe are at a level lower than they've ever had in their history. So those things help with labor and food costs and other parts of the P&L. And I'll let Raj answer the other part about inflation.

Yes, Brian, for Q4, we're still expecting the gap to be between 100 and 150. Overall, inflation is anticipated to be in the mid-3s for us, and pricing will likely range from 2 to 2.5. Thus, we still expect to underprice inflation by around 100 to 150 in Q4.

Thank you. Next question is coming from Dennis Geiger from UBS. Your line is now live.

Great, thanks guys. Wondering if you could speak to what you're seeing from a customer average check standpoint? Anything with respect to alcohol or other mix contributions that you saw in the quarter or that have changed relative to prior quarters?

Yes. For the third quarter, we noticed a moderation in the mix compared to what we observed in Q2. For our casual brands, the negative mix was about 40 basis points, while in Q2 it was closer to 60 basis points. In Fine Dining, we experienced significant improvement; it was over 200 basis points in the negative mix during the second quarter, but now it's in the low 100 basis points negative mix, which is nearly a 50% reduction. Therefore, we're seeing some improvement in the check mix. This may be partly due to the holidays being quite strong, contributing to the positive momentum we're experiencing from quarter to quarter.

That’s great. Thanks, just one other quick one. Just as it relates to off-premise, anything to call out there in the quarter? What you're seeing, how your strategy has been effective despite some of the consumer pressures out there on the off-premise side of things? Thanks, guys.

Yes. From an off-premise perspective, our sales as a percent of sales was slightly below last year, but not a lot. This is typically a high season for Olive Garden off-premise. So Q3 was closer to 26%. Last year was also in that range. We were probably 40, 50 basis points lower, but not a lot. And LongHorn was around 13%, which was also about 40 or 30 basis points lower. But overall, I think it goes back to the execution. Our focus has been staying on just ensuring that we executed the highest levels for off-premise, and that's helped contribute to maintaining the stability.

Thank you. Our next question is coming from Jon Tower from Citigroup. Your line is now live.

Thank you, I appreciate it. My first question is about how you plan to keep your brands prominent and visible to consumers, especially as the industry becomes more aggressive in marketing by increasing their spending significantly compared to previous years.

Hey Jon, if you consider our spending, even with what we spent this quarter, Olive Garden was among the top three in share of voice during most weeks. We are still reaching our consumers. We have additional methods to connect with them through our eClub and other digital marketing. Ultimately, the most effective way to encourage people to visit our restaurants is through recommendations from guests to others. That remains our focus. We will keep utilizing marketing to highlight our core strengths and drive long-term results. We offer great everyday value, and while I can't share specific future plans, we have strategies we can implement, and you'll be aware of them once we do.

Okay. I appreciate that. And then just on the '25 outlook for the unit growth, I was surprised it was lower than at least this year from a gross opening or a planned opening perspective. Can you speak to why as of right now, you're expecting kind of 45 to 50 versus what we've been seeing in the past several years?

Yes, Jon, you're right. The new restaurant projection for next year fits within our long-term plan, but it is lower than we would like. We will continue to strive for the upper end of that plan over time, although it will take some time. Construction costs have been significantly higher than they were before COVID. We have walked away from some deals due to these costs, and those deals have approached us again. We are prepared to take our time to achieve better long-term results. On a positive note, construction costs have at least stabilized. However, it still takes longer to initiate construction than it did four years ago, and the completion timeframe has also lengthened. Many of these delays are caused by developers, utility connections, permitting processes, and obtaining certificates of occupancy. Consequently, many of our openings for next year are scheduled for the end of the year and could be delayed. We want to ensure we communicate a realistic number that we can achieve, while also aiming for the higher end in the long run. Additionally, I want everyone to keep in mind that we incorporate mergers and acquisitions into our new restaurant count. We didn't mention this, but we added 77 Ruth's Chris restaurants this year, which gives us some flexibility to not be overly aggressive if it's not necessary.

Thank you. Next question today is coming from David Tarantino from Baird. Your line is now live.

Hi. Good morning. I want to come back to the question of how you would manage the business if the environment were to get worse from here? And in particular, you mentioned you had some levers to pull on. I know you don't want to share details around that, but I was wondering if you could just comment on whether anything would change if things got worse? And then specifically on the pricing question, just wondering your pricing philosophy in the current environment and whether you will continue to be conservative relative to your inflation levels?

Yes, as we consider our options, we have reduced our marketing efforts and concentrated more on our core equities. Each year, we might increase marketing slightly, but we won't alter our strategy. We won't become a heavily promotional discount brand. We have worked hard to establish a stable, stronger business for the long term, and we are prepared to endure short-term pressures to maintain that strategy. We can implement tactics that align with our strategy without shifting to a promotional deep discount brand. For example, Olive Garden had lower marketing in the third quarter compared to the second and still gained market share, whereas competitors increased their marketing. Our priority remains on gaining share and achieving sales and profit growth over time. We will continue to emphasize execution, food quality, service, and atmosphere to increase visits from our loyal guests, who we value greatly. We will not compromise our intentions based on environmental challenges. Regarding pricing, our strategy remains to keep prices below inflation over time. We have implemented lower price increases than our competitors and the general CPI over the past four years, allowing us room to adjust prices if necessary. However, our long-term plan is to continue pricing below inflation.

Great. It makes sense.

Thank you. Next question today is coming from Jeffrey Bernstein from Barclays. Your line is now live.

Great, thank you. My first question, Rick, you mentioned the operating environment tougher than anticipated. Just wondering how would you size up? How much of that is the broader macro versus maybe whether you'd say there were any internal missteps? I mean, I'm assuming your data is showing that the broader industry pullback was not just Darden in February that you're seeing, the broader industry see the very same directional trend in February. Is that fair to say? Any thoughts there would be great.

Yes, Jeff, I think it's a broader market versus any specific missteps we had. Our gap increased from January to February, our traffic and sales gap increased, both of those increased between January and February. And as I said, every category in the industry from QSR and up had negative traffic in the quarter. And so I think there's a little bit of a bigger challenge, at least a year-over-year challenge for our consumer. And we're going to see how that plays out over the next couple of quarters and see if there's anything we need to change, but it won't be a dramatic change.

Understood. And then just to follow-up the February, it sounds like you said it improved, but below plan. Did that underlying consumer weakness persist into March? I mean I know we're talking about short periods, but February is a short period and now we're pretty far into March. I'm just wondering whether you've seen any change for the better or the worse? And just curious from your perspective because you do have, I believe, up to nine brands now. What do you think drove that change in behavior? Is there anything in particular you're seeing? Because it does seem like January was weather, but then it really was just February and potentially into March. So I'm just wondering what your perspective is in terms of what drove that pullback? Thank you.

Yes. First of all, our guidance takes into account everything we know about March. I prefer not to discuss March in detail since forecasting three weeks in that month is challenging, especially with spring break shifts and other factors. We'll continue to observe the situation. I've noticed some delays in tax returns, but we won't make too much of that. We saw an improvement in the gap between January and February, which is what we're feeling positive about. We'll refrain from discussing March for now.

Thank you. Next question is coming from Jeff Farmer from Gordon Haskett. Your line is now live.

Great. Thanks. Just following up on Jeff's question there. So again, you had made some reference to the lower income consumer, but in terms of thinking about just maybe a little bit softer trends than you had expected. How much of that would you put at the feet of the lower income consumer as opposed to the balance of potential drivers?

Yes, I would say that if you think about our results being a little bit softer than we thought, I would put it more at the feet at the lower end and the higher end. Our higher-end consumer was up versus last year. So that would tell you that it was really more on the lower end consumer. But as I think about what the consumer trends are, I just want to remind everybody that we believe that operators that can deliver on their brand promise with value can continue to appeal consumers despite economic challenges. And that's what we're going to continue to focus on doing. I remain confident that we're well positioned and prepared for whatever we have to deal with. Thanks to the breadth of those nine brands that Jeff talked about, the strategic decision we made to price well below inflation and CPI over the last four years and those outstanding team members we have in our restaurants who are committed to create exceptional guest experiences for our guests. And so yes, the lower end consumer probably drove a little bit more of our miss to what we thought when we talked to you before, but we're going to continue to focus on what we do and take care of every guest that walks in the door at the best that we can to have them to come back.

And then the second question, you just touched on, you gave me a pretty good segue there. But in terms of your more conservative pricing strategy relative to your peers, from what you've seen, has that driven traffic outperformance, market share outperformance? Is that strategy actually paying dividends to these customers, casual dining customers, appreciate that the Darden brand portfolio is actually a better price value than a lot of other concepts from what you've seen?

Yes, Jeff. If you look at our performance over the past two years compared to the industry, we have a gap of almost 1,000 basis points, or a 10% gap over three years. It's been robust. We're implementing pricing strategies below inflation to offer great everyday value, and we believe that will continue to enhance our value differential in the long run. We have strong value leaders, which helps increase our traffic advantage.

Thank you. Next question today is coming from Andrew Strelzik from BMO Capital Markets. Your line is now live.

Hey, good morning, thanks for taking the question. I wanted to ask about industry capacity, particularly given what you're talking about with more challenged kind of traffic backdrop. And I think initially, during COVID, Darden talked about maybe a 10% decline in locations because of closures. And it feels like from a lot of the public companies we hear from, there's a desire to accelerate unit growth or has been. And I'm not exactly sure what's going on, on the independent side. So I guess I'm just curious, if you have a sense where capacity is now versus that 10% reduction? Are you seeing it come back in any of your markets or any specific regions? And maybe if you could touch on the independent side as well? Thanks.

Andrew, I think we're still in that ballpark of 10%-plus. But if you actually look at the last year or so, there have been more closures than openings from the data we've seen. So net, there's net closings even in the last nine, 12 months data that we're looking at. When you think about the environment today, with all the regulation around where things are, it's very hard for someone to open a new restaurant. The financing costs have gone up. There is less developments happening, that's actually part of the reason we talked about some growth being constrained a little bit in the near term for us on the unit opening. So we would say it's not that different. It has not gotten much better. Maybe let's put it that way. I would say that approximately two-thirds of our growth will come from Olive Garden and LongHorn combined, while the remaining one-third will be from our other brands. We wouldn't say there is a significant year-over-year difference; it's more of a slight change. However, looking ahead, as Rick mentioned, we will continue to work on increasing that growth further.

Thank you. Next question is coming from John Ivankoe from JPMorgan. Your line is now live.

Hi, thank you. I remember in past periods, there were a number of things that you've done that aren't necessarily operationally difficult, and I don't think overly discounts the brands, things like dinners for two, buy one take one, maybe even highly targeted couponing to certain lower income consumers to bring them back. Those types of things did prove effective to the Darden of the past. I mean, I wonder if ideas like that are on the table? It's the first part of the question. And secondly, a lot of the higher income consumer, obviously, as you're getting more price resistant about some of the restaurants that they visit, is there a way to invite some of the higher income consumer maybe through different types of promotions back in Olive Garden as well that you haven't been doing in the past couple of years? Thank you.

Hey, John. Yes, the extensive discounting and promotions were part of Darden before COVID. Now, in the post-COVID era, we're focusing on marketing strategies that enhance brand value without relying on deep discounts. While we may still have various price options in the future, we're leaning towards a more everyday low price approach. For instance, we offered the Never Ending Pasta Bowl this year at $13.99, which was successful for us. We're considering running that promotion again next year. We've also introduced buy one take one deals along with $6 take-home options, providing plenty of everyday value already. Regarding the higher-end consumer, we've seen growth across all segments, with those earning over $200,000 and $150,000 increasing year-over-year. However, there are signs that some consumers are trading down within our brands. LongHorn, for example, performed well by attracting some higher-end customers at slightly lower price points, and they saw positive average checks. We're observing this shift and believe that by delivering exceptional service and building strong word-of-mouth, we can encourage higher-end consumers to choose our brands over competitors. Ultimately, we aim to strengthen our core offerings, outperform nearby restaurants, and manage any short-term challenges effectively.

And is the company discussing kind of reintroducing or at least thinking about a more effective way to approach loyalty? I mean, is that something that becomes table stakes in '24 and '25 or are we happy with the current approach?

We're happy with the current approach. If you think about loyalty and full-service restaurants, frequency isn't super high. And we've learned that when we did loyalty before. And so it's a little bit less valuable for a consumer, we believe. Now there's other ways to get that data. The value of loyalty is the data that you get, and we have other ways to grab that data. Doesn't mean that we won't think about loyalty in the future. We're just focusing on what we can do right now to continue to execute better to drive results and not to drive something that's just buying sales, because we'll have to keep buying it next year and the year after that. We don't want to go out and buy sales. We want to go out and earn those sales.

Thank you. Next question is coming from Danilo Gargiulo from Bernstein Research. Your line is now live.

Great, thank you. So first of all, it appears the LongHorn, whether these challenges of this tough operating environment better than other brands. So I'm wondering what cost and what learnings could be applied to the other brands?

So Danilo, as we've discussed before, there are many factors at play. To start with the overarching theme, typically Steak performs slightly better when beef prices increase due to a greater hesitation among consumers to risk cooking something costly. However, it's important to note that not every brand within the steak category is thriving. For instance, LongHorn's strong performance has stemmed from our effective execution. Our focus has been on streamlined operations, quality, and ongoing investments in quality. Over the past four years, our team, led by Todd, has made significant efforts in enhancing both food and service. Consequently, when you look at it overall, we are offering a better value than ever before. Our pricing has been considerably lower than the industry average, particularly for steakhouses, giving us a competitive edge in value and execution. Those are the key points.

Great, thank you, Raj. And I want to follow up on one of the comments that Rick was just making on the level of attraction of your customers over the long period of time. And I wonder if you can provide some update on your customer trends with regards to the frequency at which they are spending in your brand? And maybe if you can offer also some insight on the size of your eClub member say versus the past and the total addressable market that you have? So how many customers you're seeing on a monthly basis at any of your brands?

Well, let me start by saying, I think we serve about 1 million guests a day across all of our brands, or more than that actually. And so we get a lot of people coming in. Our frequency hasn't dramatically changed over the last year. And our eClub is roughly between 25 million and 30 million guests, that's active eClub. We have more members, but they're active. And so we have ways to communicate with that and that's across all of our brands. And so we're really confident now that we've got our, as I said earlier, on the income demographic back to where we were pre-COVID, we know how to operate in that environment. We're seeing some shifts at the above 65-years old, and we've talked about that before. They're shifting a little bit more to lunch a little bit earlier to dine, and that's great. But so those are the only real major shifts we've seen.

Thank you. Next question is coming from Sara Senatore from Bank of America. Your line is now live.

Thank you very much. I have a couple of clarifications. First, regarding the industry gap, you mentioned it widened from January to February, but did it also widen prior to that from fiscal 2Q to 3Q? Historically, the gap tends to increase when industry conditions become tougher due to a more selective consumer. Is that what you're seeing? Secondly, I've received numerous inquiries about low income. I'd like to understand how this normalization might create a headwind in the upcoming quarters. For instance, now that you're back at pre-COVID levels, will this continue to pose challenges for the next three quarters until you compare against this quarter? Are you considering ways to offset this, perhaps with an improved mix? It seems that while normalization might impact traffic, there's a possibility that the mix headwind could be lessened. Thank you.

Let's begin by discussing the gap. In January, the gap decreased slightly, which we believe was largely due to geographic factors and the weather impacts on our restaurant locations. The areas experiencing adverse weather had a higher concentration of our restaurants, contributing to the gap's lack of strength. Additionally, the narrowing of the gap this quarter compared to last quarter is partly because we are comparing it to a very strong performance from the same time last year. We acknowledge that maintaining a significant gap over an extended period is challenging, and we expect it to narrow over time. However, our pricing strategies and value propositions have enabled us to continue gaining market share, which we are pleased about. As mentioned earlier, despite the increased promotional intensity in the market, we managed to outperform and capture share. Regarding income mix, we have observed a consistent shift. In Q2, we noted a movement towards pre-COVID income levels, and now, as we look at Q3, we find ourselves at similar levels to those before the pandemic. While we expect some moderation in the next three quarters, it is not projected to be as pronounced as in this quarter. Based on the available data, we believe the moderation will occur, and we anticipate the following two to three quarters will maintain those levels. From a mix standpoint, we expect improvements in the mix. We observed progress in Q2 and Q3, and we anticipate further enhancement in Q4. Looking ahead to next year, we do not expect this to present a significant challenge, but we will monitor how this development unfolds.

Great. Thank you very much.

Thank you. Next question today is coming from Gregory Francfort from Guggenheim Securities. Your line is now live.

Hey, guys. Thanks for the question. A lot of what I wanted to ask was asked, but I wanted to ask you about the commodity outlook and thoughts into the fourth quarter. Maybe what's implied in risks to the upside or downside on that going forward? Thanks.

Hey Greg, sorry. On the commodity side, we expect the third quarter guidance to be around 3% for commodities inflation. The reason it's increasing compared to where we've been is that everything except for seafood is inflationary as we move into the fourth quarter. It's not a huge increase, but beef and produce are experiencing mid-single to high single-digit inflation, while most other categories are in low single digits. Some of this is just a comparison to last year and the levels we saw then. Currently, we're 75% covered for Q4, which aligns with historical averages, and we're actually 80% covered for beef in Q4. As we look ahead to 2025, we are in the middle of our planning process for next year, and we'll have more to share in the June call. At this moment, we are working through some contracts for next year, so I'm hesitant to give too much detail right now.

Thank you. Next question is coming from Patrick Johnson from Stifel. Your line is now live.

Great, thanks, good morning guys. Rick, I wanted to touch on menu innovation, particularly at Olive Garden and LongHorn. And I'm just curious if there are any opportunities you see to either introduce permanent menu items that still align with the brand strategy or even if there's potential to create limited time platforms like Never Ending Pasta Bowl that aren't necessarily discounted, but could drive incremental interest in visits over time?

Yes, Patrick. There's always room for menu innovation. We've got to balance innovation and new items with improving our existing items and making sure our menu stays compact and simpler than they were before COVID. And there's also always room for kind of limited time, not necessarily promotional offers. So currently, LongHorn has lamb on their menu, and it does really well. It's doing a lot better than it did last year. And with brands like Cheddar's, we use opportunity buys to put some items on the menu, but at really great values. And Olive Garden is continuing to look at ways to improve some of their items and maybe introduce an item but take off an item. So yes, we still have a lot of work that we do with innovation. But most of our guests come to us for what we have on our menu today and we're not going to alienate the core guest by completely changing those menus around and we don't plan on getting back to a six or seven-week promotion where an item is great. It does great for six weeks and then the guest comes back in week 10, and it's not there anymore. And so we'll continue to innovate but we'll continue to invade a lot more on improvements, but we'll introduce new items here and there.

Great. Thank you guys.

Thank you. Next question is coming from Lauren Silberman from Deutsche Bank. Your line is now live.

Thank you very much. A few follow-ups. Can you just talk about the same-store sales differences that you're seeing across regions? And then from a marketing perspective, you're now running less than 1.5% of sales this year, well below pre-COVID at 3% or even north. So I understand you want to be prudent and protect long-term. Why is this the right level of marketing spend today? How do you assess it even if it's not deep discounting?

From a regional perspective, we are still experiencing softness in both Texas and California. Texas has shown consistent weakness throughout the year, and that trend continues. Florida showed some slight weakness, but it's not alarming. Weather also played a role, especially affecting Texas and California during the third quarter. Regarding marketing, we intend to be cautious and strategic about our approach to bringing marketing back. We have gained valuable insights into the effectiveness of various marketing channels and how to implement them. Our plan is to gradually increase marketing expenditure by 10 to 20 basis points over time in a manner that maintains our margin neutrality. We are committed to conducting thorough marketing mix analysis, supported by our data science teams and external partners, to ensure that we are achieving the desired return on investment. Our goal is to enhance brand equity and foster long-term guest loyalty.

Thank you. Regarding the guidance, lower sales have maintained or increased the lower end of the guidance, and inflation has become more favorable. Are there any other factors influencing the guidance for the year? Also, could you clarify your expectations for G&A for the full year? Thank you.

Yes, let me begin with G&A. We anticipate G&A to remain fairly consistent with what we reported last time, which was $440 million for the previous quarter. So we can estimate around $100 million for Q4. The significant points are that we've adjusted our sales expectations downward, but inflation is looking better. Additionally, our teams are managing our business more effectively, leading to improvements in productivity and reductions in waste and other inefficiencies. Other than these factors, there isn't much else to report. If we take a step back and review where we began the year, we initially provided earnings guidance of $8.55 to $8.85. We indicated that if there was a slowdown in sales or any weakness, we expected inflation to decrease and our cost management to help bring us closer to our targets. Now, we're discussing earnings guidance of $8.80 to $8.90, despite lower sales, but we've achieved this through other successes. I don't want to reiterate what we've previously stated, but that is the reality of the situation.

Thank you. Appreciate it.

Thank you. Next question is coming from Peter Saleh from BTIG. Your line is now live.

Hey, great. Thanks for taking the question. I apologize if I missed this, but I know you guys commented on the traffic softness for the lower-income consumer and maybe by cohort. But can you maybe discuss the behavior of those consumers in terms of their check management? Are you seeing a lot of trade down for the consumers that are coming in within the menu or within brands? Or are they cutting alcohol or appetizers or desserts? Or just anything that suggests that those consumers that are coming in are also managing that check down? Thanks.

Yes, from a check management perspective, the gap is more influenced by older consumers, particularly those aged 65 and above, who are managing their spending more carefully, regardless of their income. Additionally, as mentioned earlier, they are increasingly opting for lunch. We are observing a reduction in add-ons and an effort to manage the check. However, from Q2 to Q3, there has actually been less emphasis on check management, particularly with a decline in traffic. Interestingly, check management seems to be improving, and the negative mix is not as pronounced as it was in Q2.

Thank you very much.

Thank you. Next question is coming from Brian Vaccaro from Raymond James. Your line is now live.

Hi. Thanks and good morning. For my question, and sorry if I missed it, but could you share what traffic in the quarter was for Olive Garden and LongHorn? I know that's usually in the queue, but did you or can you share that?

Yes, sure. Olive Garden check was 2% in the quarter. So basically, traffic would be negative 3.8%. And then LongHorn traffic was in the mid-negative 2s.

Okay, thank you for that. And I guess you've had this question a couple of times, but I'll ask it this way. In an environment where you're seeing softness on the lower-end consumer and maybe there's just a broader backdrop where value seems increasingly important, I guess it's interesting to see Olive Garden's relative comp outperformance narrow, given the brand's strong everyday value positioning. So I guess, how do you reconcile that? And is there any evidence that you're starting to see some profitable guests to certain brands, not asking for names, but certain brands that are gaining share or have shifted their tactics in the last year?

Yes, Brian. If you look at Olive Garden, they surpassed the industry benchmark for same-restaurant traffic by 270 basis points. They reduced their media spending while many competitors increased their discounts on television. Their two-year gap is 830 basis points, representing significant market share growth over that time. I'm very proud of the efforts that Dan and his team have made to enhance the guest experience. They remain dedicated to their core offering of never-ending, craveable, abundant Italian food, particularly ensuring that every guest is provided a refill on their first course. That represents substantial value. While I can't say if any Olive Garden guest has switched to one of those competitors, I can confirm that we frequently exchange guests. Many of Olive Garden's biggest competitors are currently offering discounts. We take pride in the 270 basis point lead, in addition to the previous gap. If we are losing a profitable guest, I don't see it as permanent. Guests tend to shift and move around, so we will continue to focus on strategies that encourage our guests to return for repeat visits.

Thank you. We reached the end of our question-and-answer session. I'd like to turn the floor back over to management for any further or closing comments.

Thank you. That concludes our call. I'd like to remind you that we plan to release fourth quarter results on Thursday, June 20, before the market opens with the conference call to follow. Thanks again for participating in today's call, and have a great day.

Thank you. That does conclude today's teleconference and webcast. You may disconnect your line at this time, and have a wonderful day. We thank you for your participation today.