Earnings Call Transcript - DRI Q2 2020

Operator, Operator

Welcome to the Darden Fiscal Year 2020 Second Quarter Earnings Call. Your lines have been placed on listen-only until the question-and-answer session. I would now like to turn the call over to Mr. Kevin Kalicak. You may begin. Thank you, everyone, and thank you for participating in today’s call. Joining me on the call today are Gene Lee, Darden CEO; and Rick Cardenas, CFO. As a reminder, comments made during this call will include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the Company’s press release, which was distributed this morning and in its filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call, which is posted in the Investor Relations section of our website at darden.com. Today’s discussion and presentation include certain non-GAAP measurements and reconciliations of these measurements are included in the presentation. We plan to release fiscal 2020 third quarter earnings on March 19 before the market opens, followed by a conference call. This morning Gene will share some brief remarks about our quarterly performance and business highlights, and then Rick will provide more detail on our financial results from the second quarter. As a reminder, all references to the industry benchmark during today’s call refer to estimated Knapp-Track excluding Darden, specifically, Olive Garden, and LongHorn Steakhouse. During our fiscal second quarter, industry total sales growth was 1.2%, industry same-restaurant sales increased 0.3% and industry same-restaurant guest counts decreased 2.3%. Now, I’ll turn the call over to Gene.

Gene Lee, CEO

Thank you, Kevin. Good morning, everyone. As you’ve seen from our press release this morning, we had a good quarter. Total sales from continuing operations were $2.06 billion, an increase of 4.2%, same-restaurant sales increased 2% and adjusted diluted net earnings per share were $1.12. Looking at the industry overall, we continue to see that consumers are willing to visit brands with compelling value and strong in-restaurant execution. That’s why we remain relentlessly focused on executing our back to basics operating philosophy anchored in food, service, and atmosphere and supported with integrated marketing that resonates with our guests. We also continue to strengthen and leverage our four competitive advantages. One of those advantages is our results-oriented culture. Amidst record low unemployment, I am proud to see our retention rates continue to improve. We have a compelling employment proposition and our ability to retain and staff our restaurants with the right people is an important driver of our success. Turning to brand highlights for the quarter, Olive Garden delivered its 21st consecutive quarter of same-restaurant sales growth. Total sales grew 2.6%, driven by same-restaurant sales growth of 1.5% and 1.1% growth from new restaurants. Olive Garden outperformed the industry benchmark in same-restaurant sales and traffic by 120 basis points and 110 basis points, respectively. As a reminder, Olive Garden had a difficult promotional ramp to start the quarter with Lasagna Mia comping over Buy One Take One for the first four weeks. Additionally, we made some changes to our promotional messaging and we reduced marketing spending. As a result, we had to make up some ground from negative same-restaurant sales at the beginning of the quarter. Sales trends improved as we moved into Never Ending Pasta Bowl with more comparable marketing spend. The Olive Garden team continues to focus on operational execution, convenience and everyday value. Delivering exceptional guest experiences remains a key priority for the restaurant teams. Olive Garden also continued to meet their guest need for convenience as off-premise sales grew 17% during the quarter, driven by strong preference for the $5 take-home offer. For the quarter, off-premise sales represented 17% of total sales. Digital sales grew approximately 33% and represented 38% of total to-go sales. Finally, as we noted last quarter, Olive Garden introduced a new weekday lunch menu with 21 options under $10 to strengthen everyday value. This platform continues to perform well and has seen meaningful improvements in lunch sales trends. Overall, I’m pleased with Olive Garden’s performance. They have the right strategy in place, and I’m confident that they will continue to make the appropriate investments and execute at a high level, which will enable them to continue to grow market share. LongHorn Steakhouse had an outstanding quarter. Total sales grew 8.4%, driven by 1.7% growth from new restaurants and same-restaurant sales growth of 6.7%, the brand’s 27th consecutive quarter of same-restaurant sales growth. LongHorn outperformed the industry benchmark in same-restaurant sales and traffic by 640 basis points and 550 basis points, respectively. LongHorn’s performance is a result of adhering to their long-term strategy of investing in the quality of the guest experience, simplifying operations to drive execution, and leveraging their unique culture to increase team member engagement. Over the last four years, the team has made significant investments in this strategy and those investments continue to pay off. During the quarter, they introduced several enhancements to existing core menu items to further strengthen the quality of their food and beverage. And in order to communicate their quality story more effectively, the LongHorn team evolved their award-winning You Can’t Fake Steak advertising campaign to better showcase their high-quality stakes. The overall LongHorn experience is a key differentiator, and their distinctive, relevant advertising continues to resonate with guests. LongHorn was designed as a very simple business and the operations team has done an excellent job of finding opportunities to simplify execution. During the quarter, they implemented several ideas based on direct feedback from restaurant teams. Additionally, our renewed focus on execution standards led to improved throughput during the busiest weekend hours this quarter. And finally, LongHorn continues to leverage their biggest competitive advantage, their unique culture. Manager retention reached another all-time high during the quarter and hourly retention rates remained at industry-leading levels. This high level of engagement is further evidenced by the fact that LongHorn’s guest satisfaction rating for the quarter reached record levels across all key metrics. I’m extremely proud of the discipline the LongHorn leadership team brings to the business, and I’m confident that adhering to their long-term strategy will continue to drive their momentum. Cheddar’s Scratch Kitchen total sales increased 4.2%, driven by sales growth in new restaurants of 5.4%, partially offset by same-restaurant sales decline of 1.2%. We continue to see improvement in Cheddar’s HR and operations metrics, which are foundational elements of running great restaurants. I’m encouraged by these trends, knowing that the restaurants that have made these improvements are operating successfully. Overall staffing levels for managers and team members remain strong during the quarter, and retention levels continue to move in the right direction. Hourly turnover improved by nearly 20 points compared to last year, and management turnover showed meaningful improvement as well. From an operations perspective, Cheddar’s is a high-volume business that requires efficient throughput. One of the key operations metrics the team focused on during the quarter was speed of service, and they saw significant improvement versus last year. In fact, they saw strong improvement in the guest experience across all key metrics compared to last year. In addition to strengthening HR and operating fundamentals, the team also worked to improve the appeal of the amazing value Cheddar’s offers. In October, they began providing every guest with their most craveable and highest-rated menu item, their honey butter croissants. This is an element of guest service that we identified as an opportunity when we acquired the brand. Providing every guest with a warm honey butter croissant reinforces the wild value Cheddar’s provides. After making the necessary operational adjustments to facilitate this new step of service and given the overall improvements the operations teams have made, this was the right time to roll it out. The response from the guests and team members has been very positive. As I shared on the last call, this quarter, the Cheddar’s team increased their working media spend and conducted numerous test and learns using various marketing channels to drive awareness and trial. They are in the early stages of this learning and still have a lot of work to do. They will continue to invest the time, effort, and resources in order to determine the most effective way to market the brand in the future. While I’m encouraged by the results we’re seeing, the work at Cheddar’s is far from over. The team is working on the right priorities and I’m confident they are moving in the right direction. And finally, the holidays is the busiest time of the year for our restaurant teams, as they delight our guests and help create lasting quality memories. This time of the year is also a great reminder that being at service is at the heart of our business. We embrace a higher purpose of enhancing people’s lives, which is why we serve with purpose to delight our guests, support our team members and make a better tomorrow. One of the ways we’re working to make a better tomorrow is through our harvest program. One in eight households in our country live without consistent access to food. To help fight hunger, every one of our restaurants donates surplus food to local food banks and nonprofits in their communities weekly. More than 115 million pounds of food has been donated through this program, equivalent to nearly 96 million meals. The impact of our harvest program takes on added significance during the holidays, and I’m so proud of the passion our team members have for it. On behalf of the management team and the Board of Directors, I want to thank our 185,000 team members for everything you do to serve our guests and communities. I wish all of you a wonderful holiday season. Now, I’ll turn it over to Rick.

Rick Cardenas, CFO

Thank you, Gene. Good morning, everyone. We had another good quarter with second quarter total sales growth of 4.2%, driven by 2.2% growth from the addition of 37 net new restaurants and same-restaurant sales growth of 2%. As I mentioned in last quarter’s call, same-restaurant sales benefited by about 80 basis points this quarter, driven by two factors. First, an increase of approximately 100 basis points due to Thanksgiving moving from the second quarter in fiscal 2019 into the third quarter in fiscal 2020. As a reminder, the third quarter should see a corresponding decrease to same-restaurant sales because of this shift. And second, approximately 20 basis points of headwind due to the impact of Hurricane Dorian early in the second quarter. Second-quarter adjusted diluted net earnings per share from continuing operations were $1.12, an increase of 21.7% from last year’s diluted net earnings per share. We paid $108 million in dividends and repurchased $136 million in shares, returning over $240 million to our shareholders this quarter. Additionally this quarter, we had $0.91 of adjustments to our reported diluted net earnings per share. This was primarily the result of a $147 million pretax charge related to the termination of our primary noncontributory defined benefit pension plan, most of which was non-cash. The termination of this plan and the anticipated expense was previously communicated in our fiscal 2019 Form 10-K. Now turning to our detailed margin results. Food and beverage costs were 20 basis points favorable to last year, as pricing of just over 2% and continued cost savings initiatives offset commodity inflation of approximately 1.7% and continued investments. Second quarter restaurant labor was unfavorable, 10 basis points to last year. Total labor inflation of 4% was offset by pricing, check mix, and productivity improvements in new and existing restaurants. We continue to manage labor well in this environment, given the heightened inflationary pressures we still face. Marketing expense was 30 basis points unfavorable to last year. Approximately 40% of this was related to LongHorn marketing and timing shift from the first to the second quarter, and the remainder was driven by increased media spending in our other segments, primarily Cheddar’s. As a result, restaurant level EBITDA margin of 16.5% was 20 basis points lower than last year. General and administrative expense was 40 basis points better than last year, as we wrapped on higher incentive expense and sales leverage. Our second quarter effective tax rate of 5.9% was favorably impacted by the resolution of prior year’s tax projects that were contemplated in our earlier guidance. Excluding these projects, our effective tax rate would have been closer to 11% for the quarter. All of this culminated in adjusted earnings after tax margin of 6.7%, 90 basis points higher than last year. Turning to our segment performance, Olive Garden grew sales and profit in the quarter driven by positive same-restaurant sales and net new restaurant growth. Segment profit margin increased by 20 basis points by leveraging the same-restaurant sales growth and managing costs effectively. LongHorn also grew sales and segment profit in the quarter, driven by positive same-restaurant sales and net new restaurant growth. However, segment profit margin decreased 20 basis points, primarily due to the marketing timing shift I mentioned earlier, which increased marketing as a percentage of sales in the quarter for LongHorn. In addition, LongHorn continued to have slightly elevated beef inflation while making continued investments during the quarter. Fine Dining segment grew sales and profit in the quarter as well, driven by positive same-restaurant sales and net new restaurant growth. Segment profit margin decreased versus last year 10 basis points due to higher pre-opening expense and inefficiencies related to our four new restaurants opened year-to-date. Sales for our Other Business segment grew 3.5%, driven by net new restaurants. Both segment profit dollars and margin decreased this quarter due to incremental marketing expense, primarily at Cheddar’s and margin deleverage from negative same-restaurant sales growth. As you saw in the press release this morning, we reiterated all aspects of our fiscal 2020 outlook. As we look forward to the second half of fiscal 2020, we feel confident in our ability to achieve same-restaurant sales between 1% to 2% for the year, resulting in adjusted diluted net earnings per share of between $6.30 and $6.45. Finally, beginning in the first quarter of fiscal 2021, we will modify the reporting of same-restaurant sales to align with our four reportable business segments: Olive Garden, LongHorn Steakhouse, Fine Dining, and Other Business. This change will better align the current reporting of segment profits with reportable segment sales growth metrics. Before I close, I’d like to wish all of our 185,000 team members and each of you a safe and happy holiday season. And with that, we’ll take your questions.

Operator, Operator

Our first question comes from Brian Bittner from Oppenheimer. Please go ahead.

Brian Bittner, Analyst

Thank you. Good morning. My question is just on Olive Garden, the slowdown in comps in the quarter. It seems like you’re saying this is mostly related to tough promotion, tough marketing comparisons early on in the quarter. Have you seen performance in the business improve enough to have the confidence to say that these issues are indeed transitory at Olive Garden and maybe even that they’re behind you?

Gene Lee, CEO

Well, I think we are pretty clear on how sales performed throughout the quarter? We definitely had a tough wrap. And I think that we signaled that at the end of the first quarter that Lasagna Mia wasn’t performing as well as we had hoped. We pulled the promotional advertising for that promotion, and we focused on the introduction of $5 take-homes. As I stated, as we introduced Never Ending Pasta Bowl and had comparable marketing trends, trends improved throughout the quarter. And I would say, how we feel about the business is really in how we think about our guidance for the year. We’ve come back out and reconfirmed our guidance, and we feel as though that business continues to perform well and continues to take market share in the industry, and we’re comfortable with where we’re at.

Operator, Operator

Our next question comes from Sara Senatore from Bernstein. Please go ahead.

Sara Senatore, Analyst

I wanted to ask a broader question about the brands. It seems to me that with LongHorn and Cheddar’s, after you invested in marketing and value, you saw significant improvement in revenue. Although you've mentioned the challenges faced by Olive Garden, the fact that margins improved suggests a different trade-off. Is there an opportunity to focus more on value for Olive Garden, perhaps to smooth out its performance throughout the quarter? How do you evaluate these trade-offs, considering that while LongHorn may have lower margins, its comparable performance is strong? How do you generally view these trade-offs, and how might this vary across each brand? Thank you.

Gene Lee, CEO

Yes, that’s a great question, Sara. We were aware that LongHorn was performing exceptionally well during the quarter. We decided not to increase the marketing efforts for Olive Garden to compensate for the slow start we experienced. We have options available if needed, but we opted to let the quarter unfold as it did. This reflects the strength of our portfolio. We recognized the solid performance of LongHorn and chose not to raise our marketing budget; in fact, we spent less on advertising and marketing in the second quarter compared to last year. It’s important for us to continually assess what’s happening within the business. Moving forward, we will look at ways to utilize value at Olive Garden to drive same-restaurant sales while also competing effectively with our rivals. We will need to keep an eye on our competitors and adjust accordingly. When assessing Olive Garden's progress over the past four years, it’s quite remarkable. We believe it is well-positioned to maintain its leadership in casual dining, and we have more options available to support that business than many others.

Operator, Operator

Our next question comes from John Glass from Morgan Stanley. Please go ahead.

John Glass, Analyst

If I could just follow-up on LongHorn. Maybe I missed just what the combination of things were that really drove that material acceleration. But can you just revisit that specifically? And it sounds like some incremental marketing or something changing the promotional environment made some promotion with advertising environment. How sustainable is that or is that or is it you pull it forward such that you can’t maybe replicate it in future quarters or is this a new run rate of advertising, promotional, so we should think about this as maybe you’ve taken a permanent step up in that brand from a sales perspective?

Gene Lee, CEO

John, we had two extra weeks of media in the quarter; you saw that in the restaurant level expenses. I wouldn’t give that a lot of the credence for the increase in same-restaurant sales. I think, as I said, the LongHorn team has been investing in this business for four years. Every state today is bigger or better than it was four years ago. They’ve invested in the bread service, they’ve invested in many other aspects of the overall operation. But I think the most unique thing about LongHorn in this environment is that it is a smaller box with fewer employees than the average casual dining restaurant. Their ability to attract a top-quality employee, train them well and retain them, I believe enables them to execute at a higher level. And if I was to point to one thing that is driving that business, it’s that single attribute. To answer your question, is this a sustainable trend? I don’t know. All I know is this team has had a great discipline for four years and made a lot of really good investments. I believe they continue to do the right things every single day for their team members and their guests. And again, it’s a unique operation because it’s much smaller inside of smaller box and they deliver at a high level. And it all came together this quarter combined with a couple of extra weeks of media, and they had a great quarter.

John Glass, Analyst

Thank you. That’s very helpful. And Rick, just on the commodity front, specifically beef, I know you talked about where inflation is, and you’ve given this in your coverage through at least May and thinking about low single digits. But, is anything changed on the margin, are you incrementally more concerned about particular proteins as you think about calendar 2020 in total? And there has obviously been a lot of noise and incremental discussion in the marketplace around ASF and how that may impact the protein pricing.

Rick Cardenas, CFO

Yes, John, we remain confident in our guidance for total commodity inflation of 1% to 2%. This quarter, we were slightly higher at 1.7%. Regarding beef, we are not observing significant changes in our expectations for the beef market. Currently, the only effect we are seeing from ASF is minimal; only about 2% of our purchases are pork. However, there could be an impact on overall proteins in 18 months. We are noticing some inflation in ground beef, but we are covered for the year in that area, so we feel secure about our position. In terms of chicken, we are beginning to see some inflation, but we are also covered there.

Operator, Operator

Our next question comes from David Tarantino from Baird. Please go ahead.

David Tarantino, Analyst

Hi. Good morning. I’m wondering just related to sort of the strategy on advertising and media heading into the election year. Normally, we see media costs increase. And just wondering, Gene, how the brands are planning to manage through that type of environment, and if you expect any differences there?

Gene Lee, CEO

Yes. Great question, David. I think we’ll continue to focus on non-working media spend to see how much we can pull that down to help offset the inflation. But we will try to spend from a media standpoint at the same levels without increasing the overall spend for the brand. Now, I think, as you know, as you get around the elections, especially when you’re doing a lot of national stuff and some spot television, you can get bumped. And try and make sure that we get our full complement of advertising as we move into the last six months prior to the election, depending on the marketplace will be a challenge. We’ll try to work around that. We’ve got other levers that we can pull, social media, we got TDIs, we’ve got some other things that we can do to help offset that if we’re not getting our full complement of advertising. But we’ll continue to work and focus on making sure we’re as lean as we possibly can be on our non-working, so that we can maybe shift a little bit more of that into working to offset the inflation.

David Tarantino, Analyst

Great. And then, Rick, just a quick one on the margins. I think there have been several quarters in a row of productivity and mix cited as a pretty nice offset to the labor inflation you are seeing. I’m just wondering what the sustainability of that looks like, and whether you’re starting to lap that at any point in the next few quarters?

Rick Cardenas, CFO

A couple of things. One, we’ve said quite a few times that we don’t expect to have labor below last year for quite a while as we keep inflation. And so, this quarter played out, we’re about 10 basis points lower than last year in labor. The productivity, if you remember, a lot of that started with new restaurants last year around the third quarter, and we started to see a little bit of an increase in productivity from new restaurants. That should start lapping itself. So, we still feel pretty good about managing our labor well based on inflation, and we’ve all contemplated that in our guidance of 1% to 2% total inflation.

David Tarantino, Analyst

Great. Thank you.

Rick Cardenas, CFO

I’m sorry. 2.5% total inflation.

David Tarantino, Analyst

Thank you.

Operator, Operator

Our next question comes from Jeff Bernstein from Barclays. Please go ahead.

Jeff Bernstein, Analyst

Two questions as well. First one, Gene, you mentioned watching your competitors closely. I’m just wondering if you think that maybe you’re seeing an increased promotional activity and maybe that would change your marketing approach in the back half of your fiscal ‘20, whether it’s in response to what competitors are doing or whether you feel the need to be a leader in terms of being more promotional or a change in your promotional cadence? Any thoughts on the industry broadly would be great.

Gene Lee, CEO

Yes, I believe the industry is experiencing increased pressure from some promotional strategies that have become permanent fixtures on menus. A major competitor has indicated that they will remain very aggressive. However, when I examine the data from Knapp and Black Box, I see that check averages are still growing by over 2.5%. This indicates that consumers are still willing to spend at least 2.5% more. It's crucial for us to remain vigilant about industry trends and ensure we provide value within our major brands across the platform. This means offering value in price and portion sizes as we engage with our diverse consumer base. I would assert that Olive Garden is the leader in value, and we must remain focused on maintaining suitable price points for all consumers interested in dining with us. I believe we are positioned to lead in this area rather than simply following trends.

Jeff Bernstein, Analyst

Got it. And my follow-up was just as we think about the fiscal ‘20 outlook. Rick, you mentioned guidance unchanged and that’s now the first two quarters of this year. And it seems like it’s contrary to past practice of thinking of Darden as guiding conservatively and more of not beating and raising. So, I’m just wondering if maybe you enter this year guiding more aggressively for the year or maybe fundamentals have eased relative to your expectation a little bit. I’m just wondering if maybe you’re a little bit more cautious as we move through or into the back half of the fiscal year, what might have changed relative to historical practice of being able to beat the conservative start to the year guidance.

Rick Cardenas, CFO

Yes. Jeff, every year at the beginning of the year when we guide, we guide what we think is appropriate and we adjust as things play out. And things have been playing out exactly as we thought, which is why we haven’t changed our guide. In the past, things have been a little bit better than what we thought in the beginning of the year. So, that’s why we’ve adjusted up. But, I wouldn’t say that we were more aggressive in this year’s guide than we have in the past. We used the same philosophy that we always have. It just happens that the first quarter and the second quarter didn’t outperform what we thought as much as it has in the prior year. That’s why we didn’t raise our performance. And we still have, coming into the back half of this fiscal year, chances of weather, chances of election, and everything else is going on in talking about consumers having other things to think about. So, again, we didn’t change anything the way we’ve done things in the past, and we feel pretty good about where our guide is right now.

Jeff Bernstein, Analyst

Great. Thank you very much.

Operator, Operator

Our next question comes from Chris Carril from RBC Capital Markets. Please go ahead.

Chris Carril, Analyst

So, I’m curious to hear your current thinking on the off-premise opportunity, and in particular how the performance of the $5 take-home offer and the sequential acceleration in off-premise growth may impact your thought process on off-premise strategy today? Thanks.

Gene Lee, CEO

I believe that the $5 take-home option has been a valuable addition to Olive Garden's off-premise menu. It has been positively received by consumers, and we will continue to enhance this platform as we go forward. Our main goal as we concentrate on off-premise is to increase convenience for our customers. We recognize that the two most essential elements are timely delivery and accuracy. As we expand in this area, we will prioritize these two factors while also ensuring that each of our restaurants has the necessary capabilities. We are investing in our restaurants to provide adequate space and equipment to meet the growing demand. This will be a major focus for the next 12 to 18 months. We aim to reduce any friction for the consumer. Feedback on this experience has been highly positive, and we will maintain our commitment to high standards. As long as consumer demand persists, we see opportunities for growth in this area. I am genuinely enthusiastic about our direction, particularly regarding the off-premise aspects, as it relates to the quality of the experience and the products leaving our restaurant. I believe this commitment to quality is a significant reason for our continued growth.

Operator, Operator

Our next question comes from Will Slabaugh from Stephens. Please go ahead.

Will Slabaugh, Analyst

I have a question about Cheddar's. I know you're not quite where you want to be yet, but there has been a nice improvement compared to what we've previously seen. You mentioned some enhanced turnover in customer metrics, but there was something else. I was curious if you could highlight anything from the quarter that contributed to the significant improvement in the two-year trend, which I believe is over 400 basis points. I would love to hear your thoughts on that.

Gene Lee, CEO

Yes. Bottom line is that we’re operating better. We’ve got more stability. I’m starting to see a culture develop inside of Cheddar’s for the first time, one culture. Right? So, you go back to when we did the acquisition, we had these three distinct cultures. For the first time, I’m feeling like we’re Cheddar’s of one. I’ve said all along, this is not a brand issue, this is an operations issue. I think our teams are making significant progress, and we’ve got stability in a lot of places for the first time. And again, this is the beginning of a journey. But, you look at the power of LongHorn. We have the stability and what we’re able to accomplish. Gaining 20 points in a reduction in our employee turnover is huge. I think we can continue to do that again. That’s really what’s got me excited. We’re just doing a better job. I had lunch in Cheddar’s this week. It was fantastic. It was the best experience I’ve ever had in Cheddar’s.

Operator, Operator

Our next question comes from Gregory Francfort from Bank of America. Please go ahead.

Gregory Francfort, Analyst

I just had two. The first one was on, Gene, I think you mentioned turnover at LongHorn. Can you maybe frame that up versus either the industry or versus maybe its historical levels? Is it down, is it just maybe up less than the industry? I guess, what was the commentary meant to suggest? And then, the other question I had was on off-premise. It’s been I think a couple of years since, Gene, you’ve given some thoughts on the competitive push into off-premise. I think a few of your competitors have gone into third-party partnerships. They’ve grabbed a few points of sales, but the profitability is becoming more of a focus. Can you maybe give where your updated thoughts are on third-party delivery, particularly small order? Thanks.

Gene Lee, CEO

Sure. LongHorn's management turnover is under 15%, and it's below 10% at the managing partner level, which is crucial. In comparison to the industry average, which is in the mid-30s, our numbers are industry-leading and standout within Darden. We have significant tenure among our staff and, importantly, a strong sense of pride in the business. Employee turnover is in the low 60s, resembling more of our upscale operations. This leads to reduced training costs compared to the industry average, particularly for this segment, contributing to strong operational performance. Regarding off-premise delivery, our stance hasn’t changed. We aim to maintain control over the customer experience. We do offer off-premise last mile delivery for Olive Garden orders over $75, and if customers inform us by 5 o'clock the previous evening, we can deliver. This segment is rapidly growing for us, with an average check in the 300s, making it worthwhile to pursue. As a team, we prioritize controlling this experience to ensure on-time and accurate deliveries. Our position on last mile delivery companies remains unchanged.

Operator, Operator

Our next question comes from Dennis Geiger from UBS. Please go ahead.

Dennis Geiger, Analyst

Gene, I just wanted to ask a bit more about Olive Garden looking ahead. Good to hear that the trend accelerated through the quarter, but just wondering if you could talk a bit more about contributions from key drivers going forward to continue to support this outperformance. You talked quite a bit about off-premise. Is there anything more kind of on the strength of the operational execution, how impactful that can continue to be? The lunch gains you mentioned thinking ahead, promotional dry powder, maybe your thoughts on the innovation pipeline, and just kind of anything else to continue to support the outperformance that you’ve seen for quite some time now? Thanks.

Gene Lee, CEO

I think off-premise will continue to be a driver. I think the $5 take-home platform will continue to be a strong driver. There’s a lot of innovations that we can still do in that platform. We think that we’ve got other platforms out there that will continue to strengthen whether it’s Buy One Take One, Never Ending Pasta Bowl. I think that the promotional pipeline continues to be strong. I want to pivot back to an important time that we focus on running great restaurants, as staffing is the most critical thing that we face today in this employment environment. We need to make sure that our Olive Gardens remain staffed with great people. We need to continue to focus on improving our employment proposition. These are high-volume restaurants. I believe that we win if we have the best people inside the box. I’m comfortable with our ability to create a strategy to continue the momentum, and I think there are drivers out there.

Operator, Operator

Our next question comes from Brett Levy from MKM Partners. Please go ahead.

Brett Levy, Analyst

Great. Thank you. Can you provide more detail on the calendar shift? Was the 100 basis points mostly distributed evenly, or did you notice any significant changes among brands? Additionally, did you observe any regional differences? I understand you prefer not to give intra-quarter updates, and you mentioned a weaker start to the quarter that improved later. Can you quantify the market share gains on a GAAP basis later in the quarter compared to earlier? Lastly, did you observe any fundamental operational aspects at Olive Garden, such as guest satisfaction or turnover, that could reinforce the brand's strong position? Thank you.

Rick Cardenas, CFO

Hey, Brett. Regarding the calendar shift, there were a lot of questions, but it affected the brands differently. Generally, the casual brands saw a positive impact, while the fine dining brands experienced a negative impact, with each brand reacting in its unique way. Among the casual brands, Cheddar’s had the smallest positive effect. The regional differences weren't significant; essentially, the Thanksgiving shift was consistent across regions, with weather being the only variation. Concerning the market share gap for the quarter by month, we prefer not to delve into the monthly changes, except to note that Olive Garden started negatively in the first month and had to recover to achieve a positive outcome for the quarter. Specifically for Olive Garden, their operating metrics are at all-time highs, with guest satisfaction and various operational metrics reaching record levels throughout every month of the quarter. I hope that addresses your queries. Thanks, Brett.

Operator, Operator

Our next question comes from Nicole Miller from Piper Jaffray. Please go ahead.

Nicole Miller, Analyst

Thank you. Good morning. There’s a lot of discussion around value proposition in Olive Garden. I’m wondering when you do see the value proposition and how you look at your lens, your perspective move one way or another in the dining rooms. Does that show up in a demographic shift? Does every demographic want or seek value in the same way, or do you see some more or less sensitive to value?

Gene Lee, CEO

That's an interesting question, Nicole. For some of our consumers, who represent a broad audience, their understanding of value often focuses on the cost, with many looking for entry-level price points. Others may see value more in terms of portion size relative to price. We aim to provide value for everyone, though it can vary based on what is important to each consumer. Given our brand's wide appeal, we need to ensure that value is present in all aspects; it's about balancing what is significant, whether it's the cost or the quantity. We recognize that there is a specific customer segment at Olive Garden for whom price is crucial to their choices. Therefore, we need to maintain promotions frequently to attract them, as they might choose other options without those deals. Our analyses support this understanding. Additionally, we know that when it comes to specific dishes like chicken alfredo, increasing the portion size can significantly improve perceived value. This is particularly relevant for customers focused on entry-level price points. Overall, we need to consider various perspectives and tailor our definition of value to fit different opportunities, ensuring we offer something appealing to those consumers who are particularly deal-oriented, which we recognize needs to be consistently available.

Operator, Operator

Our next question comes from Andrew Strelzik from BMO Capital Markets. Please go ahead.

Unidentified Analyst, Analyst

Hi. Good morning. This is actually Dan on for Andrew today. We saw sort of mixed performances across some of the polished casual where trends have been a bit more challenged recently. You talked about some of the incremental marketing spend at Cheddar’s and LongHorn, but I know last quarter you also spoke about potentially adding some marketing spend around some of those smaller portfolio brands as well. So, did you end up doing that? And if you did, can you just kind of give us an update on how those initiatives are performing and how you think it will work, given the lack of national scale?

Gene Lee, CEO

Yes. I think the brand that we made the most progress in was Yard House. The Yard House was positive before the Thanksgiving shift. We are very pleased to see that. We’ll continue to find ways to try to use digital to promote these brands. We’re doing a lot of test and learn in those brands also to try to be effective. We’re making progress in all those brands. I would say that Seasons, as Rick alluded to, Seasons was the most impacted by the holiday switch. I think we’re making progress in that business.

Operator, Operator

Our next question comes from Chris O’Cull from Stifel. Please go ahead.

Chris O’Cull, Analyst

Gene, I know the Company had indicated Cheddar’s would be testing some of these various marketing initiatives. But did these tests have a material impact on the comp performance during the quarter? And when do you think we could see some of these tests being implemented more broadly?

Gene Lee, CEO

I think they had some impact on the quarter, but I'm not sure it was significant. We are testing this activity on a small scale to better understand what can drive results. This is an ongoing process, and we need to continue refining our new store development strategy to enhance efficiency in various markets so we can achieve better outcomes. I can't provide a specific timeline for when we will have all the answers. Additionally, in today's digital landscape, things are constantly evolving. Testing and learning in the digital space will be a continuous practice for companies due to the emergence of new channels to reach consumers, who are more unpredictable now compared to the past with traditional television advertising. Adopting a test-and-learn approach will be part of our strategy for the foreseeable future.

Chris O’Cull, Analyst

And then, I know you mentioned Olive Garden’s comps improved during the quarter, but I’m curious whether the check benefit from the $5 take-home was somewhat negated by the Never Ending Pasta Bowl promotion?

Rick Cardenas, CFO

Chris, this is Rick. The benefit from the $5 take-home was not offset by the Never Ending Pasta Bowl promotion. It was actually the lunch investment made earlier in the fiscal year that affected our check. For Olive Garden, the check grew by 2.7% for the quarter, with 2% of that being price increases and about 80 basis points attributable to catering, while the rest balanced out. The 80 basis points from catering can be viewed in terms of guest counts, since we don’t credit them towards guest numbers. To answer your question, the $5 take-home was not impacted by the Never Ending Pasta Bowl.

Operator, Operator

Our next question comes from Peter Saleh from BTIG. Please go ahead.

Peter Saleh, Analyst

I just wanted to come back to the conversation I think we had several quarters ago on loyalty. I think you guys had loyalty tests in place for over a year in maybe about 10% of your stores. Where do you guys stand on the loyalty test? Is that something you plan to forward with or just an update on loyalty would be great.

Gene Lee, CEO

We’re still testing. There’s really no further update. We continue to analyze the results. But at this point in time, we’re just in the same 10%, and we’ll continue to watch how that’s maturing.

Peter Saleh, Analyst

Is there anything you’re looking for in particular before you decide whether to just scrap it all together or move forward?

Gene Lee, CEO

We want to keep exploring the potential of first-party data and its value to us, as well as its impact on sales through the loyalty program. We are assessing this carefully since these decisions are significant and not easy to reverse. We need to be very confident that we are choosing the right direction, and right now, we have not reached that level of confidence.

Operator, Operator

Our next question comes from Jeff Farmer from Gordon Haskett. Please go ahead.

Jeff Farmer, Analyst

On the June earnings call, I believe you commented that your concepts were seeing some, I think you described it as day-to-day and week-to-week sales volatility. I’m just curious if that volatility has continued. And if it has, what that might signal about the consumer and their demand for casual dining more broadly?

Gene Lee, CEO

Yes. I think we’ve experienced some significant calendar changes. The volatility in comparison is still present. However, the environment seems to be improving compared to how it has been recently. Employment remains strong, and consumer confidence is on the rise. The immediate risk of a recession appears to have diminished, which makes me feel optimistic about the overall situation at the moment. As a team, we don’t get overly concerned about daily or weekly fluctuations. While volatility is still there, influenced by both our competitors and our own actions, we are aware of the need to align our promotional efforts. Nevertheless, we have become more open to making long-term decisions and accepting some weekly volatility in our marketing strategies. This can make short-term forecasting a bit more challenging, but in the long run, everything tends to balance out.

Jeff Farmer, Analyst

And then, just as a follow-up to that in terms of some of the volatility that you’ve seen with the consumer demand side, despite incredibly strong consumer metrics that sort of break down in that very strong relationship historically, meaning if you saw a good consumer trends, good consumer health metrics, you typically saw a pretty nice casual dining same-store sales. You guys pointed out that that had softened up a little bit. Any further comment on that?

Gene Lee, CEO

I would like to make a brief comment on that. This marketplace will be shaped by those who succeed and those who do not. If you have a strong value proposition and execute effectively, your success will be influenced by how well you attract and retain employees. In this environment, it has never been more challenging to secure and keep great talent. Those who manage to do so with a strong value proposition will emerge as the winners.

Operator, Operator

Our next question comes from Katherine Fogertey from Goldman Sachs. Please go ahead.

Katherine Fogertey, Analyst

Great. Thank you. I wanted to touch a little bit on the off-premise at Olive Garden. You talked about overall sales starting the quarter pretty soft and then improving. Did you see similar trends in off-premise, especially kind of when you take away the $5 take-home side of the business and focus on the traffic that you’re seeing from people placing orders 5:00 pm ahead of time, $75 and higher threshold? Did you see softness there in the beginning of the quarter and that improve or was that business behaving differently?

Gene Lee, CEO

Again, a little too granular there, all I would say is that our delivery program continues to grow at a good pace. When we’re doing Never Ending Pasta Bowl, that’s not a great time; I mean, it’s not one of our best periods for off-premise comp. It’s just not a promotional item that lends itself to that. Overall, I would just say that $5 take-home was a big piece of what we have for a new offering. It got people excited. Overall off-premise business continues to grow with consumer demand. I’m not going to get into much more detail than that.

Operator, Operator

Our next question comes from Katherine Fogertey from Goldman Sachs. Please go ahead.

Katherine Fogertey, Analyst

I think you gave some good color around the 100 basis-point benefit from the Thanksgiving shift by some brands. But curious if you could help us understand a little bit more, was it Olive Garden that benefited more than LongHorn or was that benefit kind of equally split?

Rick Cardenas, CFO

Hey, Katy. This is Rick. The Olive Garden, LongHorn were pretty similar in benefit from the Thanksgiving shift.

Operator, Operator

Our next question comes from John Ivankoe from JP Morgan. Please go ahead.

John Ivankoe, Analyst

I heard your comments that you made on obviously some of the upscale brands actually being hurt by Thanksgiving. But could you talk about are there any other common themes in upscale that are kind of noteworthy at this point? Gene, would you expect the upscale brands to actually be performing better today for where we are in the economic cycle and where we are in the stock market, for example? Is there anything Darden can do, self-help to improve those?

Gene Lee, CEO

Yes. I mean, Thanksgiving has turned into one of the biggest days in upscale, and they didn’t have that in the second quarter. I think these upscale brands are performing really well. We have two of the best upscale brands out there today, very high volume with Capital Grille and Eddie V’s. They continue to perform at a high level. I’m excited about what they have going forward. As I’ve said before, I think their books look good through the holidays. These are exciting businesses, and I’m very pleased with their overall performance.

Rick Cardenas, CFO

And I may have missed the number. How big the calendar shift actually was there in the second quarter? Could you also comment on some of the brands between Olive Garden and LongHorn and the two Fine Dining brands? The calendar shift for Darden was 100 basis points favorable. As I said on the call, the casual brands were benefited by that and the upscale Fine Dining brands were hurt. The upscale Fine Dining brands were hurt more than the casual dining brands were helped, but the casual dining brands are bigger. That’s why we’re at about 100 basis points.

John Ivankoe, Analyst

Okay. All right, understood. Thank you for that. And then the brands in the middle?

Rick Cardenas, CFO

There weren’t really many brands in the middle. We’ve pretty much had casual. I also mentioned that Cheddar’s was the least benefited of the casual brands. Everything that’s Fine Dining that takes reservations was hurt.

Operator, Operator

Our next question comes from Matt DiFrisco from Guggenheim Partners. Please go ahead.

Matt DiFrisco, Analyst

Thank you. I'd like to take a different approach here. Many people often focus on smaller brands like Cheddar’s as the primary growth drivers, but LongHorn has really seen a significant improvement in its margins. The return on equity is positioned for better growth moving forward. It seems you’ve only added about eight net stores in the last year, which appears to be a bit low, especially since you're present in only around 13 or 14 states. There is certainly much more potential for growth. I'm curious what has been holding you back. Why can't that brand return to its previous growth days, and could it be on the verge of doing so?

Gene Lee, CEO

I see a growth opportunity with LongHorn. We are gradually entering new territories and focusing on filling gaps where we can. We believe that the limiting factor for growth is human capital. This brand is vital to how we cultivate our culture and manage operations. We aim to open 15 to 20 locations this year, which is a solid target. We have not opened any LongHorns in California yet, which is our last major available territory. We plan to open a restaurant in California this spring to gauge the brand's reception. We will open a few more and provide support for those efforts. We are very pleased with our approach. I appreciate our controlled growth strategy, as we are currently in 43 states with over 500 units, approaching a $2 billion brand. We will continue to grow this brand responsibly, as we see significant opportunities for expansion.

Matt DiFrisco, Analyst

Sorry about that. I was saying you have an average of 13 in a state. That’s what I was saying. Just also I guess, we’ve been checking a lot. A lot of these smaller brands have been closing down. Is there that opportunity when you look at where you would grow LongHorn? Does it have to be necessarily a new site or are there opportunities, maybe more in this economic cycle where you could sort of take over an existing restaurant that just won’t belly up and it’s sitting next to a couple of Olive Gardens or in a market with a couple of Olive Gardens where you can get some synergies?

Gene Lee, CEO

We evaluate every real estate opportunity to determine the best approach. If a building is structurally sound, we will renovate it. We have done several of those projects. However, if we feel that the building lacks the potential to serve as a suitable LongHorn restaurant for the next 30 years, we will demolish it. Each site is assessed from an economic perspective to determine the most favorable financial outcome for the investment.

Operator, Operator

Our next question comes from Stephen Anderson from Maxim Group. Please go ahead.

Stephen Anderson, Analyst

I wanted to follow up with you on the off-premise opportunity and specifically at Cheddar’s, seeing that you’ve built out a good infrastructure over at Olive Garden and at LongHorn, just wanted to see what your thoughts are. As soon as you build out your marketing capabilities at Cheddar’s, what role off-premise will play and online mobile ordering will play there?

Gene Lee, CEO

Yes, Stephen, that's a great question. We haven't focused on enhancing our off-premise sales at Cheddar’s. However, we see it as a significant opportunity that we plan to address over the next 6 to 18 months. We need to revisit and develop effective processes, understand what capabilities we need, and implement online ordering, which is currently unavailable. All of these represent growth opportunities. We will launch these initiatives when we believe we have the appropriate operational capabilities in place. You've pointed out a prospective growth avenue for Cheddar’s.

Operator, Operator

Our next question comes from Jake Bartlett from SunTrust. Please go ahead.

Jake Bartlett, Analyst

Great. Thanks for taking the question. Gene, it was the second quarter of last year that you talked about more explicitly about pulling back on incentives that the consumer was strong enough. You wanted to kind of have that in your pocket if the economy got worse. Where do you stand on incentives? Have you kicked that up since the second quarter of last year? How do you think your approach on incentives for consumers is going to be going forward this year?

Gene Lee, CEO

Yes. We plan to utilize that strategy wisely. We have been experimenting in the marketplace with new offers that have a relatively short expiration to observe consumer reactions. This is just one element of our broader strategy to drive the business. As we scaled back our incentives last year, we noticed that there are consumers who will only visit our restaurants if there’s an incentive available. We’ve learned that we need to provide something for this group. One of our focal points, especially as we return to basics, is our integrated marketing approach. This includes how we implement incentives alongside other promotional efforts. We approach these aspects together rather than in isolation. I would advise caution in interpreting our frequency metrics alone, as other components of our media spending have a significantly greater impact than our incentive spend, particularly regarding the total rating points we have in the marketplace.

Jake Bartlett, Analyst

Great. And then, second question is on acquisitions. And one is just if you could talk about your appetite for kind of continuing acquisitions? It’s been I guess almost two years since acquiring Cheddar’s, but also the environment, whether you’re seeing some smaller chains kind of under more pressure, given the kind of scale benefits with technology and with some inflation that’s going on. So, one, your appetite and the second kind of the environment for acquisitions out there that you’re seeing.

Gene Lee, CEO

Yes. I’m going to probably dodge that a little bit and give you the standard answer that we’ll continue to evaluate our current portfolio and evaluate the opportunities to add to the portfolio. As you know, we continue to look at the opportunities out there, we continue to look at the opportunities internally, and we’ll continue to have those discussions with our management team and our Board. And while we’re doing that, we’re going to continue to focus on running the great brands that we have.

Operator, Operator

Our next question comes from Jon Tower from Wells Fargo. Please go ahead.

Jon Tower, Analyst

Thanks and happy holidays. Just a quick one for me. Based on work, it looks like your off-premise business in Olive Garden was greater than 100% of the comp growth in the period. I believe that off-premise offers like catering and $5 take-homes only show up in the mix and not traffic. I think Rick, you hit on it earlier that lunch might have driven down mix a little bit in the period. But I am curious if you could expand upon the thought that maybe these to-go businesses are cannibalizing potential future visits, or maybe you can give us some comfort that it isn’t happening in the market.

Rick Cardenas, CFO

Yes. We don’t believe that they’re taking away from future visits. People are making a choice between dining in or ordering out, and we want to be part of both options. Reflecting on the quarter, we had a strong promotion last year with Buy One Take One, and this year we had a weaker promotion. It's important to acknowledge that we didn't meet expectations with Lasagna Mia, which led us to withdraw the promotional advertising for it. Not every initiative will succeed, and we realized something was off with this one. We didn’t allocate promotional dollars effectively and made adjustments. This situation put us at a disadvantage in the quarter, but we chose to let it unfold, mainly because LongHorn was performing well. I view everything as part of one larger group. We aim to provide Olive Garden when and where people want it, and we're making good progress in that area. I'm excited about our recent launches and believe we've improved our performance. We're becoming more competitive. Looking ahead, we may need to make strategic changes to compete better during dinner as well. This business is always evolving, and we can't remain stagnant. I'm confident in our team and insights, and my goal is to make Olive Garden available to anyone who wants it, wherever they want it.

Jon Tower, Analyst

Following up on the promotional ups and downs this quarter, was there anything different about the testing process for this promotion compared to past tests that might have changed the go-to-market strategy or affected what played out in the market versus what you observed in testing?

Gene Lee, CEO

No. I think that anytime the testing environment is small, it’s always different from a macro test. We’re not sure what else was happening. We made the decision. In hindsight, we may have made that decision too quickly and didn’t give it a chance to play out. But we did what we thought was right, regardless of the outcome. We made a pivot, and it’s behind us, and now we’re moving on.

Operator, Operator

Our next question comes from Brian Vaccaro from Raymond James. Please go ahead.

Brian Vaccaro, Analyst

Thanks. Hey. Good morning. Just two quick ones for me. Could we circle back on the Olive Garden incentives in the quarter? And if you look across all marketing channels, how do the mix of value and incentives compare year-on-year?

Rick Cardenas, CFO

We definitely had more incentives in place, which was necessary because we reduced our advertising spending. While it's a smaller channel, we increased our efforts and conducted a lot of testing. The concept of test and learn applies not only to our smaller brands but also within Olive Garden, where we focused on understanding which targeted design initiatives would appeal to consumers and how long they should be activated to engage them. We were actively involved in the market, which also allowed us to communicate effectively with our E-club members. However, it's important to view this in context, as the media spending was significantly lower, and we were engaged in testing and learning within this channel.

Operator, Operator

Our next question comes from Mike McGinnis from Northcoast Research. Please go ahead.

Mike McGinnis, Analyst

Thanks for taking my questions. Just a quick follow-up on the promotions. We saw you pull back this summer in response to some of the issues you had. What are your thoughts on the role promotions will play in the current competitive landscape? And how do you think about a path forward here and if you’re planning to lean into more promotions in the future?

Gene Lee, CEO

You never stay too far away from it. It’s a matter of tests and understanding what resonates. So, I would expect that our strategy going forward is we will deploy them selectively, and we’re not going to go out there and do it full-fledged. We’ve got to test what works, and we’ve got to be thoughtful on how we move forward.

Kevin Kalicak, Vice President of Investor Relations

Thanks, Carol. That concludes our call for today. I’d like to remind you that we plan to release third quarter results on Thursday, March 19th, before the market opens with a conference call to follow. Thank you all for participating in today’s call.

Operator, Operator

Ladies and gentlemen, this concludes today's conference. Thank you again for your participation. You may now disconnect.