Q4 2020 Darden Restaurants Inc Earnings Call

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Your line for been please listen only until the question answer session.

Yes. Good question you May press Star one on your Touchtone phone.

This conference is being recorded.

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I'll now turn the call over to Mr., Kevin Calico.

Thank you you may begin thanks, so much.

Thank you James Good morning, everyone and thank you for participating on today's call. Joining me on the call today are gene lead Darden CEO and regarding the CFO.

Minor 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 projection.

Those risks are described in the company's press release, which was distributed this morning.

And then 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 Dot com.

Today's discussion and presentation includes certain non-GAAP measurement and reconciliations of these measurements are included in the presentation.

We plan to release fiscal 2021 first quarter earnings on Sept, <unk> September 24, before the market opens followed by a conference call.

Now I'll turn the call over to gene.

You, Kevin and good morning, everyone. That's been 14 weeks since our last earnings call.

No about all of you put it felt more like 14 months so much as happened.

Over the past three months, our businesses business changed in ways, we never imagined so I want to spend my time with you. This morning tried to put it all and perspective for you that Merck will share some of our fourth quarter and year end results and provide our outlook for the first quarter.

I look back on all of those trends part one thing that stands out as the resiliency of the full service Donnie industry.

Prior to the pandemic total annual sales of the casual dining industry was approximately 108 billion.

And while I did not know how long it will take the industry to recover from the significant impacted experience I am confident that this category will get back to size. It once was.

Our industry plays a vital role in our communities.

That was evident and how the consumer relied on restaurants over the last several months, even any to gold environment.

And while off premise will continue to play an important role as we recover we noticed the consumer still wants to enjoy in in restaurant experience.

Fact going out to a restaurant with friends and family is the number one activity consumer say they look forward to doing as the economy opens back up.

And we've seen that as our diamonds reopened across the country.

Hi, this vital industry continues to rebuild this tremendous opportunity to increase market share through increased on premise demand an incremental off premise sales.

Those executing at the highest level are going to continue to win.

And Darden is well positioned to take advantage of the opportunity.

We last spoke in March we knew the pandemic was going to have a significant impact on our business.

Our ability to manage through the <unk>. This crisis has been driven by our commitment to.

Prioritize gifting team member safety and best in our team members provide frequent and transparent communication.

Leverage our digital platform.

And be brilliant with the basics.

The health and safety of our guests been team members is always been our top priority.

And we've taken a number of steps to create a safe environment and our restaurants.

So, let's see masking other personal protective equipment for our team members to developing a contact with.

Curbside pickup process our brands.

At our brands, while dining rooms were closed we're mindful of the trust our guest and team members placed on us.

Today, our health and safety commitments are focused on team member health checks personal protective equipment enhance sanitation processes.

So she'll distance and and frequent handwashing.

Well, we also provide paid sick leave for all our team members. So they can stay home if they're hill.

Well, we can't do it alone and that is why we incurred drug guests to join the online waiting list or make reservations.

No I enjoy restaurants severe symptomatic.

Where mask and utilize contact with or mobile payment options were available.

We continue to invest in our team members is a times closed.

In addition to rolling out permanent paid sick leave we introduced a three week emergency pay program that provided nearly $75 million a paid during the fourth quarter for Ali team members, who could not work.

When emergency pay ended we covered insurance payments and benefit deductions for always team members who are furloughed.

As we brought poly team members back to work to support increased to go volume, we introduced an additional payment to help cover unexpected costs, such as transportation and child care incurred as a result, a bit pandemic.

And to recognize the unbelievable work our managers did during the quarter, we paid the target bonus for the fourth quarter.

Nor are our people our greatest competitive advantage.

Not only were these investments the right thing to do to take care of our team members. They've also created a deeper loyalty and strengthen engagement.

We've seen this pay off as we bring our people back to work.

Communication is the most important aspect of leadership during the crisis.

We knew frequent and transparent communication with our team members and investors was important.

Beyond daily meetings with all of our brand President who in turn met with their operational leaders on a daily basis, we have mean team it consistent communication cadence with our team members.

Since this crisis began I provided right your business updates to our people and have been open and honest about the impacts to our business and consequently, the impacts to them.

We took the same approach with our shareholders and analysts by providing for business updates during the quarter.

The pandemic accelerate the consumers' desire for convenience and we saw a significant increase in digital engagement.

The work we have done over the past few years investing in our digital platform to reduce friction preparedness to quickly adopt <unk> to consumer behavior and deliver on their expectations of convenience and our to go only environment.

During this time, we have strengthened our digital platform and made meaningful progress against our digital strategy.

In addition to improving the guest experience across our digital channels. A strategy is focused on using technology to help our guest easily order outside and inside the restaurant.

Improved the weight to be ceded streamline the order pickup process and speed up holiday pay.

We've been building on our digital platform to support increased demand and we certainly tested like never before.

During the quarter online ordering at Olive garden grew by more than 300% over prior year and accounted for 58% of to go sales.

Longhorn online ordering grew by 400% and accounted for 49% of to go cells.

Additionally, we accelerated our timeline enrolled the online ordering at our brands that had not yet deployed it.

We also added the ability to order alcohol online for all of our brands in markets, but that was allowed.

Our commitment to being really with the basics allowed us to remain focused on operational execution, even as the environment forced us to radically change how we serve our guest.

Each one of our brands did a phenomenal job delivering a new just experienced by collaborating and sharing best practices.

This involves creating content contact with curbside pickup that included designing what was essentially a drive through on a parking lots.

Wallace execution this environment meant enabling our guests to order and pay online and have our team members seamlessly placed their sealed or is in their vehicles.

Our operators display tremendous innovation flexibility and passion as they continue to serve our guess.

And to ensure we consistently executed the highest level, we took the opportunity to streamline our menus and improve our processes and procedures.

With these changes we are seeing improvements in execution and direct labor productivity.

So what are we learn from all this we've learned a lot.

Most importantly, this situation has reinforced at our strategy that we developed five years ago grounded in our back to basics operating philosophy, leveraging our for competitive advantages and cultivating a portfolio of iconic brands still the right one today.

Strong brands with loyal guests to fared better and the trust we have earned from our guest is critical.

Being brilliant with the basics by consistently delivering exceptional food service and atmosphere is imperative.

However, we know how important safety in closing this our to our guests right now and we must continue to earn their trust every day.

And throughout this unprecedent time, we have been it benefited greatly from our for competitive advantages are significant scale.

Our extensive data and insights our rigorous strategic planning and our culture.

Well the sourcing P. P. P for our team members, ensuring we're not impacted by supply chain issues or sharing best practices across eight brands.

<unk> ability to leverage our scale has allowed us to quickly react to constant change.

Finally, as I said earlier, we know our people our greatest competitive advantage and I'm impressed by how our team members responded and continue to respond to take care of our guests and each other.

Having a strong culture has been part of our DNA since we were founded.

We were able to keep the majority of our managers employed and we speak connected with our furloughed hourly team members. This allowed us to bring our people back quickly and get our donovan's open safely without any delays.

As you saw in our press release, 91% of our downturns have reopened with at least limited capacity.

We have also brought 60000 furloughed restaurant team members back to work and we expect to bring at least another 40000 back as business continues to improve.

I'm incredibly proud that our culture is actually strengthened during this most difficult period, our company's history.

This above all else is what gives me confidence in darden's future.

Now I'll turn it over to Rick.

Thank you Jane and good morning, everyone.

Fiscal 2020 was on track for a solid year performance and the beginning of Q4 was no different.

The first few weeks of sales were strong and then nearly overnight the impact of cobot 19 required us to pivot to it to go only format.

This post unprecedented challenges for our restaurant support center team and I am proud of how everyone moved quickly to increase to go sales reduced cost manage working capital and improve efficiency.

The simplifications gene referenced helped reduce key variable expenses in our restaurants, especially direct labor.

The teams also worked to reduce or eliminate other fixed costs in a restaurant and restaurant support center as well as eliminate non essential capital spending.

Given the significant reduction in cash flow. We also had to work quickly to ensure we had enough cash for whatever might occur.

During the quarter, we suspended the dividend and share repurchases.

Fully drew down or $750 million credit facility.

Got to $270 million term loan and raise over 500 million in a follow on equity offering.

All these efforts and the strong loyalty of our guests resulted in a tripling our prior to go sales run rate averages and materially reducing our cash burn as we disclosed to you through our periodic business updates.

Given the confidence in our cash flow trends and the ability to access it in the future.

We fully repaid our credit facility in early May.

Now turning to the results.

The total sales were 1.3 billion.

A decrease of 43.0%.

Same restaurant sales decreased 47.7% and adjusted diluted net loss per share was $1.24.

Because of the significant reduction in total sales compared to last year all of the expense lines experience sales deleverage. So I'll just touch on a few highlights.

First food and beverage costs were higher as a percent of sales given menu mix related to both to go mix and simplified menus as well as increase packaging expense and elevated beef cost.

As we look at the Labor line, there was significant de leverage in management labor, including approximately 25 million in manager bonuses.

However, we saw an improvement in hourly labor as a percent of sales of over 150 basis points.

Even with a substantial reduction in sales.

Restaurant expenses per operating week decreased over 20% given our focus on cost management.

Even as we incurred over $5 million, an incremental cleaning supplies NPP related to covert 19.

For marketing and Gionee expense, we were able to <unk> to reduce the absolute spend by 37 million in 17 million respectively versus last year.

Included in our restaurant labor and two X. mall extent Gionee is approximately $50 million of investments net of retention credits.

This was related to emergency and furlough pay for our team members, while they were not working.

This negatively impacted our EPS by 30 cents, which was not adjusted out of reported earnings.

During the quarter, we impaired $390 million of asset as a result of lower sales reduced profitability and lower market capitalization.

The impairments related to $314 million of Cheddars goodwill and trademark assets.

$47 million of restaurant level assets and $29 million of other assets.

We permanently closed 11 restaurants in the quarter six of it which were already impaired.

The entire 300 million dollar $390 million of impairment charges were adjusted out of our reported earnings.

We ended the quarter with $763 million in cash and another $750 million available in our credit facility.

This gives us over $1.5 billion of liquidity available to weather the crisis and make appropriate investments to grow profitably.

Our adjusted debt to adjusted capital at the end of the quarter was 61% well within our debt covenant of 75%.

As we shifted to an off premise only model, we took a disciplined approach to pursue sales opportunities.

With an eye toward incremental profitability and cash flow by focusing on cost management and the guest experience while ensuring our team members were taking care of.

This approach resulted in a better finished to Q4 than anticipated and is the underpinning for the strength of our business model that is reflected in our first quarter financial outlook.

Now turning to fiscal 2021 performance.

In today's release, we provided quarter to date same restaurant sales and the performance of our restaurants with dining rooms at least partially open.

These results are encouraging with last week's blended same restaurant sales down 30%.

We are operating cash flow positive at these levels.

Our to go sales remain elevated in restaurants with dining rooms at least partially reopened.

I Love Garden to go sales are approximately double their pre covered averages and longhorn as more than tripled their pre cobot averages in these restaurants.

Well it is our normal practice to provide an annual financial outlook due to the uncertainty in business performance moving forward, we are only providing an outlook for the first quarter.

We expect to achieve approximately 70% of prior year year sales levels.

Total EBITDA of at least $75 million and diluted net earnings per share of greater than or equal to zero on a diluted share base of 131 million shares.

At this point, we don't intend to further share intra quarter business updates since we have provided our first quarter outlook.

For the full year, we intend to open between 35 and 40 net new restaurants, our first opening of the year is expected to be in early July with a few other is likely to be opened by the end of the first quarter.

In total we expect between 250 and $350 million of capital spending for fiscal <unk> 21.

Turning to other aspects of capital allocation.

As you recall, we suspended our dividend last quarter due to the level of cash flow uncertainty and the need to preserve as much cash as possible.

We have been consistent in our commitment to returning cash to shareholders and our dividend is a big part of that.

As soon as we see the business began to generate the sustainable cash flows to support a dividend and repay our term loan we will have discussions with our board on our dividend policy.

And now I'll turn it back to gene for some closing comments.

Thanks, Rick and as you've seen in our 8-K filing this morning, Dave George will be retiring on August 2nd.

Dave will celebrate its 65th birthday later this year and we've been discussing this transition for some time.

David I had been partners on this journey for 23 years. He was a joint venture partner for long haul when I joined rare and 1997.

I still remember the first time Adam.

We're going to visit is restaurants, we pick me up at the airport news Volvo with nowhere conditioning, and the North Carolina heat.

If I knew what the ended the day to day was the special operator, I wasted no time, we bought out is interesting this joint venture and brought him into the company.

Over the last 23 years, Dave it's been a successful and every one of his leadership positions. He has led three of darden's iconic brands the capital grille Longhorn Steakhouse in Olive Garden and most recently served as our Chief operating officer.

He built great teams and became a mentor to many operators in executives.

His can do approach and attitude permeates throughout darden and each of our brands today.

For many of the last 23 years, Dave and I have had lunch together on Monday discuss to discuss what happened to previous week and talk about what needed to get done going forward.

Not much has changed over those 23 years, except today, we order salads instead of two or three entrees each.

And for the last five years Davis sat next to me during every our earnings call as he used today help me find the details I need to answer your questions.

I will miss seeing and when I walk into the room on these days.

For all the Darden team members listening today, our annual conference would usually happens in August we would have been a great opportunity for every one to see Dave thank him and wish him well in person.

Unfortunately, because of Cobot 19, our conference has been postponed until next year.

We will however, being volume Dave to our conference in 2021, and he's committed to come. So we can celebrate always done for darden and for many of you.

In closing I want to say, thank you to all our team members. Those currently working and those who remain on furlough.

And as I've said to you repeatedly your ability to adapt innovate and collaborate during this time has truly been inspiring.

Thank you for your ongoing commitment to our guest and each other.

And now we'll open it up for questions.

At this time I'd like to remind everyone in order to ask a question. Please press star followed by the number one on your telephone keypad. If your question has been answered or you wish to remove yourself from the Q. Please press the pound key for those who are cued up for questions. We ask that you limit yourself to one question and one follow up question only thank you.

We will pause for a moment, while we compile lets you in a roster.

And your first question comes from the line of David Tarantino with Baird go.

Go ahead. Please your line is open.

Hi, Good morning, I first want to pass long my congratulations Dave George on a very successful career and.

In addition, the best to see it requires.

So gene I guess my my Big Picture question is related to what you think the environment could look like on the other side.

Last year.

Dilution just.

You there David.

And every okay.

I lost you I left last where I heard was on on the other side.

Yeah period after that or.

No.

I'd love to hear your thoughts on how you think environment, we'll work on the other side of the pandemic, especially as it relates to.

The competition and the potential for unit closures and how you're positioning darden took that potentially take advantage of that type of environment whether its.

Potential to grow faster or how do you think about those dynamics as you look longer term. Thanks.

Yes, good morning, David Yeah, I think that as I said in my prepared remarks, we we went into this is $108 billion category.

And I've been really impressed with the resiliency of the consumer and how important.

Full service casual dining has been Ben.

And everybody else everyday life.

Of our guests.

So I think the I think the industry gets back to where it was I think it's important.

I think people really miss it.

Well I Miss it more than they know.

There's been a lot of predictions of how much capacity will come out of the system I'm not going to sit here today and say I know what the exact number is the one thing I do believe is still beall there'll be less competition.

As we unless restaurants as we move forward and that's a great opportunity for US I think scale is going to matter more than ever.

I think that we believe that we can get back to 2% to 3% unit growth pretty quickly we're going to continue to opened restaurants within a continued due to new deals. We think the economics going forward here in the short term should get better for us on new restaurant development.

And I think we'll go back to our basics, we're going to continue to try to improve our food offerings, we're going to try to make sure. We have the right value that were off from the consumer.

As we mentioned in both our comments this morning, we've improved.

Productivity.

And our restaurants through more streamlined menus. So we think the opportunities there.

We also think that off premise will play a bigger role.

As we move forward.

We think our capabilities and now have improved dramatically over the last 14 weeks.

And we and I think a lot of consumers have had the opportunity there may be use our service off premise that hadn't used it before I think there were really pleased with the overall experience.

Great and then Jim you mentioned kind of streamlining the operations in the bad news is that something you think will or continue longer term or do you see that maybe some of the items coming back.

No.

Yes, I think I think each David each brand in a different place each brand went.

Went to a different place when they went off premise only so some brands I would say right now are probably back to 100% of where they will want to be other than maybe some promotional items here and there other brands still have 10, 15% that they need to add back to their menus to make them competitive.

What was not only the menu I mean, I think when we basically closed down the operation except for off premise, we had the chance to rebuild as we open back up and we get a chance to look at all our processes and procedures and I think we were able to simplify and eliminate a lot of prep work and some of our businesses that will never get back into the.

<unk> business I think visa costs that were going to we've gotten out.

We've had a lot of discussion around our table is that it's been much easier as we build the on premise business back up to Reimagine, what the operation the back of house looks like versus trying to Reimagine why your operating.

And we're really thrilled with the results so far.

Great. Thanks, very much and good luck.

Your next question comes from the line of Brian Bittner with Oppenheimer <unk> co. Please.

Go ahead. Please your line is open.

Thank you good morning, I'll show, we'd like to wish Dave, Georgia, very happy retirement, congrats on a on a wonderful career.

Gene.

Note. During this pandemic you instituted load lower order price thresholds for delivery across the olive garden portfolio.

What are the insights and maybe the impact you're seeing from from this and what are your updated thoughts on that opportunity is this environment is so rapidly change these last few months.

Yeah, we run a lot of test there David I think we're where we settling into right now is 50 dollar minimum.

It's still the five o'clock called the day the day before we find that to be the sweet spot.

The average order size is still well above that.

We didn't see any benefit of going below that threshold.

And so that's where we're going to and that's what we're netting out and we think that that opportunity we'll continue to be there.

I will we will tell you that we did test Dom doing our own delivery founded significant really inefficient.

And it wasn't that additive and so we're really focused on this curbside operation and think Thats the future.

For off from Us.

Okay.

My follow up it's just it's interesting to see the longhorn sales recovery.

Occur a bit more rapidly than olive garden.

Particularly in units at every open their dining rooms.

Jim what do you really attribute that to and.

My question in the spirit of the fact that to go sales in in the open longhorn units are actually much lower than olive garden. So im surprised we're seeing such a big recovery and longhorn first how garden more recently.

Brian two things to consider first of all geographies.

As working for all longhorn.

We've got the stated, Georgia, where we have a huge presence there and businesses come back real strong I would also say that the olive garden.

Dining room yields a higher percentage of tables.

Available in.

With the occupancy restrictions in olive garden dose and so I want to take this opportunity to talk just a little bit about occupancy a lot of people have done a lot of work on this and I think that you're I think this I think you. When you do you think about just a little bit differently once you're past, 25% occupancy.

The only thing that matters is there six feet a social distancing required.

Remember, there's always significant inefficiencies and your seating capacity, we've always got two's enforce fours and Sixs, we got tables for large parties, our average party sizes 2.3.

So different layouts, even in different inside the same brand will yield you different seating efficiencies.

We will be installing temporary barriers and approximately 100 restaurants in the next two weeks to try to improve this efficiency, especially in olive garden.

We want to do that while maintaining the social distancing requirements.

We'll analyze the sales growth.

After that we installed those barriers and decide how many more restaurants, we want to add it at it too.

So that's a long answer to your question, but I think that Theres. Some confusion out there and we have to remember.

That once you are passed 25% occupancy this six foot restriction on social distancing trumps any other restriction there is.

Could you can't get to 50%.

Understood Thanks to the coaching.

Our next question comes from the line of John Glass with Morgan Stanley.

Please your line is open.

Thanks, Thanks very much.

And congratulations Dave on your retirement.

I wanted to ask about incremental margins as you think about the recovery. So coverage made a lot of businesses, including yours rethink how you do things you talked about menu simplification.

But you also talked about this heavier to go mix maybe influence food costs.

Do you think is your easy's recover that you're able to get back to higher margins to media experience of the past given some of these efficiencies or do you think there's puts and takes how do you think about the recovery of margins relative to each of these given the changes in the business assuming that you're getting dining respectful at some point.

Hey, John Thanks for the question.

Relates to margins incrementally going forward.

Right now if you look at RPL and the way our margins look our margins are better on a variable cost basis than they were coming into the pandemic.

So if we don't make other investments going forward, you would anticipate our margins to be a little bit better than they were we before however, we're still making decisions on what we'll do as the sales continue to grow.

Whether we bring some things back or invest in our guest even more to that to grow sales even faster. So I don't want to comment too much on what our margin structure is going to look like in a year or two years, because we may make choices that take away some of that margin gain that we had or we may let that margin flow to the bottom line, but as of right now our variable.

Our genes are better than they were coming into the pandemic.

Okay. Thanks, and then just following up on your question about the today show being your for your curbside being the preferred off premise channel did you take the opportunity to chess Test third party in this period of time.

Do you look at your results and say there just as good as many of your peers with third parties. So what's the advantage I mean, how do you conclude or look at this period of time in change in any way your view, one third party or maybe stepping your results against it.

John We we've had third party delivery and some of our restaurants, even before the pandemic started including some olive garden's a lot of yard house.

And we actually added some third party delivery in yard house in a different state.

And we really Didnt see that the third party delivery grew faster than our own to go business our own to go business actually grew faster than the third party business in those restaurants.

And so we're still at the point, where we believe that are off premise business is really strong and continues to grow and we are not anticipating launching a third party delivery model now as we've said all the time that can change as soon as we see or if we see that those margins.

Our equal to what we do today than maybe we'll go into the third party model, but as of right now our resolve is strong we believe that doing off premise that way, we do it especially now that we've added this the significant curbside business.

Is the way to go.

Got it thank you.

Your next question comes on line of Gregory Francfort.

With Bank of America go ahead. Please your line is open.

Sure. Thanks, Thank you very much.

And Dave, but congratulations on risk retirement.

Two questions. The first as a follow up just to the capacity restraints I guess the point that average party size is lower in olive garden, which is what's creating the six to six foot distancing I. I think the 2.3 was overall, but I guess I'm just trying to understand that point and then the other question I had was just on off Prem.

Yes.

And how much maybe that could look like any fully the recapture scenario. How are you guys looking at it is you guys give some data in the release.

Maybe it's like US a third of prior.

Sales volumes now or 60% of what the peak.

The off premise was but I'm curious how you guys are thinking about that and trying to figure out what that business is going to look like in terms of side. After this thanks.

As far as capacity for Olive Garden goes.

I don't really thinks it hasn't party size has an impact on that it's just more the way the physical layout is and we have we have a lot more room, we have looms, we have less booths.

And so trying to create that 60 is more difficult.

I remember some of our smaller rooms were offset their family tables their larger parties Olive garden.

Does a lot of that but the majority of our buildings right now because the booth backs are less than six six feet. We can't create the same yield if if we if and we are adhering to the local jurisdictions. If we appear to those laws local jurisdictions, we can't create the same percentage occupancy.

The all of most of the olive garden's that we can in longhorn.

And that's why putting some of these temporary barriers that we're building in there could help increase the yield.

And we'll we're seeing we're seeing what think when we talk about olive garden, we need to focus on the absolute sales number which is significant and as we get towards the weekends, our percentages come down a little upcoming get get a little bit tougher to keep up right. So as the bigger bigger.

So we have an olive garden are harder to match early in the week arse, our year over year sales declines are a little bit less.

As far as off premise.

I think that.

We believe off premise will play a bigger role going forward.

I'm not so sure.

We expect to kind of keep these run rates once we get back to normal environment as long as a threat of coal bid and people have modified their personal behaviors that we think off premise business will continue to stay robust.

We think this will be a contributor going forward, we think when we level out will be higher percentages of off premise in all of our businesses.

Can't sit here today, and say what I think that percentage is going to be I do think you'll be greater.

Got it thanks. Thanks you.

Our next question comes from the line of Andrew Charles was Cowen and Company go ahead. Please your line is open.

Great. Thanks, and I was also extend best wishes to Dave on your next chapter.

Two separate ones from me one for Rick can you talk philosophically for how you arrived at one Q guidance for sales was this more top down or bottoms up just in recent news just the virus spread in some key states for Darden.

Well, Andrew It was actually both I mean, we did a top down look at where we are geographically what we've been running lately and our brands did our own bottom up look at it at it by geography et cetera, and we came to around the same number.

So if you look at what we have we are saying approximately 70%, which is where we are after three weeks of this quarter now mind you.

The restaurants that are open with dining rooms, open or doing a little bit better than that.

But we just want to make sure that we we don't under we don't know exactly when all these dining is going to open we don't know when.

If theres going to be another wave.

Or have some closures were hoping that doesn't happen.

But thats, where we came up with our 70% number for sales and then up on the profit side.

As you know as you saw in our fourth quarter, we did a much better job in controlling costs and expenses and everything else and so we just have a stronger business model, which makes us feel comfortable with our.

Our bps of zero or greater and a 75 million dollar or greater EBITDA and Thats total EBITDA net restaurant level that's everything.

That's helpful. And then a question for Eugene you're looking beyond the 35 to 40 openings planned for 2021, you talked about how you'll be able to achieve 2% to 3% net restaurant growth.

Shorter term resin longer term, but can you talk about how the pandemic has changed your practices for site selection as well as changes the restaurant prototype to help maximize ROI folks what looks to be more off premise curbside focused future.

Yes, I would say, it's too early to say, it's really changed our.

Our.

Philosophy on new restaurant development at this point.

One thing I do believe is the economics are going to be more favorable than they were pre cobot.

I think that there'll be a lot less less people growing out there. So I think the cost to construct of construction should come down just like it did 910 11, I think the cost of the underlying land should come down significantly.

So as we look forward I think the economics.

Look promising.

The best restaurant deals, we did where it was we're after the recession and own nine and 10.

Especially for our specialty brands, so we'll push hard on that to get favorable economics, where possible.

I do think that.

As as we look at these businesses transition to more curbside than folks coming into our restaurant that picking up the takeout ordering we still don't know how when we get back to a normal environment, how thats going to migrate back whether it's gonna stay 100% curbside. Our people are going to want to come in we've got to really go through that discovery process.

I think the big work that needs to be done is to think about what do we need to do.

Inside the box to better support and stage curbside, if it's going to be up big Big part of our business up until recently in our existing restaurants, we've been doing remodels to create capacity for inside pick up now we've got a really really look at that.

As we go forward.

We had been developing in olive garden more of a dedicated pickup space off the side of the kitchen that we're really happy with but that might not be the way we want to go going forward, we don't know.

And so we'll see.

As we move forward I think we'll we'll try to build a little more flexibility in our diagrams and think about different barriers.

And our floor plans.

So that if something like this happens in the future we might have more flexibility.

But I'm actually I'm really excited about the opportunity to to build restaurants.

Confident in our model.

I'll leave the cost the initial investment cost is going to be less or at least not be inflating at the rate it was inflating.

So we're going to be able to create significant value for darden going forward, new restaurant growth and we'll probably be one of the few out there thats opening new restaurants.

That's helpful. Thank you.

Our next question comes from the line as Eric Gonzalez with Keybanc.

Please your line is open.

Hey, Thank you so much and also like Ed Mike My Congrats David.

Based on the discussion we had earlier about the occupancy at Olive garden versus Longhorn I'm. Just wondering if you could speak to why it seems that the the off premise sales, perhaps are being cannibalized little bit more at olive garden versus Longhorn and then my second question relates the promotional environment. It seems like very few of your competitors or discounting or even advertising.

Right now you had that 12 nine from earlier this month, but wondering.

When you think the right kind of lead restart the promotional schedule. How you think the competition setting up with regards to advertising deals.

Thanks.

On the first question I think all of in Longhorn just started at a much lower level.

For off premise, that's why it's growing at three times and not two times I don't think there's anything more to that I think the absolute dollars going outside on Olive garden ROI on takeout are impressive I mean, there perhaps some of those CD level. So overall sales I mean those are impressive numbers. If you look at 40% last week on 80 181000 dollar.

As per week, Dutch I mean that that's a huge business. So.

I wouldn't read anything else into that other than longhorn started at a much much lower level as far as promotional go promotions go we've pulled back obviously.

We pulled back on almost all promotional activity, you're seeing as to a little bit of television olive garden, because we own we own the spots we bought them in the up fronts.

And so we need to we will continue to advertise there.

Right now, we don't think it's prudent to be promoting.

People into our restaurants.

When we have long waits to get into the into the die rooms.

Well I think we would just be creating more frustration for our for our guests to can't get in.

And so at some point, maybe will pivot to do some more off premise.

Advertising, but right now.

We're looking we're taking this opportunity to cleanse our marketing spend to understand as we put it back in what works better what gets is the highest return on investment as we as we put it back into the system when that's going to be a big opportunity again, this is where scale will matter.

We can we can come back in and advertise our businesses at the right time, we don't think this is the right time.

To be advertising. We think this is the right time to pull it back analyze the situation and we'll make when the it's doing this and this situation is as right. Then we'll start to layer some advertising back in and promotion back in.

Helpful. Thank so much.

Our next question comes from the line of Chris Carroll with RBC Capital markets. Go ahead. Please your line is open.

Thanks, Hi, good morning, good to hear from you all and congratulations to Dave and his retirement.

Gene you referenced Georgia performance regarding recent longhorn strength. So following up on that can you provide any additional detail what you're seeing more broadly in the states that were among the first to allow dining rooms to reopen are you seeing sales in those states meaningfully different than that of your overall average and how is off premise mixing in those states now versus.

The average thanks.

Well I think that I'll answer. The first question last question first off premise is strong its maintaining wouldn't see and no change in off premise and those in those states.

For the most part.

As far as how those states are performing against others. It all depends I think on what your brand strength is and what your relative share is in those markets. So.

Obviously, when you look at Longhorn Atlanta, Georgia, we've got the.

Largest share of voice there I mean, we have 45 restaurants in the DNA were very trusted brand we were born out of longhorn.

I'm out of Atlanta, and so I think people just trust the brand.

And so where we have great brand strength, whether it's a cheddars market that has great brand strength or an olive garden market, that's great brand strength those restaurants come back faster.

And perform at a higher level and so I don't think it really has to do with as much as when the state opened as much as what's the brand strength in those specific markets are another example is where we do really well in longhorn Cincinnati is another one of those early markets and we came back strong and since.

And now you soon as we opened.

But that's true in fall for Cheddars in certain markets is true for olive garden certain markets.

Great. Thank you.

Our next question comes from the line of Jeffrey Bernstein with Barclays. Go ahead. Please your line is open.

Great. Thank you very much and.

Steve that's a long time to be having weekly lunch with with gene. So congratulations.

Just one question one follow up just in terms of the question. The the changes you discuss that you've made during coded I'm. Just wondering maybe you can prioritize a few that you think it may be good business. Some will remain post Gulf. It I know you mentioned curb side, and we talked about delivery, but thoughts around social distancing or you mentioned the online.

List and reservations and the reduced menu I'm just wondering if any of those you see is kind of more permanent and then I had one follow up.

Well the most permanent and the most significant thing we've done is streamline the menus and our processes and procedures and Thats and Thats forever.

This was the opportunity.

A lot of its been waiting for.

When we closed on our Donna rooms, and we knew we had to simplify for the off premise and then we had we had those three or four weeks to really focus the corporate level with our with our teams. This okay. What do we really need to come back and how do we keep this simple because we had we had no idea what was going to happen when we opened our dining rooms, we didnt.

If anyone to show up.

Right and so we had these simple menus out there they're all disposable we knew we could change them quickly if we needed to but what we've learned was we could get enough variety on the menus to satisfy the demanded the consumer and we could simplify it because we wanted to make sure. We didn't have as much labor in the back of house to execute it so to me.

That's the biggest thing our teams have done.

I must have been the biggest insight.

That some of the what I would call. This powerful this menu items that are on our menu that one out of 100 people that were buying when they were coming in just aren't important and most of those created the complexity in the kitchen and so with this this.

Hopefully once in a lifetime opportunity, we were able to pull those out.

And I think that's what's going to be with the lasting change it's going to have significant impact 234 years from today.

Gotcha and then my follow up was just it was mentioned earlier about the re infections and seems like it's ramping up in recent days a week. So I'm just wondering if there's any color you can give directionally.

In states, we've seen recent spikes how your business maybe changes.

Maybe how your approach to.

The decision is going to change versus the first time, whether speed to close the duration of closure just wondering what you've seen way those spikes of happened and how your business. How you might change it process of making decisions. This go around versus the first thanks.

I would just say real quickly we've seen no change in our business trends in the in the states that are starting display obviously, we're concerned we're focused on it.

But as a leadership team we're vault well, we talk about let's focus on what we can control right. We can't control is we're not doctors were not in the government.

Folks are going to do what their leadership inside the states are going to do what they're going to do what we if we were focused the pivot again to more.

You know more of a more restrictions in restaurant dining or even if we have to go back all the way and off premise, we can pivot that way, it's going to be a lot easier. This time, the pivot that way because we know we're going to do we know how to do it last time, we were kind of making it up as we as we were going we made a lot of right decisions as we did that but this time it would be.

A lot smoother for us to pivot back to on off premise six only experienced for a short period of time I think the difference. This time is that this will be micro not macro.

And that's how we're thinking about it and that we've got a team set up to manage.

Day to day, what's happening in these local municipalities and we'll adjust but I know as we think about as a management in the leadership team is we're going to control, we can control and we're not going to worry about things that we can't control.

Thank you.

Our next question comes from the line of Jeff Farmer with Gordon Haskett Go ahead. Please your line is open. Thanks. So just wanted to follow up on the question that shows just asked so I. Appreciate that you said that so far you're not seeing much of a change but.

Just drilling down a little bit from that level.

It again is there any type of.

Pivot back to off premise from on premise reduced frequency.

Sounds like you're seeing that at least as it relates to the overall volume levels you haven't seen much of a change but in terms of consumer behavior or taking a little bit of a deeper dive to see how those consumers are behavior.

As consumers are behaving in those states that have seen a dramatic jump in koby cases is there anything you can add to beyond what you've already answered for jeffs question.

No Peter I mean, it's been we're talking here in those six or seven days since we've really seen something we haven't seen any change in any behavior at this point in time.

That debt.

We can call out and who knows maybe something will change tomorrow I don't know, but right now there's nothing for us to say that could add any value to this topic and then just one other follow up question. So is it possible for some of these restaurants that are operating at 50 60, 75% capacity.

To put up positive same store sales numbers can they actually.

Again growing sales year over year positive comps with us 50% to 75% capacity constraints.

Yeah as of today, we have somewhere between 10% to 15% of our restaurants that are putting up positive same restaurant sales.

Their restaurants that have good solid off premise business.

And they bought a business that that will that kind of goes all day right. It's a you know there and trade areas where.

Even early in the week, you've got business from two to five and go after eight so.

Tend to 50% of our restaurants today are positive same restaurant sales.

Thank you.

Our next question comes from the line of Peter So late with BTG.

Please your line is open.

Great. Thank you I wanted to echo the congrats Davis well.

I wanted to ask about how you're thinking about value. I know you said you don't really want to Oh right now, but it also seems like you've got some labor productivity.

Fits into your back pocket with about 150 basis points productivity. So you've got some margin I guess the spend how are you thinking about.

Maybe over the next couple of months or maybe a couple of quarters as you know it seems like we're going to be a.

Hi.

Our unemployment environment and competitions coming more back online just trying to understand your perspective on value going forward.

Yeah, I think it's real simple once we hit if once we have the capacity and if we see any let up in demand than we can pivot to value, we have that opportunity to invest in value to drive traffic.

At this point it just doesn't make any sense, because we have no capacity to drive it too.

Understood and then just my second question is on the.

I just talked about a competitive advantage and.

Extensive data and insights that you guys have is are you seeing anything on the data that would.

More towards a loyalty program or away from a loyalty program.

And the future as things normalize it has anything changed during this environment.

Yes. This is Rick something did change in there in this environment, we actually cancers, our loyalty program test and that ended at the end of the fiscal year.

Ben and it ended for a couple of reasons. One is we've had it out there for a while we had seen some incremental improvement overtime, but we just didnt think this is the right time to continue to invest in that we wanted to streamline everything we were doing.

That said there is a chance it will bring one back in the future. We did get some good data out of the loyalty test the delayed the data is richer than the data that we get from our credit cards and other things.

The real question was do we have enough of that to utilize to market and to do the right things and so we cancel the test again to streamline to ensure that we're focusing on the things that are the most important right now.

That said, we may come back with another loyalty program in the future.

Very helpful. Thank you very much.

Our next question comes on line as Chris So coal with Stifel. Go ahead. Please your line is open.

Thanks, Good morning days I want to wish you all the best during a retirement I've really enjoyed covering a career at rare and darden.

So I just have a couple of questions Rick the first quarter guidance implies no improvement in the current trend. So I'm wondering if you're anticipating sales could be impacted when the supplemental unemployment benefits expire.

Well everything that we're anticipating as in our guidance they could they could be impacted that said, we don't know if they're going to be expanded granted by theyre going to be extended or they can be extended at a different dollar amount theres still some discussions along those lines and so we put everything in there there is some positives in deck.

It happened there is some negatives can happen and Thats why we we felt that are 70% sales number against last year was the right number.

Okay, and then the company had 43% sales decline in the fourth quarter and lost about a $1.25 and adjusted earnings expect 30% sales declined in the first quarter and earnings to breakeven can you give us a further a little more explanation as to what are the key line items driving that improvement in earning sensitivity.

Yeah, a couple of things one is we had $58 million of costs that we did not adjust out of our earnings that we won't have in this quarter.

As we talked about before.

The $58 million of investments that we made.

50 million of that was definitely a.

Definitely but it was a it was an impact that we wouldn't expect to happen going forward.

That's one and two when we came into this and started declining fast it took us a little bit of time to get some of the cost out right. So you go from a positive sales in one week to negative 75% and within a couple of weeks. It takes a little bit of time to move those costs now.

We have all the fixed costs, where we'd like them, where we like them and so with a 70% sales so 30% reduction versus last year, we can be profitable.

Okay, great. Thanks, guys.

Our next question comes from the line of Sara Senatore with Bernstein Go ahead. Please your line is open.

Thank you.

Two questions, one that unit growth and want to follow up on margins.

The new units and we had actually anticipated that you might have much lower unit growth, just because and there might be constraints and construction or permitting that kind of thing out could you just talk about what whether we should expect opening speak more backend loaded or it's the paces is sort of.

Level loaded more like normal and then I guess the other.

And what what brands would we expect to see a is it safe just seems olive garden in longhorn given the volume recovery. There. So that's the first question just on on units at cadence and Brian.

So this is Rick in terms of opening cadence for the year recall, we stopped construction in the fourth quarter and a lot of those restaurants, where either done or close to done. So the restaurants opening in July was pretty much already completed.

And so we will have some restaurants that can open quickly if we want them to.

We're opening as I said one in July we've got to probably handful more that will open by the end of the quarter and that we're doing to make sure that we can train in social distancing and make sure that we're training the teams correctly.

And then after that we've got a lot of and that can open as soon as we think that we can serve the guest need in the in that coming into that restaurant.

And so.

We can flip the switch fairly quickly, but the likelihood is it'll be a little bit more backend loaded just because you want to see what the environment is before we open restaurant that had limited capacity.

I've got it and I'm the Mark the question at about margins.

I'm, sorry did you say, which spanners you might be happening olive garden longhorn or is it you can look back at historical rates.

But right now yeah, I would look better and get back at historical.

Our plan this year is to open a at least one restaurant for every Brad.

And some of them again, we're already under construction, but the majority of our openings will be olive garden longer.

Okay got it. Thank you and then just on the margin follow up can you give a little more color you talked about labor savings, but I'm also trying to understand when we look at that margin compression sort of.

Food labor other how much that is different and off time, especially the on premise and without those margins look like or was there mix I know.

Yes, I think that is negative for food, but that's our labor just trying to understand.

How much of this is sort of that that expense management in the end efficiencies that you you found first phase.

Thanks.

Yes, there are cost of sales was unfavorable to us in the fourth quarter a lot of it because of mix in brands mixed into go business.

And and the the higher expense for packaging. Unlike other brands, we actually put our packaging costs in our cost of sales.

It's not in restaurant expenses in cost of sales. So when you think about how much we shifted to go and we had some value platforms into go Olive garden did buy when take one for almost the whole time for to go. So that was a higher cost of sales. We had we had to go packaging for more entrees than normal we had bundles at some of the other brand. So it was really.

The mix of to go a mix of what we were selling.

And then brand mix is a little bit of that but it's not not too much except for the fact that are higher end brands actually had a lower lower same restaurant sales, so a bigger negative and some of those brands ever fairly good cost to sales measure.

On the Labor front, you know it was all de leverage as we talked about on the as I talked about in the prepared remarks, we had restaurant managers, we paid them even when they were on furlough.

We had.

We we kept most of our restaurant managers throughout this downturn.

We had the the $58 million of those expenses as gene mentioned those that was in our restaurant labor, primarily there was a little bit and DNA, but most of it was in restaurant labor So that hurt our margin on that front to those are things that we don't expect to continue.

What we do expect to continue as de leverage in the in a restaurant manager Labor line, because that's a fixed cost.

But we do have some as we said some favorability on the hourly labor side.

Okay. Thank you so much.

Our next question comes from the line of mix in from Wedbush Securities Go ahead. Please your line is open.

Thank you.

Yeah, appreciating that we don't really know what happens to think mile $60, a week or other stimulus measures.

Going forward I mean, but is there than kind of looking back.

Internally around the extent tuition stimulus measures.

Contributed to date to the sales recovery.

That's my first question ABS follow up.

Yes, I think when you think about stimulus I would say, it's definitely a positive.

I'm not sure we can quantify how positive it is.

And I would say that yeah right now there is we think it's some of that's going to go away at the end of July.

But I have to it you have to at least I think that the government is going to have to add some of this stimulus to the economy that should be a positive to us and just may come to us through a different vehicle.

And so I expect the the overall economy the have stimulus in it I.

I don't think it'll come in the same form as its coming today, but I think that we'll get our fair share of it.

And just given your experience and Youve navigated through a number of cycles, what's your sense that even if the capacity constraints are completely normalize but we're in.

Low sort of teams are high single digit unemployment environment, what's your sense in terms of where Steve failed. Eventually do stabilize and then just structurally around sort of the fine dining business sort of yard house business given its exposure to two malls et cetera, how do we think about those those businesses in the medium to long.

Longer term.

Yes, I think.

I think what you're asking me is impossible to predict right now because what we we don't really understand that competitive situation, we don't understand.

How many competitors are going to be out there we don't understand the stimulus.

That the government is going to put in so I don't know where this levels out right, but I do think it's important to note that our fine dining businesses and aren't almost or primary our specialty businesses.

Going to return to normal.

More slowly than I think casual dining will return to normal primarily because capital growing Eddie V's rely on.

Business travel and entertainment has a big part of their sales and we saw that and no nine and 10.

The businesses do shift you become more weekend focused in fine dining I know in an environment like this and we're already seeing that shift that are weekends or are actually fairly good and fine dining.

Our midweek business is weak.

And so I think in the sum it up especially brands are going to are going to come back a little bit lower.

Expectedly in some of like some of the yard house, Susan that are tied to.

Ballparks are far stadiums or something like L.A. live.

As those areas come the those entertainment.

Areas come back slower they'll have that we'll have some some tough sledding going going forward there.

But I I don't know where this all ends up all I do know is that with our strategy and our and our and we believe with our scale and our competitive advantages that we are positioned to gain market share.

As we move forward and I'm confident in that and I believe the investments we've made and our people.

We are going to be the biggest advantage we have.

Thank you very much.

Our next question comes from the line of Dennis Geiger with Yes go ahead. Please your line is open.

Great. Thanks for the question and Jane Thanks for the commentary on capacity constraints.

I wanted to follow up on Jeffs question about kind of getting those you. These headed back towards toward flatter positive. Just wondering if you could talk a bit more about the things you can do other than the partitions to increase capacity your capacity utilization. While there were sticks restrictions are in place maybe even more broadly in addition to two capacity utilization.

And just speaking to somebody other key things that you can do to drive that you'd be recovery with those restrictions in place. Thanks.

I think it's tough I think that that's where we're balancing how much do we want to how much capital we want to invest in some sort of temporary solution.

He asked me two weeks ago I would've thought there were on a.

Half of a better path to.

Being able to see all the restrictions lifted obviously that that has changed here in the short term.

So there's not really don't think there's much more than we can do that then create some physical barriers without routing the atmosphere in the restaurants.

To create a to create capacity I mean, some of our folks of being really creative with outside seating.

Which I applaud.

And I hope they continue to do that but as you know as we get into though the summer months down. So if that gets more difficult because of of the thunderstorms and things like that so I really don't see I think we have to learn to live with what we what the what the restrictions are until such time they removed.

Got it thank you.

Your next question comes on line of Nicole Miller with Piper Sandler Go ahead. Please your line is open.

Thank you good morning, and thanks for this extended time for the conversation I would ask what your team in the stores how are they feeling if you think about reopening the dining room.

How many of what would've been up prior concept in play we are able to retain and are not retain but actually bring back and is that something that you're leveraging.

In terms of the reopening process.

Yes, absolutely that's what we think the in the investment that we made with.

With the emergency pay and paying their benefits has really paid off we've had very little problem, bringing our people back to work they're excited to come back to work they missed that work family.

And so depending on the on the brand were anywhere between.

50, and 70% of of the initial workforce coming back.

We.

In the restaurant business.

Our reputation is one of the most important things that we have and so we have great basic.

Hygiene processes and procedures already developed.

And so our team members are used to working in this environment now were enforcing some social distancing they have to wear masks.

But the great already at washing their hands.

Restaurants are already clean they've got great food handling procedures and so there's a lot of confidence in our restaurants that these are these are great environments to work in and they feel safe our people.

Our just so excited to get to get back to work and even I would even say even while we were in there are off premise only the amount of people that would we're calling back to work and doing different types of jobs and just looking to contribute in any way was was incredible.

And so that's why.

One of the things that we talked about his leadership team. The first thing that we're going to do is we're going to try to take care of our team members. The best we possibly could and is very very difficult situation and Thats why weve invested.

And a gross level $75 million, an additional pay for those first three weeks and I think we're being paid back for that not just today, but I believe will be paid back for that in 2345 years. Our restaurant managers are incredibly loyal we treated them very very well during this process.

And just to confirm and close the loop on that if you think about the.

Relatively back in the range of 70% of sale the staffing levels are 50% to 70%.

As a as a match to the 70% of sales is that the way to think about that that so thats, how I would think about it.

Okay.

Right. Thanks again.

Your next question comes on line of Andy Barish with Jefferies. Go ahead. Please your line is open.

Hey, guys.

Last one and then a quick follow up just gene can you give us sort of an update progress report on how Cheddars has come through this I know you are making some good strides on the people side. Obviously this was unprecedented but just an overview on on where shutters and setting.

Yes, I think shutters me through this is very well just two things I would highlight on shutters first of all they've always wondered into indexed on off premise.

And we were able to do a couple of things through this a lot quicker than we were playing a do first of all we only had two antiquated phone lines going in Detroit restaurant and through this we were able to get them a an upgrade a phone system. So people could actually calling orders.

And get a response from from our team members second we were able to transition them to online ordering.

We just had a big impact and so they're off premise business has built and continuing continues to build each and every week.

Through this process, which we think we'll be very beneficial the most important thing that happened for Cheddars through all this is the way that we had darden treated them.

And I think that when you think about the management employees, especially management. This was a critical I always look at it I always look at when we do acquisitions as always this critical moment when the management that gets about the old days and they don't have that romance with it and then there thankful for the new days and through the.

Process. This is the time I think that are Cheddars leadership, and then people in our restaurants were just thankful that they were they were.

They were a big part of a big company that could step up and do the right thing and I think that is going to create incredible loyalty.

We've lost very few management people through through this time on people were really excited about what they're doing and lastly, they have the opportunity to through this they made the biggest change with their menu and proceed processes and procedures in the back of house, that's going to have a long lasting impact on that business.

Improved the overall financial performance. So we're pleased we think leadership did a great job, we think management and the restaurants to the great job. The team members come back excited.

So we think this was a this was a a positive for charters when it's all said and done.

Great and just quick follow up on the.

Agency in the back of the house and lower hours was was that simply the menu changes or do you also where were you also able to layer in some supply chain changes with more value added product or something like that.

No I think it was it was a little bit of value add but not much I think it was really there was just the.

There was a handful of products that weren't providing a whole lot of value. The consumer that caused a lot of chaos and a lot of additional prep and cost in the kitchen that we just removed from the menu and our guest haven't been asking for it back so.

I mean, this just a lot of streamlining but that menu is come down to lot simpler and they did some really good procedural work and from the back door to the front to the to the dining table that has just made it easy to execute.

Thanks, guys.

Our next question comes from the line of Andrew Strelzik with BMO capital markets. Go ahead. Please your line is open.

Hey, good morning, I, just wanted to circle back on the comment you made about some of the investments you're considering making going forward and I just wanted to better understand the decision making process. There is there something specific that you're looking for.

Just a matter of timing just curious for any color on that please you talking about the investments in the facilities to create.

There was a comment well there was a a comment about kind of margins two or three years from now and not wanting to commit to something around that so I guess I'm just curious around those potential investments that you are considering.

Andrew This is Rick I made the comment on margins.

And you know there are lot of investments we can make one of them is to bring marketing back you know and so we took we're taking marketing down significantly now we'll still have some number in RPL and in Q1 for marketing as presented sales. So I would encourage none of you to put zero in there we do have some marketing.

But we significantly reduced it.

Venue simplification is that we made our theres some items that we need to bring back as we do some more research down the road when our when we have full dining rooms, do we have enough breadth of appeal and so if we bring them back how do we do those how do we bring those back with a simplified process, but it would still be us a small and.

Investment.

So there are there other investments that we can make we can make investments in taking less pricing because we have margin.

To do that we can make investments in quality, which we're doing right. Now longhorn has just made some more significant quality investments in their menu even throughout this process.

I don't know if it's in the restaurant, yet, but it's coming it's a it's a higher higher ounce wait for one of their best products without really pricing for it significantly olive garden is making some significant investments right now in their menu.

In terms of better quality and better value and so we still have a lot of investments. So we can make we're not going to talk necessarily but what we're going to look forward, whether we make those investments or not but.

Just be be sure to know that the margin that we have today gives us room to make investments or gives us room to drive driving to the bottom line.

Great. Thank you very much.

Our next question comes from the line of John Tower with Wells Fargo.

Please your line is open.

Great. Thanks for making time for the questions and Dave Congratulations on your retirement.

Just a few follow ups for me first kind of going zeroing in on this specifically what percent of in store sales can olive garden read gain with the six foot capacity constraints still in place.

John This is Rick that's actually pretty difficult question to answer because every restaurant is different in their lay out not every restaurant, but a lot of restaurants are different in their layout.

And we actually showed in our presentation, what theyre doing today. So what the restaurants are doing that are opened what are they doing and total sales than to go sales in kind of get an idea of where they are we think we can make that a little bit better over time with some of these.

Some of these barriers that we're looking at but anyone brand is different it's kind of hard to tell you exactly what percent. We can do it also depends on how much people are willing to go on the shoulders of a meal period.

And so you know as as the capacity constraints happen, our people willing to wait a little bit longer or come in a little bit earlier and that'll help us drive more sales but.

I couldn't tell you exactly what percent is the right number okay. Thanks, and then just on the labor savings so far how much of a 150 basis points that you saw this quarter do you think can stick when volumes kind of return back to normal and then just lastly, I don't think anybody's asked yet and maybe I missed it but you guys raised quite a bit of capital during the.

Quarter can you just discuss your.

Intent on use of those proceeds thanks.

John as it regards to the 150 basis points, how much can stick as sales go up all of our hourly labor is primarily variable so unless we're making some significant changes to our menu or where we have to bring in some training again, because there's a little bit less training in the fourth quarter.

That would be the reason that our labor as a percent would go up or if we determine as we look at our guest experience did we take a little bit too much out and so we don't believe that was the case because a lot of this labor came out of the kitchen.

That will look and see that see that and determine whether we need to bring some of it back but I would still say that the first quarter should have a late and hourly labor benefit.

Now remember, it's going to be offset by de leveraging the management labor side.

So if you can remind me the second question sorry, just in terms of the.

Capital front, yes, when we raised that that additional $500 million in capital. We said it was too it to invest in growth.

And to shore up our balance sheet and so we believe our balance sheet is shored up as we mentioned.

Our our adjusted debt to adjusted capital ratio of 61% and our covenants to 75% had we not raise that capital we had been a lot closer to that covenant.

We are making investments in growth right now as I mentioned some of the investments that we're making arm investments in quality, we're using some of that capital to invest in quality, we used some of that capital to invest in our team.

As gene mentioned, so the things that we did that we think are going to benefit us and long term.

We now have the capital to be able to start growth again.

And as use as we said we're going to start opening restaurants again, we think that others might not have as much of a balance sheet to be able to do that.

And so those are the investments we're talking about today.

And we'll continue to look at other ways to invest that capital for future growth. We think theres a there is tremendous opportunity to invest and that's why we took out that.

That extra equity.

Great. Thank you.

Your next question comes from the line of Brett Levy with MKM Partners go ahead. Please your line is open.

Great. Thanks for taking the call and Dave I think you really misunderstood, which he was saying when he said that this is going to be a work at home a stay at home autonomy and so congrats to your time off.

When you think about the capital that you provided us the outlay for it seems 50 to 300 million.

How much of that is going to go into towards the new the.

The new level of maintenance that these units are going to take it also just how are you thinking about areas like the step to IP and.

And the digital on slot that we're seeing and then just when you think about your portfolio you've talked about wallboard olive garden Chatters a bit.

Where do you still see additional need to work on at the other chains to catch them up to where you are and I'll stop there. Thanks.

Okay. So you've got maintenance Capex technology and brand mix. So if you think about our maintenance capex.

Our number of 250 to 300 is probably got a $100 million to $125 million hundred $120 million, the maintenance which is.

A little bit lower than we normally say about 120 million. So, let's just say, we take a $20 million number out of that.

On the technology front, we're still investing in technology. That's one of the things that we're going to continue invest in and we and we.

Made a lot of investments in the fourth quarter. When you think about what we did to bring Cheddars online bring all the other brands that didnt have online ordering up.

To make some investments now on our curbside and how do we make that curbside, even more streamlined through technology, how do we improved payment and doing other things. So there's a lot more we're going to do in technology that teams really really busy we're really really proud of what they did over the last couple of a couple of weeks of the X. 14 weeks to ensure that.

Our websites stayed up and running as we drove a lot more traffic.

I mean as it turns to the brand that we're investing in.

We believe that we should invest and all of our brands.

As we mentioned in the number of the openings were going to open I believe at least one restaurant for every brand. If we can get through all of the all of the space limitations in the and the social distancing limitations in that 35 to 40 restaurants and we are we're very excited about every one of our brand.

Ends in their ability to grow.

Our next question comes from line of David Palmer with Evercore ISI go ahead. Please your line is open.

Thanks, Good morning, and Dave Congratulations on your career, obviously a huge.

Work done in the past on Olive garden.

Two questions first on seating capacity.

You talked about how social distancing is more of a constraint.

It sounds like it was more of a constraint for olive garden and Longhorn I don't know if you meant to imply that and if that just a case how much of a boost to capacity can occur with those barriers and have a follow up.

Well the barriers that we're testing and olive garden 10 boost capacity significantly because the booth backs are so low in an olive garden not the difference between olive garden Longhorn is the boot facts are much higher and you think about a long horn Longhorn is just one big room.

Well known what we do in a long runs we use dividers to create space and to create the on beyond that we want which ended up working in our favor to created some social distancing, whereas in olive garden everything's at a much lower level looks like at four feet.

So we're looking at how do we how do we we have gone into a majority of the olive garden's already input plexiglas in certain places to create some barriers.

To get us to the occupancy that were at and also an olive garden you have a lot of nooks and crannies, where we have four tables in there and now we're lucky if we can only know willing to use to if we can some of those instances and those rooms, you only really get to use one.

And so it's just it just had to do more with what the how the floor plan was and and our ability to.

Great barriers with booth backs.

I mean this this is that 7% difference in the recent opened stores roughly the difference I mean, how how much of a boost to add bill could you get there is some did some geography thats favorite longhorn versus olive garden, a lot of Olive gardens, you know I mean, just with the way it.

Laid out when you think about Georgia, and the percentage of restaurants to longhorn has in Georgia and there are no restrictions in Georgia right now for the most part.

It really benefited from that.

And I and I guess, you mentioned there was positive comps in 10% to 15% of restaurants.

We were talking about these capacity constraints, it's hard to get your head around how that's possible.

Is there can you have any comment on that and how what sort of information that gives you about what's possible for the rest of your restaurants well. It's just it's just the you got to you got a significant off premise.

Business it looks in those restaurants, and you have a consumer that probably has limited access to other restaurants that is willing to eat at two o'clock in the afternoon.

And that's when I looked at those restaurants some of them more rural.

Especially in Georgia.

And so I think each individual situations is has got a specific reason why I think that that individual restaurant is performing the way it does.

But it just says that combined with good off premise.

Consumer consumer base that is willing to roll through the whole day and use the facility. You can you can create some volume greater than last year.

But we don't feel like you're wasting so David Yeah. I mean, do you don't feel like sharing what percent capacity increase you can get from these barriers on olive garden is that something.

Put your finger on.

Maybe up a much is 20%.

Okay, you, putting we'll probably get the put every booth in.

And maybe a little bit higher when put every booth in play right now every other Bruce is out.

Yes.

Very helpful. Thank you very much.

Our next question comes from the line of John I can cope with JP. Morgan go ahead. Please your line.

Hi, Thank you I know, we've kind of touched on unit development a couple of times on just looking for maybe some clarification and also maybe a little bit afford guidance.

35 to 40 net how many as that grows in another words, how many are you expecting.

You had to actually close in 21, and obviously had did see some impairments and you're wondering if that was going to end.

And lead to some closures than.

That capex number of 250 to 300 is a low number given the number of units that you are opening and certainly any capex that you haven't 21 would also.

In kind of foretell, whatever you're going to opening 22. So it are you kind of thinking that you can get back to a 2% to 3% unit development in fiscal 2002, and how should we think about let's say a lot of different questions here.

How should we think about overall maintenance capex is perhaps a percentage of DNA in a post post crisis environment as you've kind of rethought. The overall business models and I would like another question as well.

All right John.

So the 35 to 40 restaurant.

Is really almost gross and net so there is we don't have a whole lot of open closings that we would anticipate in this fiscal year. We just closed 11 restaurant in the fourth quarter.

Some of them, we're already impaired in the rest of 'em, we impaired when we close them.

So if we had something that we were going to close we already did it.

Unless we had something where the lease wouldn't allow us to close so.

We don't anticipate closing any more restaurants this year unless there's a lease expiration that we couldn't move or if something gets damage in other ways. So the gross to net is about the same.

In terms of Capex at the 250 to 300 remember we had.

GAAP construction of 17 restaurants that were supposed to open in Q4.

Or in the in the fourth quarter really of F., why 20, and so a lot of that Capex has already been spent even if we ramp up development.

We wouldn't be able to ramp it up enough to spend a lot of capex in <unk> in the late at why 21 for F 22.

We're not ready to talk about F. why 22 openings. So if you take out the 17 openings that we hit our that we had delayed from F. why 20 to 21 that cuts the 35 and half right and it cuts the 40 down to.

23, and so.

We do believe we could get to the 2% to 3% unit growth.

Get back to that fairly quickly, we'll probably be close to that this year. When you think about 35 to 40. The question will be 22, and how fast do we ramp up development. When we have to make sure that the landlords in the landowners and the construction folks understand there's there's probably a new price out there today and so that takes a little bit of time for prices.

Discovery.

And so we'll see how long it takes us to ramp back up we have the team to be able to do it then we're ready to do it when we need on the maintenance side.

I mentioned.

100, $120 million, it's not too different than what we've been doing before remember our number one priority with capital is to make sure. Our restaurants are maintained beautifully and we've been consistent in that along all along and so we do not want to.

Cut down on maintenance that is essential and as needed and we believe maintaining our restaurants is essential maintenance.

So while we did reduce that during the fourth quarter.

Because.

Basically restaurants weren't very busy.

We will bring that back and that's why we've got 100 120 million in our Capex number for this year.

Okay, and maybe thinking about maintenance capex as a percentage of DNA, maybe as you kind of something to think about over the very long term and it doesn't necessarily have to play out over a couple of years I suppose is like you're telling me yeah. It won't play out much.

Okay understood and then the second tier topic, and it's got a comic con to completely different one, but it's a big spending bucket.

A lot of companies are you kind of thinking about reevaluating their calendar 21 versus calendar 19 DNA.

We're all kind of recognizing how different we can work inefficiency and how much travel, we actually need to do and how much money and time virtual work and working on what have you.

Actually face us odd and that's that's something separate even then head count.

How many of the changes in terms of the organization. Yeah are you, making whether its spending per employee not in salary, but on things on top of salary and also a number of employees.

We began the I think.

Might be the right level for the organization and if it's possible that.

Because it's such an important number and to put in the model and this thing is to think about what that calendar 21 versus calendar 19, if it's fair to think about it and that way it could look look like for Darden.

John It's hard to answer calendar for us because we're at fiscal year company. We don't think calendar. So to think that way would take a little bit of mental math, yes, I understand but it's like I just want to put an asterisk on cap on calendar 2000, <unk>, but yet you are unusual night, you're right in the middle of it so no okay, but yet.

And just let me give you an idea you know we would anticipate in the first half of our fiscal year to have significantly less spend per employee.

In travel and in some of the department expenses that we have we're also looking at our organization to see what the right size. The organization is based on based on our sales levels today.

And so as we mentioned after in Q4, we save $70 million in DNA.

We don't anticipate to save 17 million in Q1, but we're going to save some some gionee and Q1 and continue into Q2.

Without talking about what the percent GE and 8% is it's not going to be hugely hugely different than what it was at the end of the fiscal as in in fiscal 20.

So.

I wouldn't model dramatic changes it could be 5200 basis points different but.

Higher just because of the sales deleverage.

But thats all in our guidance that's on what we have in Q1.

And as we get better understanding of what our sales levels are going to be going forward, we'll have a better understanding of what our gene as a percent will be but we will spend less per person on the on the department stuff and the and the travel.

In the first half of this fiscal year.

Very helpful. Thanks for the patients in time.

Our next question comes from the line of Matthew Difrisco with Guggenheim.

Go ahead. Please your line is open.

Thank you so much at two quick questions. One for gene in particular, you guys have talked a lot about the.

The bigger at your scale big advantage and consolidation at the top.

So some smaller independent smaller regional players potentially falling out some capacity coming out I wonder if you could update us on sort of your outlook say the next six months or so what we should look at as year over year capacity that potentially could come out of the full service casual dining sector.

And then secondly for Rick I wanted to sort of walk through that model, where you gave about 30% down on sales equates to a little over 600 million in sales in your model and once you and then your EBITDA is about 200 million or so less wonder how how do we get back to a whole basis year over year on EBITDA do we.

Need all of the 600 million or so of sales to come back or could we get a portion of that to get.

Greater than 200 million of EBITDA back I'm trying to understand the flow through on this new lower variable cost model. Thank you.

Hey, Matt on the on the capacity I think it I'm not going to sit here today and predict a number whether that's 10%, 20%, there's a lot of people throwing around different numbers out there.

The one thing I will say I believe they will be us significantly less restaurants out there to compete against in the near term and the longer a this environment last.

The more fallout you're going to have and so I think that that is an advantage for us going forward.

Matt and as it relates to sales to get back to our EBITDA.

Yeah, you're right, it's about 600 million as what what you mentioned on the 30% we don't need all 600 million to get back to that EBITDA based on what our margin structure looks like today.

You know I'm not going to give you exactly what we need.

But it's it's not 100% of what we're doing before.

That said the reason I'm not going to give you that number is because we may invest some of that stuff. Some of that back. So I don't want I don't want to put out a number to say you know, it's 90, 95% or 100% because we're going to do the right thing for our guest and our team members to make sure that this this cost structure that we have today is the right.

Cost structure in the future and if it's not will make some investments.

But I will say that those investments may take a little bit of time. So we will have a better flow through in the first quarter on some of these sales than we would have had in the past.

Excellent. Thank you for that color.

And our next question comes.

Comes from the line of Catherine Fogarty with Goldman Sachs. Go ahead. Please your line is open.

Great. Thank you for the question I have a couple of questions mainly around the menu.

Okay segment, you, obviously as you enter during the quarter and I was hoping you could kind of walk through bright brand, where you find the greatest amount of efficiencies.

And you mentioned some are are about 15% to 20% below prior menu point, what would be the catalyst to bringing them back and any kind of number if you could put around the cost savings.

Right and I have a follow up.

Okay. This is Rick.

You know on a bought brand by brand level to tell you what the margin differences are and what we've done that it'd be pretty.

Pretty long conversation, but I would say that as gene mentioned earlier Cheddars made a lot of change their menu and a lot of change in their procedures to bring a lot of direct labor out of the system. So if you think about kind of an order of magnitude Cheddars had the most change.

In their menu and the improvement in their labor cost over time.

All of our brands are doing better indirect labor as a percent of sales than they were last year.

All of them Chatters is doing a lot better but to tell you exactly what we did again all brands did things differently all brands changed your menus, a little bit differently, but all brands focused on when we went into it off premise only model. They focus on how can we serve what can we serve what are our highest value.

Items, what are highest guest satisfaction items and what are the items that we can actually run it would just managers. So if you think about brands like Cheddars like capital grille. The smaller the specialty brands most of theirs to go sales when they were to go only we're done with managers only so we had to simplify that menu.

And Olive garden also simplified even though they had team members in the restaurant the same time.

But those simplifications again were to streamline the menu to the most value items value items for the guest and the ones that the guest.

Wanted to most and so what's interesting now is without pictures and without the menu marketing in the different things that we do on many development.

Yes, Sir voting with what they're buying and it's amazing was as we simplified the menu we can actually see what the guest favorites really are and the great thing is for for a brand like Olive garden. It's a few products that are on a few different menu items and so it actually is better to keep it that way because we streams.

Line.

And so without giving you specific examples those are some kind of high levels of how we did it and again all brands had hourly labor efficiency improvements and we expect those to stay maybe not as good as they were but we expect the inefficiencies to stay.

Yes actually super helpful ranking.

And then my follow up question is is actually ran the comments you made about investing for growth.

I like to be thinking that M&A is potential opportunities given you had the benefit of your balance sheet and if that is right what categories look, particularly attracted to you. What do you think would help with your overall I would fit well you have any holes in your portfolio that you are particularly I did about going forward.

Well.

The management in the board will continue to look at the opportunities that are available out there, we'll look at our own portfolio, we look at what.

What it's out there that could possibly fit our portfolio or what the only thing I would say on on on specifics around that is that we believe we want to be in the full service business Thats, where we get the advantages of our scale.

So as we look out there at the full service environment.

I think that we'll continue to analyze the opportunities and if something makes sense. Then we'll we'll try to bring it into our platform.

Our thought process is always does benefit by coming on our platform and is the platform benefit if it by them coming on the platform.

Get through that screen and they can grow a little bit then it makes sense I think right now it's about timing, it's about what's the right what the price the price discovery.

And than than we'd have to make make the decision at that point in time.

Okay. Thank you.

It looks like that's all the questions that we have at this time I'd like to turn the call back over to our presenters.

Thank you James that concludes our call I'd like to remind everyone that we plan to release first quarter results on Thursday September 24th fourth market opens thank you for participating in today's call.

This concludes todays conference call you may now disconnect.

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