Q1 2021 Darden Restaurants Inc Earnings Call

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I'll now turn the call over to Mr., Kevin Calix. Thank you you may begin thank you so much.

Thank you Marcella good morning, everyone and thank you for participating on today's call.

Joining me on the call today are gene Lee Darden's, CEO and Rick Cardenas CFO.

As a reminder comments made during this call will include forward looking statements as defined in the private Securities Litigation Reform Act of 995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

Those risks are described in the company's press release, which was distributed this morning and in its filings with the Securities and Exchange Commission.

We were simultaneously broadcasting a presentation. During this call which is posted in the Investor Relations section of our website at Darden Dot com today.

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

We plan to release fiscal 2021 second quarter earnings on December 18th before the market opens followed by a conference call.

This morning gene will share some brief remarks about our quarterly performance and business highlights and then Rick Rick will provide more detail on our financial results and share our outlook for the second quarter as.

As a reminder, all references to the industry benchmark during todays call refer to estimate the Knapp track, excluding darden, specifically olive garden and Longhorn steakhouse.

During our first fiscal quarter industry same restaurant sales decreased 26% now.

Now I'll turn the call over to Jean.

Thank you Kevin good morning, everyone given the ever changing environment. We continue to operate in I'm very pleased with what we accomplished during the quarter. We are focused on four key priorities the health and safety of our team members and guests in restaurant execution in a complex operating environment investing in and deploying tech.

I will do to improve the guest experience and transforming our business model.

The progress we made in these areas combined with our operating results gave us the confidence to repay the $270 million term loan and reinstate a quarterly dividend.

Let me provide more detail on the four priorities.

The health and safety of our team members and guests remains our top priority. Following CDC guidelines in local requirements. Our teams continue to practice aren't had safety protocols, including daily team member health monitoring we.

We also continue to configure our diodes for social distancing to create a safe welcoming environment, while maximizing allow wallboard capacity.

A key part of this work is installing booth petitions to enable us to safely increase capacity were permissible.

At the end of August we had completed installation and just over 500 restaurants in our total portfolio.

Operating in this environment adds another layer of complexity to an already complex operation and I'm proud of the commitment our teams make every day to keep our guests and each other safe.

Second we are laser focused on our back to basics operating philosophy to drive restaurant level execution that creates great guest experience, whether that's in our die rooms outdoors on our patios or in their homes.

But it's not easy executing at a high level with more complex today due to covert 19 restrictions that vary by market.

Additionally, the constantly changing mix between on premise and off premise plus it.

Plus expanded outdoor dining that is weather dependent leaves the unpredictability in sales.

This is why the work we continue to do to streamline our menus and improve our processes and procedures is so important.

Moving complexity from our operations has allowed our restaurant teams to execute more consistently and this unique environment.

Our operators continued to deliver great guest experiences by displaying a high level of flexibility creativity and passion every day and I'm thrilled to see that that reflected and our guest satisfaction metrics.

Third we're continuing to invest in and implement technology to remove friction from the guest experience.

This includes providing multiple ways for our guests to order inside and outside the restaurant across our digital storefronts. Additionally, we are deploying mobile solutions to make it easier for our guests to let us know when they arrive to die or pick up curbside order to go well.

We're also expanding mobile payment options, providing additional convenience for our guests.

For our three largest brands combined more than 50% of our off premise sales during the quarter were fully digital transactions were just ordered and paid online.

Finally, and most importantly, we transformed our business model.

Even with the sales declines we're experiencing our restaurants continue to produce high absolute sales volumes.

Therefore, we made the strategic decision to focus on adjusting our cost structure in order to generate strong cash flows while making the appropriate investments in our businesses. This.

This provides us a stronger foundation for us to build on sales to build on its sales trends improve.

The first step in this process was to Reimagine our offerings. This resulted in simplified menus across the platform driving significant efficiencies in food waste and direct labor productivity.

Additionally, due to capacity restrictions, we significantly reduced marketing promotional spending along with other incentives, we have extort who used to drive sales.

We will continue to evaluate our marketing promotional activities the operating environment evolves.

Finally, we are further optimize our support structure, which is driving gionee efficiencies.

The results of all these efforts to transform our business model can be seen in the fact that we generated adjusted EBITDA of 185 million for the quarter.

Turning to our business segments all.

Olive garden delivered strong average weekly sales per restaurant $70000 why significantly strengthening their business model, resulting in higher segment profit margin than last year.

They were able to capitalize on simplification initiatives that strengthened the business model, while making additional investments in abundance and value.

This work was critical to position olive garden to drive future profitable topline sales as capacity restrictions. These.

Olive garden same restaurant sales for the quarter Dolores declined 28.2%.

220 basis points below the industry benchmark.

Overall capacity restrictions continue to limit their topline sales, particularly in key high volume markets like California, and New Jersey were Dimes real close for the majority of the quarter.

In fact restaurants that had some level of dying capacity for the entire quarter averaged more than $75000 in weekly sales retaining nearly 80% of it to last year sales.

Given the limited capacity environment during the quarter Olive garden made the strategic decision to reduce the marketing spend as well as incentives and eliminate the promotional activity.

They will continue to evaluate their level of marketing activity as capacity restrictions fees.

Additionally off premise continued to see strong growth with off premise sales, increasing 123% in the quarter, representing 45% of total sales.

Thanks to technology investments, we continue to make online sales made up almost 60% of total off premise sales more than tripling last year's online sales.

Finally, olive garden successfully opened three new restaurants in the quarter, which are exceeding expectations.

Longhorn had a very strong quarter same restaurant sales declined 18.1% outperforming the industry benchmark by 790 basis points.

This strong guest loyalty and operational execution helped drive their outperformance while they also benefited from their geographic footprint.

In fact same restaurant sales were positive for the quarter in Georgia and Mississippi.

Additionally, the longhorn team made significant investments in food quality and operational simplicity, which led to improved productivity and better execution.

They also took a number of steps to improve over the overall I guess the overall digital guest experience off premise sales grew by more than 240% representing 20% of total sales.

Finally, longhorn successfully opened two restaurants during the quarter.

The brands in our fine dining segment are performing better than anticipated.

While weekday sales continued to be impacted by reduction in business travel conventions and sporting events. We saw strong guest traffic on the weekends and believe there will be additional demand does capacity restrictions begin to use.

And lastly, our other business segment also delivered strong operational improvement with segment profit margin of 12.8%.

This was only a 130 basis points below last year, despite a 39% decline in same restaurant sales yard.

Yard house's footprint in California is impacting same restaurant sales in this segment.

Finally, I continue to be impressed by how our team members are responding to take care of our guests to each other we know our people are our greatest competitive advantage and I want to thank every one of our team members. We're succeeding thanks to your hard work and resilience now I will turn it over to Rick.

Thank you Jane and good morning, everyone Dan.

The encouraging trends in performance, we experienced toward the end of the fourth quarter continued into the first quarter of fiscal 21.

Furthermore, the actions we took in response to covert 19 to solidify our cash position transform the business model simplify operations and strengthen the commitment of our team members help build a solid foundation for the future.

These actions and our continued focus on pursuing profitable sales have resulted in strong first quarter performance that significantly exceeded our expectations.

For the quarter total sales were $1.5 billion a decrease of 28.4%.

Same restaurant sales decreased 29%.

Adjusted EBITDA was $185 million and adjusted diluted net earnings per share were 56 cents.

Turning to the piano.

Looking at the food and beverage line favorability from menu simplification more than offset increased to go packaging costs. However.

However, beef inflation of over 7%, primarily impacting longhorn drove food and beverage expense 20 basis points higher than last year for the company.

Restaurant Labor was 20 basis points lower than last year with hourly labor as a percent of sales improving by over 350 basis points driven by operational simplification. This was mostly offset by deleverage in management labor.

Restaurant expense, including $10 million of business interruption insurance proceeds related to covert 19 claims submitted in the fourth quarter of fiscal 2020.

Excluding this benefit we reduce restaurant expense per operating week by over 20% this quarter.

For marketing, we lowered absolute spending by over $40 million, bringing marketing as a percent of sales to 1.9% 130 basis points less than last year.

As a result restaurant level EBITDA margin was 17.8%.

20 basis points below last year, but particularly strong given the sales decline of 28%.

General and administrative expenses were $10 million lower than last year, as we effectively reduced expenses and right sized our support structure.

Interest was $5 million higher than last year, mostly related to the law to the term loan that was outstanding for the majority of the quarter and.

And finally, our first quarter adjusted effective tax rate was 9%.

All of this culminated in adjusted earnings after tax of $73 million, which is.

Which excludes $48 million or performance adjusted expenses.

These expenses were related to the voluntary early retirement incentive program and corporate restructuring completed in the first quarter of fiscal 21.

Approximately $10 million of this expense is non cash and the remaining will be cash outflows through Q2 of fiscal 2022.

This restructuring resulted in a net 11% reduction in our workforce in the restaurant support center and field operations leadership positions.

It is expected to say between $25 25 million and $30 million annually.

We expect to see approximately three quarters of the savings throughout the remainder of fiscal 21.

Looking at our segment performance this quarter. Despite a sales decline of 28% Olive garden increased segment profit margin by 110 basis points to 22.1%.

This strong profitability was driven by simplified operations, which reduced food and direct labor costs as well as reduced marketing spending.

Longhorn Steakhouse fine dining and the other business segment delivered strong positive segment profit margins of 15.1%, 11.9% and 12.8% respectively. Despite the significant sales decline experienced in the quarter.

These brands also benefited from simplified operations keeping segment profit margin at these levels.

In the first quarter, 68% of our restaurants operated with at least partial dining room capacity for the entire quarter.

These restaurants had average weekly sales per restaurant of $69000 and a same restaurant sales decline of 21.9%.

And while olive garden in the fine dining segment had fewer dining rooms opened in our average these restaurants had the highest average weekly sales per restaurant of almost 76090 thousand respectively.

At the start of the second quarter, we had approximately 91% of our restaurants with dining rooms open operating in at least limited capacity.

Now turning to our liquidity and other matters during the.

During the quarter as we saw a steadily improving weekly cash flows we gain confidence in our estimated cash flow ranges, we fully repaid the $270 million term loan we took out in April.

We ended the first quarter was $655 million in cash and another $750 million available in our untapped credit facility, giving us over $1.4 million of available liquidity.

We generated over $160 million of free cash flow in the quarter and improved our adjusted debt to adjusted capital to 59% at the end of the quarter well within our debt covenant of below 75%.

Given our strong liquidity position improvements in our business model and better visibility into cash flow projections, our board reinstituted a quarterly dividend.

Our board declared a quarterly cash dividend of 30 cents per share. This dividend represents 53% of our first quarter adjusted earnings after tax within our long term framework for value creation.

We will continue to have regular discussions with the board on our future dividend policy.

Our first quarter results were significantly better than we anticipated.

Actions, we took to simplify menus and operating procedures and capture other cost savings along with our choice to pursue profitable sales have yielded strong results and.

And now with the full quarter operating under this environment, we have even better visibility into our business model.

For the second quarter, we expect total sales of approximately 82% of prior year, including approximately 100 basis points of headwind due to the Thanksgiving holiday moving back into the second fiscal quarter. This year we.

We anticipate EBITDA between $200 million and $215 million and diluted net earnings per share between 65 cents and 75 cents on a day.

On a diluted share base of 131 million shares.

In this environment, we continue to focus on building absolute sales volumes week to week and quarter to quarter. This.

This may result in variability in sales comparisons to last year as capacity constraints lead to less seasonality than we would have experienced historically said it.

Said, another way that capacity and social distancing restrictions remain similar to where they are today it will be challenging to dramatically increase our on premise average unit volumes are.

Our second quarter is typically our lowest average unit volume quarter in our third quarter is typically our highest additionally.

Additionally, as capacity restrictions ease and sales normalize we will be able to reinvest to drive the top line and a better overall guest experience.

One last point before we take your questions.

Based on our strong business model enhancements, we now think we can get to a pre cobot EBITDA dollars at approximately 90% of pre cobot sales, while still making appropriate investments in our business and with that we'll take your questions.

At this time I'd like to remind everyone in order to ask a question. Please press star and the number one on your telephone keypad. Your first question comes from the line of Andrew stainless steel from BMO. Your line is open.

Hey, good morning, Thanks for taking the question.

In the press release, you mentioned on the execution that it was better than expected and I'm curious if you could just kind of dig in a little bit there more specifically either by brand or by.

Cost bucket and subsequently.

No how sustainable are some of the cost improvements. If you can maybe give a sense for how much better you think margins could be if you were to get back to say 100% of the prior sales.

I'll take the execution part and I'll, let Rick talk about the margin piece of it I think.

I think a lot of our execution is coming from the streamlined menus and our ability to put out product.

With increased frequency of that product is helping our execution and our team members are becoming.

Much better at doing that and when you limit your menu and you and you and you focus on key products.

The quality of that product just.

Just continues to go up and I also think that transcends itself into the dining room and I think today.

We've gotten used to.

The complexity of operating with the co bid requirements and every day I think we are running better and better restaurants.

Rick more time, what the margins, Yeah, Hey, Andrew I'm going to start with a 90% number that we gave a second ago. We have made improvements in our cost structure is seen as mentioned and significantly improved our business model as.

As sales improve remember we assume that some of these costs will come back, but not all of them.

The 90% contemplate some cost returning along with continued reinvestment and the 90, while the 90% sales level may change, depending on the competitive environment and the economic backdrop now I will say that if.

If we get to 100% and we may.

And we make some investments as we've been talking about we could see margins improved by 100 basis points, maybe even 150, but again that depends on the economic backdrop, the competitive environment and what do we have to do to get to that 100%. So I wouldn't I wouldn't tie in the 100% to 150%.

But I would at least get into the 90% based on our EBITDA Im sorry, getting our EBITDA back based on 90% of sales.

Okay, great and if I could just squeeze one more in I'm. Just curious if you think you've seen at all any impact from from stimulus.

Tapering off as you've seen that.

Or any other kind of regional or day part differences that you also see on that would be great. Thanks, No. We've seen no no fall off with the stimulus that actually were seeing now average weekly sales.

Across the system improve every single week.

So we're we're feeling we're feeling pretty good about that some were seeing some restrictions be used.

Throughout the country so really.

So really nothing nothing firm Regionality standpoint, and just go look at the mobility Index and you got to you got to you to follow what's happening with restrictions and you can you can see that the kids you can see guest traffic move along with that.

Great. Thank you very much.

Your next question comes from the line of Andy Barish from Jefferies. Your line is open.

Yes, Hey, guys.

Just wondering how on the.

You know kind of comments on on premise dining and.

Sort of driving same store sales performance.

From here, what what would it take to.

From a capacity constraint perspective help that number or can you do more booth partitions.

And just the impact of seasonality starting with the with the outdoor patio business as well just trying to try to level set on all those areas let.

Let me let me, let me work backwards to your question.

Outdoor capacity is is really de minimis for referral for us overall as the system.

Now the good news is that we haven't really been able to use it a lot of our outdoor capacity in Florida. It's been raining every single day here for the last six six weeks, so we're going to.

So we're going to start getting that back as we lose outdoor capacity up north will will pick up a lot more in Florida than we've been able to use so.

For that one.

We think about outdoor capacity, it's really.

It's really not that meaningful for us as far as what's going to drive call. You know in the short term. Some more same restaurant sales is additional capacity, we need to get California back.

We need.

You know some other areas to increase the capacity from 25% to 50%.

Once you get past, 50% as long as the six foot rules in place.

Still not going to really be able to really Max out your die rooms.

In some areas, we're getting our bar tops back, which are which are important gives us more capacity and an inside the restaurant and so I think it really comes down to just the incremental improvements in the capacity levels, we're going to probably continue to roll out.

Petitions, we probably close to double what we have right now that gives us six to seven extra tables per restaurant in the jurisdictions that allow us to do that.

Every jurisdiction allows us to do that.

I think that our teams are being very respectful of the of the requirements in their operating environment and we're trying to create first and foremost a safe environment for our team members and our guests and we're not trying to push same restaurant sales and risks that experience at all for four.

Our team members and guests. So look I would look at Kelk in California back as Big an olive garden, we've got a 100 restaurants there.

Okay, and just a quick follow up for Rick if you could I mean that.

The same store sales and the total sales gap and the one Q were basically on top of each other.

The 18% reduction in total sales is there a is.

Is there a same store sales analog to the Twoq you, we can kind of point to in terms of the gas.

Yeah, it's pretty close it's not like we have a lot of new restaurants coming into play so it's within 100 basis points.

Okay. Thank you very much.

Marcello we're ready for our next question comes from the line of Nicole Miller from Piper Sandler Your line is open.

Thank you and good morning, when I look back to slide 16 of the presentation can you speak to the capacity in the first quarter.

The average yield was a higher or lower as you exit the quarter because that can help us kind of inform and understand the capacity into Q I know, 90%, 91% are open, but I'm wondering what kind of capacity mandate their restrictions are dealing with.

Well most of the capacity restrictions around the 50% range, 50% capacity. Some are 100, but if you average out our company when you take the six foot rule et cetera, we're probably at the 50% capacity range, even at even at the end of the quarter.

Okay, Okay Super and then.

It's not lost on us when you talk about the back to basics and I think there is obviously no one better than your teen at that.

The power of teams. So if you think about the roles and the functions.

You know for me like a chief people officer role comes comes to mind. How are you really resourcing your team to be effective right. Now can you give us some concrete examples.

Well I think I think our engage with our team members goes all the way back to the beginning.

Of coal bid.

Got it goes beyond that but I mean, I think how we handled the situation with emergency pay.

Taking care and Sting picture of our people in staying engaged with them in paying their benefits, we invested over $100 million in that short period of time into our team members. So bringing them back to work is been fairly easy for us and I think our team members are really engaged in what they're doing.

And so we've got a strong culture for a long time and our team member retention is better than ever.

It is really exciting to see I mean im looking at retention numbers for our hourly team members that I never thought I would see in this industry have been working in the industry for over 30 years I've never seen retention like this.

Which is which gives us the ability to execute at the highest level and as you know as we bring people back to work, we're bringing back our most productive in our most dedicated team members. So I think the spear is high in our restaurants I think people are excited to be out there are they are making money.

I think they're they're bringing happiness to people that come into our restaurants I think that energy is tranche. One is very difficult time is transferring between the guest and the team member and no one.

No and I'm going to restaurants every day and I'm in one of our restaurants. Most every day, sometimes twice a day.

I would tell you that the attitude is just absolutely fantastic our team members are doing a great job.

Thanks, I appreciate the commentary.

Your next question comes from the line of Brian Bittner from Oppenheimer. Your line is open.

Brian Your line is open.

Sorry, I was on mute good morning, guys.

When you talk about getting back to pre Covidien EBITDA levels on 90% of sales.

Can you just talk about your working assumption.

On that relative to DNA.

Pre co vid on and restaurant level profits per first pre Kelvin.

Well, Brian I think on the Gionee side, we talked about the the voluntary emergency Im sorry voluntary early retirement program.

And that's going to save us.

$25 million to $30 million a year on a on a rolling basis.

And we would we would expect DNA to to start coming back up as we start getting travel et cetera, we didnt do a whole lot of travel in the first quarter.

But most of our most of our investments will be back in the restaurant.

As you think about marketing spend and labor and other things so.

So I would say that if you look.

If you look at what we say on the 90% range.

Most of our investment we back in the restaurant, our DNA, we would hope our DNA would be at least.

At least below 5% in the for the for the foreseeable future.

Okay and.

Would you ascribe all Longhorns outperformance relative to our garden is that all to geographical mix and and the six feet rule on or is there anything else that you'd point out as it relates to Longhorns performance relative to olive garden.

Well I think the majority of it is geographic and I think you know.

The brand strength in Georgia is bidding to been incredibly impressive.

And I think that that's just a market where there's a lot of oil.

A lot of loyalty to the brand I think the the.

The market you know, Georgia State of Georgia Trust Longhorn and I think people are are going to where they're really comfortable and so I do think that there their consumer you know maybe a little bit.

Better off economically.

But I mean, the performance is impressive without.

Without a doubt, but it's being driven by Georgia, it's being driven a lot by their footprint.

Thanks Gene and my last question just with Al Garden, We talked a lot last earnings call about the capacity restraints related to the six feet rule.

Is there anything else if we stay in this environment for a while moving forward is there anything you are doing to improve the capacity based on the seating configuration within that six feet rule that we can that we should know about well I think we continue to add temporary barriers I think that.

The team continues to look at.

How do you can you can you move a foot few tables in the direct to improve the overall capacity. So I think they continue to try to modify that.

I think the thing when you think about olive garden. This focus on the absolutes obsolete volumes.

It did $75000 a week. These are these are healthy healthy businesses.

On.

And the off premise business continues to thrive, which is a place that we're going to we start putting some marketing money back into that business. It would be focused on trying to drive off premise not in premise.

We're just where do you know we continue to evaluate what's the best way to go with that would that investment spend when's the right time to use it.

And so the other thing I would tell you is that.

His can probably be hard for you to believe but we have one restaurant that cost US 50 basis points in comps that's the times square Olive garden. When we start every single week $300000 in the hole from a comp store basis.

We are going to get 25% capacity back in time square on the Thirtyth.

But that to me thats.

You wake up every day to $300000 short Justin.

Just in that one restaurant, that's our that's our best restaurants in the Olive garden system, we do or $50 million there.

And now we're doing you know 20.

$2500 a day.

So yeah, we got you got some odd ball things getting California back is going to be huge California is a big market for us with high volumes, we have a higher check average.

And we can see because we're starting to get some counties Bakken we can see the impact on that on a daily weekly basis.

Thanks, Jamie.

Your next question comes from the line of Andrew Charles from Cowen and co. Your line is open.

Great. Thanks, a question for Rick and quick question for Jane.

The sales leverage on labor line, which was quite impressive during the quarter was curious how would you categorize what you view as permanent savings from the shift to online pick up in and more streamlined kitchen up operations and efficiencies versus maybe some of the temporary improvements that will persist into Q from some volumes that are below peak then.

And you kind of touched a little bit about it just hit it head on.

Head on the 100 petitions that were implemented last quarter to improve seating capacity. I think you said you double dip, but curious what's been the learnings there how does that help is that a key unlock for you in terms of.

Where we are in this and the reopening or is that just some of that's just a small tool. Thanks.

Yeah, Andrew on the on the Labor line remember, we've got two components of labor. One is the hourly labor, which is where we saw a lot of efficiencies and the other one is the management labor, which is more fixed in nature, we would.

We would expect the hourly labor to today.

To not be as favorable going forward just because of training expenses, we didn't have as much training in the first quarter and we will continue to we were going to start having some training.

In Q2 and beyond but.

But as our sales pick up.

Our management labor should be leveraged a little bit more than it was before so.

I think there was a question earlier on where we would get to at a 100%.

And third and 150 basis point improvement will mostly come out of labor and some cost of sales.

Hey, Andrew on the partitions, depending on depending on the.

And the restaurant foot layout, you're going to get 60, more tables and most of those will be four tops and the average parties 2.3.

So I mean, I wouldn't say, it's not de minimis, but it's not meaningful I mean, you know you're getting especially on the weekends, you're getting another two seatings on on those tables. So every little bit helps because we have the demand for those tables.

But it's not going to it's not going to move this beat on the topline significantly.

Thanks.

Your next question comes from the line of Eric Gonzalez.

Keybanc capital your line is open.

Hey, Thanks, Good morning, just on the promotional schedule I think it's I think we're all sad to see that maybe never any hospitals not being on this year and I'm just curious.

What needs to happen from a capacity standpoint, it restriction standpoint for that formation to make sense and you hear limit that whether it be 25% to 37% of diamonds reopened where it makes sense to have traffic driving for ocean, but that one and then like later in the year is that a is that a lever that you can pull and bring it back to drive people to the restaurants.

Yes, I think on on those those high volume high traffic promotions were going to fill up to feel comfortable that we got pretty much a 100%.

Capacity.

Unless the promotion unless we come up with promotions that drive the off premise and drive our promise experience.

When I think about marketing and the team thinks about marketing I think that we we want to we want to try to get it.

For our along as we possibly can to this this crisis or cycle and then fully understand what the competitive set is going to be what the economic backdrop is going to be and then we'll figure out how to appropriately layer back in all our promotional marketing and promotional activity in our incentives.

We think we can we think we can layer those back in smarter.

And more effective than we had them in the system before and now were you know this is a terrible thing that were going through but we're trying to find okay were trying to find the positives in this.

To really.

Rethink and how rethink how we go to market with our businesses and this is you know a once in a unfortunately and once in a lifetime active op.

Option to be able.

To be able to do things that we probably couldn't do why were you know where we were pre cobot. So.

I think I think long term, we're going to we're going to look at the situation and we'll decide when we layer in our best promotional act options and we may have to Reimagine and revisit some of those promotional options to our guests. So that we can maybe do it at a higher margin rate. This but we have lots of questions.

A lot of a lot of work to do around that.

Okay. That's really helpful. And then you mentioned in your remarks earlier that the off premise nics as a moving target can you maybe dig into that a little bit more.

And talk about what sort of the cannibalization rate looks like as a as diamond's reopened or maybe what happens with restrictions are put back in place.

This and there's no there's nothing.

Concrete there because each market is behaving differently.

And so when you chip when you see restrictions changing and.

And maybe your capacity goes from 25 to 50.

In certain markets those volume just switches.

From off premise on premise northern markets it.

It doesn't.

It depends it depends what's happening.

We believe there is a good percentage of our off premise today is being generated by people coming to the restaurant that can't get in because the weights too long and is in there is no place to wait inside our restaurants, and so we think that those people have it.

I have a tendency to disc ops opt into the off premise experience.

So we really can't quantify that for you because every market is different.

Okay. Thanks.

Your next question comes from the line of David Tarantino from Baird. Your line is open.

Hi, good morning.

Two questions first on the the second quarter guidance I just wanted to clarify.

The guidance on the top line is that.

Similar to how you're running quarter to date or or are you expecting to see further improvement is that it.

That is like California start to open up.

David our guidance for for sales for Q2 remember it incorporates a 100 basis point headwind for Thanksgiving.

So we are running a little bit better than that quarter to date, but not by much.

And so we do anticipate.

An increase of about 10% of average weekly sales from quarter one.

It doesn't contemplate any significant change in cap capacity restrictions other than the ones that we already know other than the ones that have already been approved.

But it also doesn't contemplate any significant change in sales due to a second wave of vaccine approval. So that we thought 82% was fairly prudent is it's slightly below where we were running today, but it doesn't does take into effect the 100 basis point swing from Thanksgiving.

Great. Thank you for that and then Jean.

I was wondering just philosophically how you think about what darden might look like as we exit the pandemic and I guess, what I'm specifically wondering is.

Is it your goal to drive the sales volumes back to 100% of where are you where you were before the pandemic or or do you think you take less sales with a better simpler operating model does easier to execute.

I would take I want both I want and simple operating model and I want higher sales and I think that.

I think that we're setting up for that because I think there's a few dynamics that are in our favor number one there's definitely been a capacity there will be capacity coming out of the system.

And we believe that we're well positioned to take share and we think that this simplified operations will help us improve execution will get better throughput.

And so we think we think there is a pathway to both higher sales better margins I think our teams have done an incredible job of re imagining almost every aspect of their business through this and I see a pathway to get there were I think Rick keep fuse bring you back to the 90%.

Only as it only as a way to communicate where we think margins are going to be at a future sales sales level, we're not setting a target, saying that we'd be happy with that we see a pathway for you know for our.

For our sales to get above that and we see a pathway for our margins to be above pre corporate levels at that at that time.

That's helpful. Thank you very much.

Your next question comes from the line of Jeff Bernstein from Barclays. Your line is open.

Great. Thank you very much one.

One follow up and then a separate question the follow up just on the comment you made a moment ago regarding your guidance for fiscal Twoq does not assume any.

Second wave of Reinfection I'm, just wondering as you think about it in the short term what are you seeing with comps in markets, where there are spikes infection rates, whether you see a step back or what do you see capacity pullback trying to get a sense for the worst case scenarios, we were to see a second spike in terms of what you're seeing thus far what learnings you've had and then I had one follow up.

[music].

So as you know so far Jeff Weve seen no change in demand based on cobot levels in a market unless capacity restrictions change. So you know if you're if your example were in South Florida. When we had despite the fourth of July and the restaurant restrictions were very limited we definitely.

Sorry, we saw you know to me.

Demand drop but that was not because of the consumer was more because of the restrictions, though the local municipalities put on put on us.

We see a pretty resilient consumer out there I know that's hard for you guys in New York to imagine.

But the rest of the country's non operating that way and so.

So I would tell you that.

What we're seeing is.

It's all being controlled by.

A local municipalities that they're managing demand more than than the consumer.

Interesting.

And then the other question was just on the I think you alluded to it earlier in terms of what the industry is going to look like capacity going forward. So I'm just wondering as you think about the independents and the crisis. There will go on through what are you seeing thus far in terms of I guess, you call permanent closures or the impact you see for the for the industry going forward, maybe the supply demand imbalance or.

Whether it's real estate availability or market share opportunity just trying to get a bigger picture thought on what you're seeing thus far for the outlook for primarily the independence.

Well I think the independents have have it.

Well, obviously have a tough time right and you know as we think about it we think.

Somewhere between five and 15% of capacity will come out of the system.

During this or maybe a little bit more but a lot of a lot of people get recapitalize quickly and getting that you can get some of these boxes back open.

Obviously, that's that's going to benefit us in the in the short term in the long term as far as.

Real estate, so far has been one of the things that I am.

My hypothesis has been I've been a little bit off on we've yet to see a meaningful change in what we can acquire acquire real estate.

I thought that being one of the only bidders out there that we would see costs come down I think.

I think we're still going through the price discovery process on that.

And we'll see how that plays out long term I I got to believe that we will benefit from availability and hopefully price availability is already there. It's just trying to get to what we think the properties worth versus what the read or the other landlord thinks the properties worth on so.

So thats going to you know that that will have some that'll have some impact and help us grow.

I'll get to our 2% to 3% on new unit growth overtime.

Thanks, Jane I appreciate the color.

Your next question comes from the line of John Glass from Morgan Stanley. Your line is open.

Thank you and good morning.

One of the biggest to the biggest shifts I guess during cobot right has been this growth in the off premise business across the industry and second it's just been that pickup and delivery not only to the digital business overall, so could it first just talked about the.

The off premise business, how do you think you need to or do you need to change the format of the restaurant or the or some other sort of structural change that you think that can facilitate a better off.

Off premise experience or is it or is what you're doing kind of working in the operational changes of working or do you think there's more sort of you need either pick up windows or some other permanent changes to the way the restaurants are structured to facilitate that.

That's a good question John I think that going into this that we did the majority of our pick up with someone coming in the restaurant and picking up the food, we when we set up our process because we believed.

And we have proved out the accuracy and on time with the two most important things that the off premise consumer want it.

Through this we had to go to a different experience, which was we more very very quickly to curb side and.

And we what we've learned through this is that curbside to better option and that the burden of on time and accurate needs to get on us and we need to have better systems.

To be able to deliver the same level of accuracy that we are delivering pre covert.

What that means is a lot of our.

A lot of our restaurants, we're on a path to build better capabilities to handle the in restaurant pick up and now and as we pivoted to curb side the capabilities that we need to build inside or different.

The good news is that the cheaper because it really not consumer facing.

So it will cost us a lot will cost us a little bit less to be able to create those capabilities.

But to technology and the expectation of the consumer is for a curbside experience and we've taken a lot of friction out of that experience over the last 12 weeks.

And we're in the middle of really rolling out some some technology today to really make that experience a whole lot better.

Just bought notification one year in our in our.

In our parking lot versus we had a very manual procedure.

That we had to implement in the beginning of this and eventually we'll get the Geo fencing.

And we will catch up to what some of the bigger retailers retailers are doing.

So we actually think that there's a big benefit in this consumer shift because we want to take all these people that were in our dining room or in our firm and our front door picking up food and they will never enter enter our business building again, which makes it a better experience for our dining guests.

So thats really the big change John that for that has to happen and.

Right now we have the benefit of.

Some of our have any extra space inside a restaurant that enables us to stage. Some of this off premise work, but as we gain more capacity.

We will need to we will need to modify some.

Some spaces and actually and actually add some like in long haul we got the bump out of the side of the building to.

To be able to handle this extra demand, but I see it is all positive.

We think we can do curbside.

Much more cost effectively than we can do picking up the food inside the restaurant.

Okay. Thanks for that and then just picking up in the second thread on digital.

So you've got a significant amount of growth in the digital business, particularly in the on the to go business. What did you learn from that is this is this again these different consumers. For example, do you think about now your promotional marketing spend differently because digital just grown so significantly as it has.

As a channel and I am just curious GGR just your view on other brands have decided to use digital in various ways to delivery as a way to expand the restaurant into other brands, adding products, adding new brands that but specific to us to a category that doesn't relate to their existing brand.

Viable path for for Darden.

So those two questions, maybe John I'll get to the virtual brand.

In the second the first question is.

Obviously, the data is richer when we're capturing the data.

From from our digital guest.

Which feeds into our huge data base on our ability to to market to them. So we can figure out through that through our tokens that these are these are dying our off premise guess only then we can tell all our marketing towards that guest in towards that experience and we understand.

What they are buying and what they want to buy.

And so we can get smarter with that we are pretty smart prior to this we just have more information today, and we'll be able to our data sciences will be able to use that and end market effectively let me just pivot to virtual brands I'm shocked at it took this long to come up.

But.

Let me give you might to my take on this.

Everybody around the rooms very nervous right now.

But I think people are earned.

Different places and they're trying to approach this and deal with this moment in time differently.

For us this is not the right approach, we want to focus on brands that we've got.

20, plus years in hundreds of millions of dollars invested in trying to build.

And we want to make sure that they are executing at a high level.

[music].

I think brands are going to matter.

And I don't think you can I think brands are developed over a long period of time, all around delivering the promise to a consistent promise to a consumer I think you have to have a functional need an emotional need and I think thats, what I think thats, what our brand builders have done for decades.

And to get out on a digital platform and try to do that I think people got to try to do what they want to do a mock I'm not saying, it's a good idea about idea it's not for us brands are going to matter and we think it's a distraction.

Thank you so much.

Your next question comes from the line of Dennis Geiger from FBR. Your line is open.

Great. Thanks, just wondering if you could talk about where sort of customer satisfaction scores are at the moment I think you might have alluded to it earlier, but kind of just based on some of the technology. The other friction reducing initiatives and maybe some of the other customer experience investments that you spoke to if you if youre getting credit for that if you've seen a notable increase there and kind of to some extent.

How that's driving some of that some of your go forward thoughts on on on share gains et cetera. That's question, one but ill.

I'll be very very clear.

Our guest satisfaction scores are improving dramatically.

I want to I want to I want to put some context around that which is what we don't understand is it just the consumer expectations are may be different through this experience. So we're we're happy directionally, where they're going.

And we're happy directly where they're going compared to our competitors.

But at the same time, we we will you know we are we're not putting our.

Patting ourselves on the back too much because this is definitely a different environment and that in the consumer consumer feedback is different. So we don't know what the expectations are but we are very pleased directionally, where we're heading with our own internal and point and some of the industry stuff that we're seeing and how we're comparing to competitors.

Got it and just kind of as a follow up to that no. It's not the biggest needle mover right now, but just as it relates to to Cheddars and kind of any improvements that you've been able to make in this environment and whether that's resonating just curious if you could if you could speak to to that at all and and more broadly if the current environment.

At all has and emerging from the current environment and your thoughts there if that changes at all how youre thinking about future M&A strategy in any way. If you are able to speak to that thank you.

He guys are getting really good at getting multiple questions in one question.

[music].

Now, let's talk about shutters first and I'll come back to thoughts on M&A.

Charters is from a business model standpoint charters has had the biggest transformation.

The work that John Wilkirson and his team have done has been transformative and I couldn't be more excited about directionally, where they're heading.

Tactically.

One of the biggest changes and one of the one of the things that we had to really speed up was off premise capabilities. We.

We had very we had very limited capabilities going to Colby, we only had two phone lines going into most of our restaurants, we couldn't we couldn't take the demand over the phone we didnt have online ordering.

So the team rallied.

This was supposed to be an initiative that was going to go all the way through fiscal 21 really wasn't supposed to be fully operational 22, they got together and they've been able to real quickly upgraded their phone lines. There for phone lines coming in we now have online ordering new packaging is being rolled out as we're speaking and they developed.

A native app that actually getting some pretty good adoption and so that piece of it is been really exciting that they've been able to move as quickly as they possibly can.

They are in restaurant dining has held strong they still don't have a huge robust off premise business, but we need to build that it.

It wasn't something that people thought.

Charters for but we think there is a big opportunity there so.

Real directionally with what they're doing and the transformation they have made in their in their business model.

I'll just briefly on M&A, there's nothing new to report here, we continue to evaluate opportunities and discuss with our board. We are very happy with our current portfolio and we believe that we can achieve our growth targets and our value creation metrics with the portfolio that we have we believe is a great opportunity for.

For all our brands.

Thanks Jay.

Your next question comes from the line of Chris Carroll from RBC. Your line is open.

Hi, good morning, Thanks for the question.

I just wanted to circle back to margins and specifically in Olive garden. So the margins like Olive garden were particularly impressive this quarter. Despite the sales decline. So how are you.

How are you thinking about the margins for that brand longer term, obviously is it marketing potential reinvestment spend builds that will create drag but how much of the savings that you've found do you think you can hold onto you.

Yeah, Chris as we mentioned Olive garden.

Segment profit margin was 100 basis points better than last year.

No we've got a pretty good improvement in cost of sales, partly because of the question that was asked earlier about about a neverending pasta bowl that actually drags a little bit margin for us so cost so it's a little bit better we improved our food waste significantly because the because of the the operational changes that we've made.

That said you know a 22% margin on the sales levels. They have we're going to we're going to start reinvesting eventually weve got marketing that was down about $20 million year over year for olive garden and as capacity starts to come back on line as gene mentioned, we will look at our promotional cadence in our put our marketing cadence.

22% is a pretty strong margin, so I wouldn't anticipate us significantly getting better than that as we continue to reinvest to get back to a point of getting back over 100% of our sales are our goal is to drive our sales profitably and we have enough room to invest to drive those sales profitably.

Thanks, and then Rick in the estimate of recapturing create cobot EBITDA dollars that 90% of pre cobot sales how does off premise versus on premise mix factor into that estimate does that contemplate higher off premise mix versus pre cobot level. It does contemplate higher off premise.

Miss them pretty covered but not significantly higher I mean, that's.

Jean mentioned shutters should be higher olive garden should be higher in longhorn should be higher, but we're not going to be a 40 or 50% pretty kind of sales.

Premise when we've got full capacity dining rooms.

As you as we open as gene mentioned as you as we opened dining rooms, we.

We start seeing that to go business shift back into in restaurant, but we still are.

Right now, we're still retaining 60% of our peak.

Our peak off premise sales.

Got it thank you.

Your next question comes from the line of David Palmer from Evercore. Your line is open.

Hi, good morning, how much how much higher do you think to go sales might be at your big two brands. After the covert crisis and I'm wondering if you have any clues that you care to share in terms of informing that thinking such as these to go sales being new customers or perhaps.

How that debt off premise mix fades in the reopen states as your on premise rebuilds and I have a follow up.

Yes, David I might Mike and Ive got no empirical evidence to support this with my theory is that off once we open up the dining rooms, and say, we get back to a normal environment, where we have concerts and rebates going football games, and so did I actually think off premise will dip down below where it was I think they're going to be a huge surge.

Front on on premise dining.

I think people are tired of this experience on the utilizing this experience right now, but when I talk to people and we do some research people want to get back out socialized I do think that then it comes back it comes back higher than where we were.

I think our thought process, it's a little bit higher, but not terribly higher and it will continue to grow.

Overt overtime as it has been but I don't think that this is some big change that we're going to wake up and olive garden can be doing 35% off premise, if we're going to concerts in him football games.

Wow, that's a interesting take I I wonder just on the on and how you communicate with consumers, you've obviously made a lot more connectivity digitally.

With those consumers are you going to advertise last on TV. After this is all over it is this a source of.

Margin leverage for you going forward.

I think that we have to go back and go back to what I said earlier, we have to understand what the competitive set is we have to understand what the economic backdrop is we'll have to analyze how well can we can get to our consumer through television. We still believe that we can do that where we participate and yet still participating in the Upfronts. We think it's a good mechanism for us.

And that's the that's part of our scale benefit with Olive Garden right. We can we can advertise on a national platform.

And we have some we have some efficiencies and I think that will we still use that in the near term, but it will all depend on what the competitive set is in the economic backdrop, if we pull enough restaurants. So we may not have to advertise for a while.

Yep.

Thank you very much.

Your next question comes from the line of Chris Ocull from Stifel. Your line is open.

Thanks, guys. Good morning. This is Patrick on for Chris I know you spoke briefly briefly to lapping seasonal increases that really began after this.

After this coming quarter, but I was hoping to provide a bit more color on just your base case thinking currently on how that plays out and what you're expecting to see based on customer behavior that you see today and the capacity constraints that are in place and what levers do you think you can pull if you do see a much more muted seasonality in average weekly sales as you move into the back half of the year and that had one follow up.

[music].

Yeah Patrick.

I'll start with we've we've shown a week to week, we're continuing to build our average weekly sales and as I mentioned earlier Q2.

Q2 is our lowest seasonal quarter and Q3 is our highest so it does take a lot of increase in average weekly sales to get to the same comp level Q3 as Q2, but.

But what we are going to do and what we continue to do is evaluate the situation as restaurants open as dining capacities open and as gene mentioned, if dining room capacity is don't continue to expand we still have some levers to pull in the off premise side. So that's what we will do we will we will continue to to to advertise off premise if its.

What we need to do to continue to build sales, but as.

But as long as we do that profitably.

Our intention is to grow our sales profitably from where we are today.

And so.

That's what we'll do we'll continue to focus on and off premise dining rooms can reopen completely we should see an increase in sales.

That's helpful. Thanks and.

Forgive me if I missed this but it sounds like menu simplification is it sounded relatively permanent and so I was wondering if you could provide a bit more detail on exactly the margin improvement you are seeing from that initiative in particular and then how do we think about you know as sales normalize moving moving forward a little farther into the future should we expect to see some some adding back to.

The menu and some additional complexity come back on or is this something you're seeing out completely permitting even as sales normalize. Thanks.

The biggest driver of the cost savings is waste and that in that does touch menu, that's black and promotional activity. This some other things that are influencing that.

I think that the challenge for the teams is if they need to add menu items to fulfill a need Ken.

Can they do that without adding complexity I think they have I think in their calculus. Prior to this there wasn't enough weight put on the complexity of adding new menu items that wasn't enough no. One thought about that I think today, that's part of the other part of the thought process as they think about adding something how do we do this in Maine mix.

Sure, we maintain our productivity and don't increase our waste. So I think a better way to say that is as as we do many developments going through a better filter today.

That I think will have a long longer.

In a long lasting impact on our ability to maintain these cost savings.

Your next question comes from the line of Peter solely from BTG. Your line is open.

Great. Thank you.

Can you just elaborate a little bit on where.

The cost savings are coming from for doing curves.

Curbside versus in store pick up is it cheaper labor or is it just less spend on capex in the store to build out the area for for pick up I'm, just trying to understand where the cost savings maybe coming from both.

Well, it's a technology that is an issue that's creating it. It's it's no one no one taken the answer on the phone you know we're dropping.

The consumer is letting us know where they are when they are in the parking lot and we're just drop in the bag in the car. So this is this a lot less less.

Interaction there just then just the cost is just purely productivity efficiency.

Thinking about a line of five or six people at a desk or at the bar top in a restaurant waiting to get to go versus having someone just pull up to a car and put in put a bag in the trunk, that's where the efficiencies come and technologies, enabling all that.

Understood. Okay, and then just on five on the fine dining segment.

I think this quarter you guys mentioned that.

Yes, you saw strength that was also similar to what you saw last quarter are you seeing any sort of change in consumer behaviour in fine dining during the week or is it more of the same.

Well I think that you know obviously, we're missing the business travel and those types of dinners. So I mean the.

That was a big part of of capital grow, especially in your central business districts. Your you are always soft in your suburbia restaurant during the week and you made up for on the weekends I think when you just another interesting tidbit is that when you look at capital grille comps.

You're starting every week with over a million dollar shortfall just under three restaurants in New York.

We're doing 3000 Bucks a day there with our 10 seats on those restaurants do well over a million a million dollars a week.

And so you know.

You just get this just so much geographical differences in those businesses. We have we have some capital growth of performing fairly well, especially in suburbia.

But I'm confident as I see I see the sales volume on the weekends I know were turning away a lot of people in Austin as we can get a few more tables, we can continue to grow that business and I'm confident that there I'm confident those businesses are kind of going to be cash flow positive going forward.

Great. Thank you very much.

Your next question comes from the line of Jeff Farmer from Gore.

Gordon Haskett your line is open Craig good morning.

Just wanted to follow up on a couple of questions very quickly. So what level of same store sales performance are you seeing in California.

And if you don't want to get that specific I'm just curious.

Essentially what the headwind for Olive Garden consolidated same store sales are related to the California partial closures.

Yes, Jeff for the quarter, we were down somewhere around 50, 50% in California.

Now remember they were open for a little bit of time and then they re shutdown.

But we are seeing some pretty good unit volumes in California, and I was talking olive garden more than more than any other brand, but and as gene mentioned yard house is significantly impacted in California, but.

But we were down and if you take California out of Olive Garden, It's a 200 basis point swing.

For the quarter Okay.

And then as a follow up.

I think this was touched on earlier, but.

I asked you this in.

In late June and I believe you guys said there were about 10 to 15 restaurants that we're posting positive same store sales, even with that 50% capacity restrict constraint in place or limit in place.

Where does that number stand now.

Yeah, I would what I would say is instead of getting an individual restaurants, let's talk about a couple of states I mean longhorn was positive in Georgia.

The entire system was positive in Georgia for the quarter we.

We have a lot more restaurants that are positive now than we did going earlier of the last couple of weeks, it's been even better than that so with.

Without getting an individual restaurants, we have.

We have it all contemplated in our guidance for Q2, and so I'd rather leave it at that.

Thank you.

Your next question comes from the line of Brett Levy from MKM Partners. Your line is open.

Thank you good morning, thanks for taking the call.

When you think about what a great job you're doing right now in terms of managing hourly labor when you.

When you think about labor just overall.

What are you seeing in terms of inflation your ability to hire.

I would also.

There is the integration of all the different tests you've talked about.

On the technology front, you've spent a lot of time talking about the customer facing but what about on the operational side and then just the non.

The managing of how you're balancing in store in the off premise is that.

Is it your same servers is it the other front of house.

You for you've had one of your competitors talk about how the fall off premise transaction is an hourly as opposed to attack. So I'll stop there for now.

Well, Brett you got a lot in there in that first you got more I can't wait.

Let's talk about hiring hiring is very local and there are different pockets of the country that are more stress than others I will make a global comments I've been amazed that.

How how well the hospitality.

Our workforce.

Our workforce was absorbed into all the areas during co bid.

And so there hasn't been like this.

Still there's still stress in that environment, we're still seeing we still expect wages to rise somewhere between three and 5% for the year.

As far as technology technology goes and the adaptation as you know so is easy today right and we're we're doing that we haven't done it we haven't focused a lot on improving technology in restaurant all of our stuff is really been all of our efforts been focused on on the consumer right. Now we do have some we will get back.

Because some projects that will.

Modernize some of our tools in restaurant that will hopefully help increase productivity.

And as far as off premise I mean, we're using.

For off for off premise for us are tipped employees.

For them, but they've got a higher average weight, but they do collect some gratuities on on their service.

Thank you.

Your next question comes from the line of Lauren Silvernail from Credit Suisse. Your line is open.

Thank you a follow up on your commentary regarding embassy closures are you seeing any noticeable difference or do you expect to see any different levels for Jared and state that reopened earlier or maybe urban versus suburban markets. How is that informing your future development pipeline.

Well I think that the markets that have had the tightest restrictions are going to have the most closures.

Yes, I think Thats, where you know I think some of these urban environments. They just don't have the capital to to to hang on.

I don't think it changes our our development philosophy at all I mean, I think good trade or is a good trade areas. I mean, we there's a lot of talk about migration out of some of the bigger cities, we'll see how that plays out.

I think that well I think eventually we're going to have some really good opportunities to do some work in Manhattan as an example, I think that.

It was very difficult from a cost standpoint recovered to justify building more restaurants there.

But I think post Colby, we might have we might have some opportunity. So I don't think from a development standpoint it has.

Simona impact.

We'll continue to look we know where we have holes in each brand from trade areas and we're going to try to fill them.

Great and you touched on this a bit but with regard to the fine dining brand that maybe aren't as well so.

So what are these brands driven by Tory, one or alarms business Convention and then how are you thinking about that recovery and do you need some of these guys.

Very good returns with other cancer.

Absolutely we've got a bunch of yard house is tied to baseball stadiums and football stadiums and.

L.A. lives, our best Best yard house in the system and Thats been decimated because of.

What's happening with sporting events so yeah.

Yeah. This this will there's a few of our brands to a few of our restaurants that are tied to that and they'll come back.

You know I'm, a big believer that we know we're going to get back to normal he is going to be great restaurants.

But for the time being we just have to run them as efficiently as we possibly can and do the best we can with what we have.

Thank you very much.

Your next question comes from the line of James referenced from Stephens. Your line is open.

Hey, Thanks for getting in here. So a quick question on the capacity bottlenecks at Olive garden, specifically it seems like it would be key to drive traffic. It non peak times and certain there things are doing around that but are there any kinds of incentives you can do to bring people entering the shoulder periods or is this situation, where you're really fully utilizing that capacity or.

Ready during the off period as well.

No I mean, I think thats, something we faced pre cove it with how do you how do you increase your capacity at certain down times of the day.

I think thats I think thats.

Hi.

Hi, Eric that's a high activity exercise with very low payout.

I think that one of them important things about a restaurant is is that downtime to help you prefer for you know the break between lunch and dinner is important. So you can get ready for dinner eminent as parts of US we have cycles in our business and they are important I think we would I think that we've been very disciplined this process to make sure that we're not chasing.

What I would call. This low return activity and so I don't I don't think there's a whole lot. There I do think that what happens is as your business starts to improve especially mid week early week is that your you'll launch last 50 minutes longer your dinner last.

15, 20 minutes longer that's important trying to drive people into your restaurant two o'clock.

30 years, I found that to be a waste of time and money and effort.

Okay. Thank you.

Your next question comes from the line of Sara Senatore from Bernstein. Your line is open.

Thank you.

Sort of a related question on that one.

Hi, Jeff.

On the.

On the capacity I guess, you know as I think about 50% capacity.

Yes, Jim Darsey pretty soon here for a lot of great I appreciate counseling.

Good morning.

Hello.

How should I think about.

You, 15% assay for state barring courses.

Just.

Okay.

Great.

Oh, yes.

Good.

Okay.

Okay.

Yes.

Yes, actually we produce.

Last year.

60%.

I guess.

Yes.

Okay.

Hi.

Okay.

Right.

Historically you have.

There have been more capacity than then narsi other competition I don't know if there any numbers to that.

And then I guess I just have a quick follow up on him centers.

Hey, Sarah trick you were breaking up quite a bit so let me see if I get the gist of your question I think it was about the most restaurants are at this 50% capacity level, but how does that impact olive garden versus competitors and I think the way I would I would frame. It is just average unit volumes Olive garden last year was probably using a lot more of its capacity.

And then some of our competitors were using it and at that time last year and so as we think about a movies and think about the the comp differential maybe even between Knapp track, we think that some of it some of the impact is that while we're at 50% capacity today and we.

And we were at 100% capacity last year, we are using much more of our capacity maybe than someone else I think that was the gist of your question, but it was really hard to hard to hear it.

And if if I think you also had a question on on shutters.

Yes that was actually exactly my question that I have but I wasn't sure. If you had any sense of what the average capacity might look like say the industry just to help us start up for that and then the real question on chairs.

And you talked about off premise and I have been start to slow turn I think.

I think we were starting to see some improvement in the comp and then the tandem the cats.

Could you talk a little bit about any kind of metrics and in particular, I think that's where you've seen a lot.

Okay and is there any sense or can you.

Trying to quantify.

No.

Yes.

Okay.

Hi, Jason.

Okay.

Just just a little bit more color on that yes, Sarah Brown.

Broken up again, but I think I caught most of it until the end I think you are asking about the bet the impact for Chatters in how we've improved margins at Cheddars versus maybe the rest and gene mentioned I think that was your question. So Jean mentioned that Cheddars had the biggest transformation in our business model on an.

On an hourly labor basis that we said, we had about 350 basis points for Darden and proven an hourly labor Cheddars was close to three times that.

So it was a very big improvement at Chatters in their in their margin structure because of the simplification. They did and the work they have done and the fact that they went from maybe maybe less than 5% to go sales to over 20 in a short period of time and we think we'll continue to build that to go volume.

But but cheddars did make the biggest transformation in their margin structure, and we think a lot of that will stick.

Okay, Great. Your your blood Interbreeding novel question. So thank you very much.

I have triplets I interpreted mumbled, a long time.

Actually my four year off.

Better than I do.

Your next question comes from the line of Gregory Francfort.

Bank of America. Your line is open.

Hey, Thanks, Thanks for sneaking me and be the question I had was back on the margin is probably for Rick.

Margins at Olive garden above 20% at the level at which you reinvest and I think you were there right around there three co bid and so as you think about the 100 150 basis points of margin upside is that going to be spread relatively evenly across brands or do you think it overweight to the longhorn and other businesses just.

Given where the segment margins were pretty cobot, yes. Thank you very much.

Hey, Greg Yeah, I think it over ways to other brands I mean, we'll still we should still see a little bit of margin improvement at Olive garden, just because the environment is very different today than it was pre coated I mean, I think a lot of brands are out there improving their margins in some way shape or form with simplification and we just want to make sure our gap to the rest of the industry doesn't grow significantly.

But we do believe that olive garden, we'll see a little bit of margin improvement from where they were before we just think that the improvement will come even greater in some of our other brands chatters in some of our other brands in the other segment.

Thanks for the thoughts.

Your next question comes from the line of John Ivan.

J.P. Morgan your line is open.

Hi, Thank you again your answer to David Palmer questions on off premise I think it's going to be like one of the great discussed topic, you probably have this month to thank you for that.

The question Oh gosh there thanks.

Alongside helpful for all of us on it so I would imagine it's nearly impossible to get a staffing model right.

Just kind of anticipating how customers are going to come back what have you, especially with the amount of labor hours that you took out of the store I just wanted to see like how home game that model actually is and then what are you kind of seeing in terms of that the variations of margins relative to you having too much labor at any point on can't imagine too little labor.

At any point in time were gosh, you are just not that the amount of customers that for whatever reason decided to come in at five o'clock on a Tuesday that maybe could have led to some longer table times that could have actually some way actually you impaired your ability to drive the traffic that you could have until the labor model gets more fine tune.

Yeah, John I think for Olive garden, because we're not doing a lot of outdoor dining we don't have the capability there that business is a little bit easier to predict we've been you know the leadership of all of our businesses error on this side of more labor than less.

And we're tracking numbers servers per restaurant per day trying to understand.

You know as the business starts to grow making sure that we have the appropriate staffing where it gets more difficult as in some of the yard houses, where we have some a lot outside dying that that doesn't have any covers and if it starts to rain in for doesn't Ram and Thats, where life gets a little bit more difficult for operators.

I would say in a too big casual brands.

They've gotten pretty good and they need us show at what I would say it change in what's happening in the environment in other words, if if we go from 25% to 50% that's going to change the flow of mix, that's going to change whats off premise on premise and it takes from a few days to figure that.

Got out, but we're erring on the side believe or not I know our labor results are are really struggle, we're erring on the side of more labor not less.

Understood. Thank you.

Your next question comes from the line of Matthew Difrisco from Guggenheim. Your line is open.

Thank you. So much my question is with respect to Georgia, and the positive comps there could you I guess it sounds like you were saying the consumer.

Obviously, we've known this for a while with consumers all different than New York. However is that also a byproduct of PPP sort of slowing.

Slowing down and having a list or have we seen some closures happen there I'm trying to get a picture of Georgia being a positive is it a positive market or is it just positive for olive garden.

And longhorn or is the entire our dollars up for restaurant spending in the state of Georgia year over year or is it just a smaller pie and you have one consolidated a lot of that show. Thank you.

A couple of things first first of all the majority of the restaurants that are positive in Georgia, our longhorn not olive garden, Olive garden performed well in Georgia, but nowhere near what.

What olive garden, I mean with longhorn is in Longhorn has had a strong footprint and we've got 45 restaurants in the city of Atlanta.

In a world where every three miles we've got a restaurant.

And we've always done extremely well there and the brand is his beloved there. So the brand strength. There is fantastic. That's one component. The other component is that expected when you get 15 miles outside of the city.

Life is pretty is normal there is not pretty nice normal there and I landed and lend it at an airport the other day and not one person at a mask on.

I know.

I was in a hotel I started we're off to a rooftop deck and it was too deep at a bar at the bar I mean, so I mean, it's just a different life and George I know, it's hard for you guys in New York to even imagine that but.

You still can't get around Georgia, there's so much traffic.

No one in the city of Atlanta, So I mean in a city area, there's a little bit more but I would tell you that you know and I think if you look at other parts of the of the country in different states.

Behaviors fairly normal.

So I guess that would be then the the industry on a year over year basis also for or the peers. It seems like it's a rising tide. They just haven't taken as much of a dip down.

Well I think them take as much detail, but I think longhorn significantly outperforming.

Most people in that market and they always have John I mean, theyve always it's always been the the core of that brand.

And one other thing remember, Georgia is one of the first open right.

Right, so they've been dealing with reopen for a long time, a lot longer than other states. So the longer a restaurant or a market is open the more people start getting a little feeling a little bit more comfortable.

Okay and just on that I mentioned TPP also can you guys talk about sort of what any more in or how what your outlook is for the potential of amount of seats, maybe to leave the casual dining market. So.

Say when we are in now this time next year, how many seats might have exited.

We're comfortable with that believe in somewhere between five and 15% I think there's some other.

Industry folks, saying more than that but I think five to 15 and I think you remember once our restaurants or restaurant a lot of these will get recapitalizing in the next few years, but I definitely believe that we'll be competing against less competition on the other side of this crisis.

Excellent. Thank you so much.

Your next question comes from the line of Jake Bartlett.

Securities Your line is open.

Great. Thanks for taking the questions I had really had two quick ones in the first on the menu simplification simplification can you quantify how how how many less items for instance on that is just going to have a sense just as to the scale of the simplification and then Jean I'm not going to ask you about third party delivery I think I know the answer but I'm curious about your experience.

With in house delivery and lowering the minimum check or the minimum order for instance is that something you want to lean into a little bit maybe continue to to lower that to increase your in house delivery.

I think John on the answer to the second one is that we'll continue to evaluate that we don't we don't but we don't see a big upside there.

What was the first.

As a percent of menu simplification each brand is very very each brand is very good.

40% reduction in one brand.

Easiest thing to do is to go go find the menus.

Got it thank you very much.

Your next question comes from the line of Brian the cargo from Raymond James Your line is open.

Hey, Thanks, guys and thanks for the extra time, Rick could you just provide a little more color on the other opex line, obviously down around 20% versus pre coded level just walk through some of the more significant cost reductions have been and how you expect those costs to come back and then would you be willing to provide the fiscal one comps for the individual brands within the fine dining.

Other business segments. Thank you yeah.

Yeah on the on the restaurant expense line I just want to give you a couple of couple of tidbits. When we talked about business interruption of $10 million that was a that was a proceeds that we got that hit our restaurant expense line.

We did have some rent reductions in the quarter, a cash rent reductions were bigger than the PL impact the penal impact was about $3 million.

We had some most of our savings are in utilities in small wares and repairs and maintenance and we would expect that as dining rooms start to reopen as they get busy again, we'd have are in them start to increase and as as well as small was in utilities.

Those savings are maybe not as permanent right because those are just because their volumes are down.

Another another point to mention is we are spending money on PE for.

For our for masks for our team glove chemicals, et cetera, and thats about $4 million to $5 million per quarter.

Okay, and then the the comps for fine dining and other business segments Yeah.

The on the comp side, we mentioned about a year ago that we were going to start providing comps only at a segment at a segment level and this was our first quarter that that was the case and so we're going to continue with that.

Understood. Thank you.

Your last question comes from the line of Jared Garber from Goldman Sachs. Your line is open.

Good morning. Thank you for taking the question just a quick one for me as you think about longer term capacity, maybe if we just focus on olive garden is there a level of average weekly sales or however, you want to talk about it.

That's sort of a limit for olive garden, obviously, the off premise business can be quite additive, but as you get back to sort of a 100% in dining room capacity, how should we think about the longer term sort of cap if you will.

On you views in that brand. Thanks, well that I think there is there is no cap I mean, I think that you know.

If you you Reashure as you start to reach your capacity for guest count you have pricing power and you can you can move your used that way I think pre.

I think pre koby, we were getting close we were over $5 million on average unit volumes you know.

So I think that would definitely hopefully you can get back there and get out and get past that I don't I don't ever think of a cap for.

For for a concept now we know that when you start adding new units, they're not going to come on.

At the average.

Usually we can create a strong IR are with restaurants that that come in a little bit below the line below the average and a but over time, we've been able to get that average to a pretty good level of 5 million.

Thanks, so much.

There are no further questions at this time I'll turn the call back over to the presenters.

Thank you that concludes our call I'd like to remind you that we plan to release second quarter results on Friday December 18th before the market opens with a conference call to follow thank you for participating in today's call.

This concludes today's conference call you may now disconnect.

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