Q2 2021 Darden Restaurants Inc Earnings Call

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I'd now like to turn the call over to your speaker today, Kevin College.

Thank you. Please go ahead Sir.

Thank you James Good morning, everyone. Thank you for participating on today's call.

Joining me on the call the day or gene Darden, CEO and Rick Cardenas CFO.

As a reminder comments made during this call will include forward looking statements as defined in the private Securities Litigation Reform Act of 1995.

These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections.

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

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

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

We plan to release fiscal 2021 third quarter earnings on March 25th before the market opens followed by a conference call.

This morning gene will share some brief remarks about our quarterly performance and business highlights.

Rick will then provide more detail on our financial results and share our outlook for the third quarter net.

Gene will share some closing comments now I'll turn the call over to gene.

Thank you, Kevin and good morning, everyone as we.

We continue operating a very fluid environment and I was pleased with our ability to once again deliver strong profitability in an unpredictable sales environment total sales from continuing operations were 1.7 billion a day.

Crease of 19.4% same restaurant sales decreased 20.6% and diluted net earnings per share from continuing operations were 74 cents.

The last two weeks of the quarter negatively impacted our same restaurant sales by approximately 200 basis points.

We quickly went from 97% of our dining rooms being opened in the middle of the quarter to only 80% being opened at the end of the quarter.

As a reminder, Thanksgiving shifted back into our second quarter this year.

And we believe just modify their behavior in advance of the holiday.

During the quarter, we remain focused on four key priorities.

Health and safety of our team members and guests in restaurant execution in a complex operating environment.

Pulling technology to improve the guest experience and transforming our business model.

The health and safety of our team members and guests is always been our top priority. We continue to fall latest guidance from the CDC. That's what was our own enhance safety protocols to create a safe environment for everyone. It's.

This includes daily team member health monitoring requiring mass for every team member enhance cleaning procedures and social distancing protocols.

I'm proud of the commitment our team has made every day to keep our gifts and each other sales.

Second our restaurant teams remain focused on our back to basics operating philosophy to drive restaurant level execution that results in great guest experiences.

Our guests are Donnie without warning curbside to go.

Our teams have been operating in this environment for 10 months and they become very adept at adjusting to the ever changing kobin restrictions, what it's still not easy.

That's why we remain committed to our simplified operations, including streamlined menus processes and procedures, which continue to strengthen our execution.

And our guest satisfaction metrics confirmed that our restaurant teams are doing a great job delivering exceptional guest experience and this and challenge this challenging environment.

Third we continue to deploy technology to improve the guest experience our brands benefit from the technology platform Darden provides allowing each of them to compete more effectively by harnessing the power of our digital tools, including the 25 million email addresses and our marketing database.

During the quarter, Olive garden, and Longhorn Steakhouse launch refreshed web sites and.

And all our brands continue to use their digital storefronts effectively.

More than 55% of our off premise sales during the quarter were fully digital transactions, where guest ordered and paid online.

And it all of garden, 20% of our total sales for the quarter were digital.

During the quarter, we also rolled out curbside I'm here, which allows our guests to easily notify the restaurants that they've arrived to pick up the curbside to go order by simply topping on a wink embedded in a text message.

As a result, our operating spending less time on the phone and more time focused on ensuring orders are accurate and on time.

Which is leading to improved guest satisfaction scores.

We also introduced waitlist visibility, allowing guests to see their place in the weight waiting list using their phone regardless of whether they checked in online or in person.

And we're working on several other initiatives, including streaming streamlining our online checkout process and adding additional moment mobile payment options to broad even more convenient for our guests.

We continue to celebrate our digital journey and I'm encouraged by the progress we are making.

Finally, we continue to view this environment is a rare opportunity to transform our business model for long term growth.

We continue to make investments in our team members part a quality portion sizes to ensure we emerge even stronger and better position to grow share.

Olive garden same same restaurant sales declined 19.9% that's capacity restrictions continue to limit their topline sales all.

Olive Garden began November with 56 times closed and that number accelerated to 208 by the end of the Mark.

However, they were able to deliver strong average weekly sales during the quarter of more than 73000 per restaurant, retaining 80% of last year sales.

Olive Garden also continued to realize operational efficiencies and strength the margin as a result of a simplified menu and the elimination of promotional activity, including discounts.

In the current limited capacity environment that reduced marketing spend was focused on showcasing the convenience of their off premise experience well featuring compelling core menu items, rather than limited time promotions.

This led to increased segment profit margin, while making additional investments in abundance and value.

Additionally off premise sales grew 83% in the quarter, representing 39% of total sales.

Enabled by the technology investments I mentioned earlier Olive garden improved our to go experience and achieved another all time high and guest satisfaction for having orders ready to pick up at the time promised.

Only olive garden successfully opened three new restaurants in the quarter.

Longhorn Steakhouse had another solid quarter same restaurant sales declined 11.1%.

Almost 20% of their restaurants grew same same restaurant sales in the quarter.

They also successfully opened three new restaurants during the quarter.

The longhorn team remains laser focused on this strategy of increasing the quality of the guest experience simplifying operations to drive execution and leveraging the unique culture to increase team member engagement.

During the quarter the team did a great job of managing controllable cost Mark simplified menu drove improved labor productivity.

Finally, longhorn grew off premise sales by more than 175% representing 22% of total sales now.

Now I'll turn it over to Rick.

Thank you gene and good morning, everyone.

For the second quarter total sales were $1.7 billion a decrease of 19.4%.

Same restaurant sales declined 20.6%.

EBITDA was $206 million and diluted net earnings per share from continuing operations were 74 cents.

Our second quarter start was encouraging with weekly sales building on results from the first quarter. However.

However, that's COVID-19 cases began increasing in November and many state and local governments reimpose dining room restrictions the last two weeks of the quarter trended down significantly.

We estimate that this downward shift in sales over the last two weeks negatively impacted operating income by approximately $15 million.

Turning to the piano food.

Food and beverage expense was 30 basis points higher than last year, primarily driven by investments in food quality and increased to go packaging.

Restaurant Labor was 140 basis points lower than last year with hourly labor improving by over 310 basis points driven by operational simplification.

This was partially offset by de leverage and management labor due to sales declines and $3 million of emergency pay net of retention credits as we reinstated our emergency pay program for our team members impacted by dining room closures.

Restaurant expense per operating week was 13% lower than last year, driven by lower repairs maintenance and utilities expenses. However sales to leverage resulted in restaurant expense as a percentage of sales coming in 170 basis points higher than last year.

We reduced marketing spend by almost $50 million this quarter with total marketing 210 basis points favorable to last year.

Restaurant level EBITDA margin was 17.9% 140 basis points above last year, despite the sales decline of 19%.

General and administrative expenses were negatively impacted by $8 million of mark to market expense on our deferred compensation.

This is related to significant appreciation in both the darden share price and equity markets this quarter.

As a reminder, due to the way we hedge this expense it is mostly offset in the tax line.

Page 12 of this quarter's presentation illustrates the $8.1 million reduction of operating income and corresponding operating income margin reduction of 50 basis points from mark to market expense.

Our hedge reduced income tax expense by $6.4 million, resulting in a net mark to market reduction to earnings after tax this quarter of $1.7 million.

The effective tax rate of 8.3% this quarter was lower by 5.1 percentage points due to the tax benefits from the deferred compensation compensation hedge I just mentioned.

After adjusting for this the normalized effective tax rate for the second quarter would have been 13.4%.

Looking at our segment performance this quarter Olive garden Longhorn Steakhouse in our other segment all saw segment profit margin increase despite sales declined.

This was driven by our continued focus on simplified operations, which significantly reduced direct labor and lower marketing expenses.

Our fine dining segment profit margin of 18.8% was impressive although below last year, driven by a 30% sales decline.

We ended the second quarter with $770 million in cash and another $750 million available in our untapped credit facility, giving us over $1.5 billion of available liquidity.

We generated over $150 million, the free cash flow in the quarter and improved our adjusted debt to adjusted capital to 58% at the end of the quarter well within our debt covenant of 75%.

The board declared a quarterly cash dividend of 37 cents per share 50% of our Q2 diluted EPS within our long term framework for value creation.

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

As I mentioned earlier the quarter started with sales building up on first quarter results.

Dining room closures increased these improving sales trends reversed.

As of today, we have approximately 77% of our restaurants operating with at least partial dining room capacity versus the peak of net 97% in the middle of the second quarter.

Moving forward, we may experience further dining room closures and increasing capacity restrictions in the third quarter.

As you May recall in our last earnings call. We mentioned that the third quarter is historically, our peak seasonal sales quarter, driven by the Christmas New years, and Valentine's day holidays as well as travel time during this time of year.

At that time, we also stated that it will be more difficult to increase on premise averaging volumes if capacity restrictions do not easy.

Current dining room closures capacity restrictions and reductions in travel will exacerbate our same restaurant sales comparison to last year due to the higher sales seasonal sales from last year.

Additionally, there are still uncertainties surrounding further capacity limitations and dining room closures and the duration of these impacts.

Given all these factors, we are providing a broad range of expectations for the third quarter.

We expect total sales to be between 65, and 70% of prior year levels, resulting in total sales of between 1.53 and $1.65 billion.

EBITDA between 170, and $210 million and diluted net earnings per share from continuing operations between 50 cents and 75 cents on a diluted share base of 132 million shares.

With dining room closures, increasing we're focusing on our playbook of expense management and off premise sales.

Well there is encouraging news on the broad distribution of COVID-19 vaccine in the spring. We currently don't anticipate meaningful sales trend improvements until sometime in the fourth quarter of fiscal 2021.

Despite the short term headwinds, we face with sales trends operational complexity and impacts to our team members I'm confident we are making the right decisions for the long term to create a better guest experience and strength in our business.

And consistent with our messaging last quarter. We continue to believe we can achieve 100% of our pre cobot EBITDA dollars at approximately 90% of pre cobot Ebitdas is pre covered sales.

While continuing to make appropriate investments in our business.

Now with that I will turn it back to gene.

Thanks, Rick. This morning, we also announced that Rick will become our president and Chief operating Officer, Rick Rick career represents what our industry is all about joining darden as a bus tour at Red Lobster 90 day before has worked extremely hard mastering many functions on January 4th he will become the president of the world's largest full service restaurant company.

It's been a great partner to me over the last five years and I look forward to working side by side with him in his new role.

Additionally, we announced that Raj venom will become our Chief Financial Officer Raj began his career Darden in 2003 and has done an exceptional job in every role he has held.

His promotion recognizes the significant contributions he has made to our individual brands as well as the greater organization.

With a brilliant mine and a keen understanding of our industry Rogers the perfect person to take over for Rick I'm excited to see him expand his role in the company as CFO.

Rick and Raj are here with me in the room today I want to take this opportunity to congratulate both of them.

I want to close by recognizing our team members in the restaurants and that the support center.

Can't say enough about the dedication they've demonstrated throughout the year, there focus commitment and determination is exceptional.

With multiple jurisdictions implementing diamond closures, we don't many team members will not get the hours they needed during this holiday season.

That's why we've been reintroduced our emergency pay program that will provide three weeks of emergency paid to team members, who are furloughed from their restaurant when dining rooms are closed.

Our people are our greatest competitive advantage and were committed to taking care of them.

On behalf of the management team and the board of directors I want to thank all our team members for your tireless effort to serve our community by providing the comfort of a war meal.

Thank you for going to the extraordinary lengths to take care of our guest at each other.

I wish you all a safe and happy holiday season, and with that we'll take your questions.

Thank you and we will now take questions if youd like to ask a question. Please press star followed by the number one on your telephone keypad, if youd like to withdraw your question. Please press the pound key ladies and gentlemen for today's session. We do ask that you limit yourself to one question and one follow up question only to allow everyone a chance.

Wants to ask a question. Our first question comes from the line of David Tarantino with Baird Go ahead. Please your line is open.

Hi, Good morning first Joe.

And congratulations on being elected to chair of the board and.

Rick and Raj also congratulations on your promotion is very well deserved.

Gene My question is about those changes I want to maybe a day here your thoughts on how your day to day involvement will change as a result.

Rick taking on that the president and CEO COO role and and just your thoughts on whether investors should should interpret this as a signal that you will be less involved in the business going forward.

No absolutely not I plan on being has evolved operationally as I ever had that's that's my strength.

I mean I see this is a opportunity to create growth for both and Rick and Robert I think it's going to give Rick an opportunity to understand operations more deeply obviously you had a great relationship with our presidents today, but I think it's important for him and his development to get <unk>.

Get a little bit deeper into into the operations and and get to know an.

And oversee a lot of the other people that make things happen just not the president I also think it's important for him to partner with me on making sure that we are leveraging all the non consumer facing parts of our business and to see if there's an opportunity to continue to find additional synergies to enable us to further invest in our business.

And so I see I see this as an opportunity to to work with people that deserve the opportunity to grow.

And more importantly, I'm have an extra set of hands to be able to do some things and look at things, maybe a little bit differently, given Rick the freedom and the time to look across the organization and see where we can we can pick up some additional synergy I think is a is a good thing I think that.

I try to do that but even in the position that was in but I know, there's a limit to the amount of time you have I think given Rick that time will be very beneficial to the organization as as we move forward. So I'm excited about these changes it has it.

I don't think anybody should read anything into it.

I am going to still be heavily involved in food service and atmosphere, just the way I am today.

And.

Well look at it as a great opportunity I also look forward to working with Raj.

And given him a chance to develop and as a world class Chief Financial Officer, and I think that's going to be it's going to be really exciting. So.

Don't read anything into it other than we're creating growth for our people, creating new opportunities and we have a few a few things that we want to get done with this change.

Sounds great Congrats again to all of you.

Our next question comes from the line of Chris Ocull with Stifel. Go ahead. Please your line is open.

Thanks, Good morning, guys.

Machine, how is the company thinking about returning to normalized marketing spend meaning does the company plan to wait until government restrictions on dining usage or live lifted or does the company plan to see what kind of pent up demand there is going to be.

As consumer mobility increases to determine how much advertising utilized I'm just trying to get a sense for how you guys are thinking about that.

We have we have no definitive plans to put back marketing at this point in time, obviously, we have.

We have developed a multiple options of how to come back and use those resources that we have but I think I know I think in part of your question I think the answer is there is that we're going to look and see what the competitive environment is like we want to see what the pent up demand is like.

And we're going to put back the marketing you know put.

Put marketing resources back in the business judiciously.

And you know I would love to get to a point, where we can grow our business and rely a little less on on advertising spend we really like the PNM was with the with the marketing line at the level is that right now and so there's no predetermined outcome on this we just we need to get into the into the competitive environment and then make.

Our decisions that we have developed multiple options.

If needed.

Great Congratulations on everyone's promotions.

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

Great. Thanks, so much gene, Rick and Raj happy holidays, and congrats on a well deserved promotions gene to the most recent few weeks of sales trends change your view from last quarter that 5% to 15% of the category is likely to see store closures and what I'm trying to get at is are you starting to see more payable terms from landlords and developers so Dennis.

The development pipelines, you look out to 2022 and 2023 class openings.

No I don't think I mean, I think that my position on closures still in that 5% to 15% range and.

Yeah, it's unfortunate that a lot of these small businesses are being impacted this way.

Because I do think it has it will have a negative impact on our on the creativity of our industry selling so force so.

As far as far as real estate goes I think that the my position on that is still pretty much. The same is that there's some more availability out there right. Now however were not seeing any weakness.

And in the rent rent deals I think what we're I think there's some speculation going on out there right now with some of the reads.

So.

I think as we as we move forward.

We will continue to try to grow our businesses responsibly, we want to eventually get back into our long term framework.

We'll give you some more guidance in March exactly how we're thinking about F Y 22 for development.

But we reconfirmed our guidance for this year and hoping that we can get.

The number of restaurants that we talked about in the press release open and we have a bunch of restaurants today sitting there ready to go.

That that are ready to open.

We just need to our our guideline here is once we get to approximately 50%.

Keep in C.

In a in a jurisdiction, where we'll go ahead and open that restaurants, we've been very successful doing that.

Thank you so much.

Our next question comes from the line of Brian Bittner with Oppenheimer and company go ahead. Please your line is open.

Thanks, and good morning, and I Echo the congratulations to all three of you on on the upcoming move into new roles.

Gene and the press release and on this call you talked a lot about the fact that you are taking this opportunity to transform the business.

Long term growth.

On the call when you spoke about day in your prepared remarks, you specifically said.

Employee investments in some menu and portion changes.

But can you just talk a little bit more beyond that what else are you doing to truly transform this company for long term growth and how do you strategically think about growth both.

For the HIV recapture opportunity and the unit and portfolio growth of the company in the long term.

Good question Bryan I think we think about in three ways right. What are we going to what are we doing to ensure that we can grow the base from a same restaurant sales perspective.

And I think a lot of the simplification and efficiency on the efficiencies that we're creating a.

But more importantly, and I think I talked about this in the last call is as we as we brought our menus down we've learned a lot about guest.

Guest behavior and what the guess wanted to buy without our knowledge and I think that that's really an eye opening for us and I think that that's going to strengthen the the operation and and day to day operation on that side. So I really think that we're well positioned there we've done a lot of good work to ensure.

Sure that our brand is set up for success.

Secondly, we talk about transformation and when it when we go to the second bucket of growth, which is new restaurants. The key here is that we believe that the business model from a cost side is much stronger than it was pre print pre pandemic, which should enable us to be able to to grow, especially in olive garden deeper than.

We may have thought we would be able to grow price.

Pre pandemic.

So that's one of things I'm really excited about is we think that we can actually overtime tickup olive garden growth and handle because of the improvements. We've made we think we can handle the cannibalization a little bit better and still get a good a good return on our investment.

The third bucket that you highlighted was really around you know.

How do we continue to add brands to the platform and as I've said Forever. You know we continue to look at what our options are.

The filters that we use really comes down to does the Brent does it benefit us to put that Bryan on the platform does the platform benefit that brand do we think you can grow.

Faster than olive garden to improve our growth rate and Weve historically done something every three or four years. This.

This has obviously been a different period of time, but we believe that to be an avenue an avenue of our growth and to support our long term framework and so I think we're really well positioned in all of those in those three buckets to to drive the business. The last thing that I would say is I think that.

And in this transformation.

Its moved a lot of the technology forward faster than what we originally were planning to do.

The big the Big change for US is moving from moving how we handle the off premise business, which has been a big part of our growth historically the last five years as we captured the convenience trend, but really getting clarity that this is going to be a curbside business, it's going to be technologically enabled versus someone coming to the restaurant and getting out of the current.

Coming to pick it up and I.

And I think that we've really worked hard and our team has done a great job and I think that experienced a day when you come into an olive garden specially olive garden longhorn in all our brands, but really this is an olive garden play because the food travels so well I think that that's going to really be a competitive advantage going forward.

Thanks for that gene and nobody seems to be taking their follow up but I'm going to ask one if you don't mind.

The step back that's happening in the business in the third quarter is pretty telegraphed by what's been happening in the world, but when you look back at the quarter you just reported when you got to that 97%.

Units offering in store dining in the middle of the quarter can you give us a peak in into how that business was performing with that type of percentage of stores operating in that manner.

Well I think there was still gene dose still geographic problems and I would say that we you know we were really adhering to the social distancing, but.

But the business.

You know in some ways I gave you that as I said, we were the last two weeks cost is 200 basis points for the quarter.

And so I think you know there are parts of the country that we're performing really well and I think you can look at the mobility index out there and see what parts of those the country, we're performing well.

And so you look at you look at Georgia, and Texas, Florida hasn't been performing as well just because the tourism is down and we have a lot of restaurants based in tours and put it on non tourist markets in Florida, We're performing well. So we had we had some good momentum.

But we all we can do as a management team that we werent. This wasn't done that we're going to face. This the second wave and we are prepared for it and we had good processes and we've been able to wind down the businesses and effectively to off premise only and.

And we will quickly be able to wind them back up and take advantage the opportunity.

Thank you and congratulations guys.

Our next question comes from the line of Eric involves with Keybanc capital markets. Go ahead. Please your line is open.

Hey, Thanks, and I'd also like to add my congrats on net promotions. Yes. My question is as you as we look ahead to the vaccine rollout can you talk about what you think you need to do differently in order to maximize the opportunity to capitalize on that pent up demand it likely exists.

And the follow ups that what is this we think the flow through rate is on incremental sales today. What do you think it will be post vaccine, assuming you don't need any any income discount or otherwise advertise thanks, I'll, let our new president answer that.

Well first of all thanks, everybody for all the kind words, and I want to congratulate Raj as well.

On his promotion he has been a real partner to me over these but the four and a half five years that I've been the CFO and so I appreciate that.

You know what do we need to capitalize gene has been talking a lot about what we're doing to make sure that we invest in our team members invest in our food and as the restaurants start to ramp up we really believe that we are seeing and weve seen.

Growth when those restaurants start to open you know, we're not going to talk strategically about what we're going to do to capitalize on that but just know that our business model is so much better that even if we you know as we get our sales to grow our margins will continue to improve which gets you to the second part of that question that you asked the question is flow through on incremental sales as we.

As we look at.

What we are doing today right today, our variable margins are closer to 50% and before they were closer to 40, and so we've taken a lot of costs out, but some of those costs will come back in and as we mentioned.

And that would imply you know about a 150 basis points of margin improvement over the long run, but right now incremental profitability is pretty strong.

When we started to see some closures. We started we started to see that drop and so.

You know as we as we move forward, we still believe that we're going to get to a 100% of our price of EBITDA, 90% of pre Govan sales. We just don't know when we're going to get to the 90% a pretty good sales.

Very helpful. Thanks.

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

Hi, Good morning, Gene, Rick and Raj Congratulations on your new roles and promotions announced this morning.

Rick or Raj can you. Please provide your thoughts on how to think about DNA now moving forward both in the near term and longer term at this point how much of the savings that you've seen thus far do you think can be held on to in a more normalized environment and how does the increased focus on technology impact us.

Yeah, Chris Thanks, the DNA you know I'll talk about this quarter that we just ended.

As you saw we reported about $90 million and Gionee.

But that would have been closer to $82 million that mark to market expense and as you recall at the end of the first quarter call. We talked about the early retirement program that we had saving us about $25 million to $30 million a year, we're still seeing that and we still believe that we will keep that as we move forward.

But we've also had some savings in gionee because of reduced travel and other things and no general manager conference and those kind of things those things will come back how fast they come back as a question, but you know we're running.

About 5% Gionee, 5.5% gene a right now which is remarkable considering our sales where they were where they are.

As we get back to you know our pre cobot sales, we will start seeing gene had come up a little bit, but nowhere near where it was before because of that $25 million to $30 million I'm, sorry, $25 million to $30 million of.

Of savings that we got an early retirement.

Got it. Thank you and just again the increased focus on technology is there any potential impact there.

No we've been we've been investing in technology for years you know.

As we continue to work on our technology investments, you know that'll impact for depreciation and amortization line going forward.

But we also have some projects that we worked on five and six.

Fall off we're going to continue to invest in technology will that help make us more efficient here in the support center yes.

But a lot of our a lot of our gene is out in the field and our directors of operations in our and our senior Vice Presidents of operations and technology will help them be more effective and more efficient, but it won't get us a whole lot of DNA save.

But absolutely the technology investments, we're making are more about 10 restaurants. So that's not a DNA that's kind of restaurant margin.

Got it thank you.

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

Thank you good morning, and congratulations gene Rick and Raj.

One question and then a follow up question just in terms of the labor outlook, obviously lots of moving pieces and I think we did read darden as an employer of choice.

And with unemployment up inflation in theory should ease and you experienced significant leverage in the second quarter I'm. Just wondering how you think about that in the context of a.

Potential for a national minimum wage increase just wondering your bigger picture industry. So, let's maybe using Florida as a guide or how you think about how you can offset that weather with cost savings or menu pricing or just broad outlook on the labor line going forward and then I had one follow up.

Yes. Good morning, Jeff Labor is definitely the is a little bit of a question Mark Wright force and for the industry, but as we think about labor we've dealt with the structural increases over time very effectively.

We are better positioned than anybody else in the industry to be able to deal with that because because where our margins are today no do I email bottom if you're asking me do I think there will be a.

Federal minimum wage increase that somewhere to Florida.

I think overtime that we will see the fed will receive federal minimum wage increase but not at the same rate as Florida I think the key for us and the way we're thinking about is how do we how do we get to a the right tip wage and to keep that relationship between the constituents to constituents the guest.

And the server that don't want that relationship the change, albeit the people in public office and some advocacy groups believe it that that that relationship should change where our team members and service really don't want that to change. So how do we protect that get to the right level.

If we're all the industries all faced with it then yeah, we're going to have to figure out how from a pricing standpoint.

We were able to pass that through I think long term when I look at the piano and think about it I think its California as an example of it today, you're going to end up with a little bit lower cost of goods sold in a little bit higher labor costs.

But you're going to end up at the same place and so as long as you're thinking about that way I'm confident in our ability to manage that over the long term could have some short term impacts and volatility the cost structure, yes, but long term.

I like our I'd, like where we're positioned and our ability to be able to deal with it.

Understood and then just the follow up you mentioned earlier gene that maybe there's an opportunity to increase penetration of your brands. Obviously olive garden is the furthest along so maybe that's the best example.

I'm just wondering whether there's any clarification on that or how you would think as an alternative about maybe using goes kitchens. I mean would you what would your portfolio being as large as it is I would think you can create your own goes kitchen just of your own portfolio. Since the brands are already pretty well known and not necessarily need to open up as many new boxes. So just trying to get a sense for that thank you now we believe what we bought.

We were an on premise restaurant company and.

We believe.

We strongly believe that demand for in restaurant Donny is going to come back really strong there'll be some fall off on the off premise occasion, I think people have a lot of fatigue with that right. Now long term convenience is going to when you think about long term can be still going to be important.

But I think that right you know.

In off premise will come back and be strong EPS be stronger at some point than it was pre coded.

But I believe that these are these these brands.

Need to be developed to be on premise locations that that's your primary business that drives an auxiliary business, which is your off premise location.

Our off premise business, but you're you develop the brand in a box and we create in restaurants, great in restaurant experience.

And logistics of moving that the last mile are just so so expensive and something that.

We know really cuts into the profitability and something that we don't want to be involved in.

Thank you.

Our next question comes from the line of Peter So Lee with BTI GE go ahead. Please your line is open.

Great. Thank you and congratulations to the team on the promotions.

[laughter] gene I wanted to ask if you could give us an update on the Cheddars brand and what if any changes you guys have made throughout the pandemic how should we think about the unit growth of that concept.

When we come out of this pandemic.

Yes.

I think we've talked about in the last call that the biggest transformation. We've made the cost structure has been at Cheddars as we simplify the menu, we really were able to get in there and looked at all the processes and procedures from the back door to the to the dining room table and.

The team has made great progress there, which has resulted in a significant reduction in labor cost and we've had a significant reduction in the waste in that business around cost of goods sold which is you know.

Really changed the business model.

Prior to the to the pandemic, we just rolled out croissants.

To every single guests, which is being received very well.

And we were able to absorb the pricing.

We implemented when we did that our value ratings have actually increased.

I think that by all the other thing that day.

Going through this this this crisis has accelerated their off premise capabilities price.

Prior to the pandemic, we did not have.

Ton of capabilities. There, we didnt, we only had a couple of phone lines. We it was just a mess. So we've increased number phone lines. We've got online ordering in place. We've now got the Curbside me I'm here and there and the take up business is growing.

Fairly rapidly through the through the pandemic and we're very pleased with that we've got two we've got to get better at it.

Because it's not a core competency in cheddars, but I think the teams are working really hard on it and I know they've got a big initiative and I'm really proud of what they're doing.

As far as unit growth goes.

We've really I always talk about human resources, when we talk about unit growth, we've stabilized the human resources in Cheddars the.

The human resource metrics are getting closer to darden metrics I think actually management.

Turnover is actually in the middle now after being such an outlier for so long so I'm excited about that but we still need to bring when you still need to build management strength to handle growth we've been opening restaurants, all the way through the through the through that.

The transition through the plant.

Pandemic, Andrew really through.

The integration on I would suspect unit growth you know to be somewhere.

Five to 5% to 8% range, which I think we can handle from a human resource standpoint, so its additive to our growth rate. We're excited about the business.

We're excited to see what the Pinedale will really look like in a in a post pandemic environment.

And we you know we've always love the business and we love the business today. We're excited about we've got you know teams done a great job I'm really proud of them.

Do you anticipate having to spend more as a percentage of sales for cheddars to Joe on the marketing side.

To accelerate that growth in the coming quarters or a year.

No. We just don't have we don't have the density in that business to be cost effective from a marketing standpoint, I think we'll we'll we'll continue to use a digital.

Our digital capabilities there.

But you don't really it was always a high volume concept that didn't have the cost structure set up right. Now we have the cost structure set up so we think set up right and you know doing 5000 guests so weak.

You know I think the growth from that business really comes from new units not really comp growth.

There's not many restaurant companies out there doing 5000 guests a week.

Thank you very helpful.

Our next question comes from the line of John Glass with Morgan Stanley Go ahead. Please your line is open.

Okay. Thanks, very much happy holidays to everyone and congratulations from me as well.

Rick arise just maybe two more boring finance questions. One is just on the third on your current quarter guidance.

Even at the high end would assume revenues might be a little lower than they are total revenues this quarter.

But the operating margins might be actually higher as should the EBITDA margins is that just a function of like the gionee, which was a little bit off this quarter because of mark to Mark in sales going on that would actually allow you need the net higher profitability versus second quarter on lower sales.

Hi, John No I think I think you've got it a little bit on the gene a fraud, but you know as we continued to reopen restaurants, we're getting more efficient at that price. So if restaurants come back and reopened we're just getting better at doing that and as restaurants closed we're getting them were more efficient doing that as well. So we just believe that we've got a business model that is why.

Wired pretty well right now and that should show up in our margins in Q3.

And the next this is probably the last quarter, we'll be talking about negative same store sales and then you start to lap that may period, et cetera, where how should how should investors sort of think about how to model the business or think about the recovery should we just focused on average unit volumes and then just sort of back into this implied same store sales because that's that's weekly.

Dr. density really year over year doesn't matter, it's really just the volume capacities are limited to a points until those deposits restrictions and is that the best way to think about your business over the next couple of quarters. After after you start lapping the pandemic John.

John I think I think what what investors have to do is make assumptions for when when the pandemic start to ease and when when dining restrictions CLO.

Kind of reefs three.

When dining was reopened.

And then look at our average unit volumes, what we're doing today and kind of put some kind of a factor on that and you can kind of see some of the some of the things that we've shown in our releases and pretty transparent in our weekly sales and and restaurants have dining rooms opened versus the total company and just kind of make your best guesses on when you think depends.

Mick is going to wane and when when dining rooms are going to reopen.

We can't tell you when that that is.

But we feel really confident that when that does happen, we're going to be there to capitalize on it.

Great. Thank you.

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

Thank you and congrats to all on well deserved promotions gene wondering if you could talk a bit more about technology and the digital platforms, you talked a bunch about the initiatives that recently rolled out and those that are coming but can you size up the opportunity a bit more in the role that tech plays in digital plays and 10 play for the brand perhaps.

A bit more maybe on some of the topline benefits and thinking about guest satisfaction speed ultimately and sales there.

And Rick I think you talked some about the benefits from our cost and margin perspective, a little bit, but if there is anything more to kind of.

Frame up that opportunity as well thank you.

Well I think first of all I think technology really helps you on the off premise side.

As we talk to our guest they continue to talk tell us they don't want to technologically advanced our enabled in restaurant experience. They they don't want to look at digital menus I mean, as we as we put the QR codes out there and have people try to look at the menus on the phone they really pushback, they don't like that and so that too.

And I don't think is going to going to take place in restaurants now there were playing with some handheld devices to see if we can get orders quicker.

I think that Ziosk has played a major role in a lot of our brands. It's enabled our servers to Adam.

Non pandemic time be able to use that device to get good orders in that really does a great job on payment the adoption rate on payment is extremely high with that device as the consumer becomes.

Used to using it so in restaurants, I don't see a ton of technological advances there over time I think the things that we're working on.

No wait list.

It is important.

Yeah, and then a big one that we're working on right. Now is is how do you how do you accelerate the checkout process on an online order and how can that be is friendly.

The big retailers and so those types of things on the margin I think technologies that were fairly technologically advanced no with our ore there.

Don income system Arkady EPS system.

Not sure how much more is there that we see right now we are working on a technology roadmap over the next five years to figure out where do we want to invest and how do we get the highest return on that and so.

Still work to be done I think the majority of it still has an off premise.

To accelerate that and then on the other side, we don't talk much above what we you know we think about the size of our email database today and how we how we interact with our guests digitally.

We'll continue to evolve that and get better at that and more efficient with that trying to figure how to communicate.

More effectively with our consumers and let them know about the things that are that that might drive a visit.

Omics I'm excited about that there is a lot of engagement digitally with our brand both both on from an email database, but from social.

Just think about what happened last week when Taylor Swift drop the song with Olive garden in it and how we were able to capture capture that sold.

Socially and create buzz around that and all of a sudden when Taylor Swift drops our name and the song our brand becomes very very relevant. It's a 40 plus year old brand that that's all of a sudden relevant with her audience and we our team.

It was working around the clock to cap it to capitalize on that activity and to those that are listening that were on that team did a fantastic job.

To to be able to to make that relevant. So thank you to them and thank you Taylor Swift for drop in Olive garden and our song.

Thank you.

Our next question comes from the line of Jeff Farmer with Gordon Haskett Go ahead. Please your line is open.

Great. Thank you and congratulations to all three of you well deserved across the board.

Another lever question for you so.

Its memory serves you saw 350 basis points of hourly labor favorability in the fiscal first quarter sounds like you guys just talked about 310 basis points in the second quarter.

How should we be thinking about favorability moving forward, especially with the the emergency pay coming back.

Hey, Jeff This is Rick the on the labor front, the hourly labor of 310 basis points favorability. This quarter. It was really driven by the fact compared to 350 in Q1. It was really driven by the fact that you know in Q1, we had a much much more simplified menu and some of these restaurants, because some of them were still to go only.

Some of those restaurants were running with very few hourly employees and so you know as we started ramping up dining rooms, yes, we added some labor but.

But 40 basis point difference is a isn't isn't very big when you consider the sales that we added from Q1 to Q2.

Any emergency pay it.

Isn't it we don't necessarily put that into our into our direct labor cost. It's a it's more in the in the kind of fixed labor we talk about it. So when we talk about a 310 basis point to 350 basis points. It does not include emergency pay okay, and just as a follow up again on labor. This was a popular investor question, but.

You touched on it but with indoor dining suspensions affecting roughly 25% of the system as you most recently.

Can you provide some color on the impact that that has on variable restaurant level costs.

Specifically on the labor in restaurant expense lines.

And I know you share some color on hourly versus management labor.

As a percentage of total labor, but anything there to sort of help.

Analysts and investors understand.

The movement between fixed and variable costs.

For restaurants that are essentially close to indoor dining.

Yeah, we think about when you have no indoor dining.

Big part of our restaurants as the servers and so that's a little bit less actually a little less efficient in number of hours than than an off premise business on dollars. It's not so bad but on an hours basis, you have a lot more servers per guest than you do on a to go to go experience. So.

Actually it does help us a little bit when we go to off premise only just for little bit of time, we actually don't like to be off premise only we would much rather have the total sales and the total margin of being open on premise.

In relation to the fixed versus variable that you know as as the as as the definition says the variable cost definitely go way down as we as our sales go down.

Most of our costs on the fixed side will be there we have a few things that we can turn off when we go to <unk>.

Off premise only you know the Tvs the music in those kind of things, but that's not significant the other thing that is significant as we have a little less repair and maintenance when you're doing your restaurant isn't getting beat up in the dining room, you don't have to do as much repairs, there, but I would say we would much rather have a full restaurants full dining rooms and deal with the cost of that.

Then have empty dining rooms, and just to off premise.

Thank you.

Our next question comes from the line of Lauren Silberman with Credit Suisse. Go ahead. Please your line is open.

Thanks for the question congrats to all hopefully at this time next year, all restaurants will be opened at full capacity. When you reopen restaurants, how long does it take for restaurants to wrap up sales to their full allowable capacity. So that immediate takes several weeks to build I'm trying to get at is how quickly do you expect to reach full recourse sales levels, assuming capacity or stretch.

Let's say, 100%.

Well I think that Thats hard for us to to really define for you I think that from our standpoint, we can we can you know other than maybe having to ramp up some staffing.

We can get right, we can get to a point, where we can move back to 100% fairly quickly.

Of where we were from a volume standpoint, I think even even staffing it would be more of a fatigue thing because we probably have to work our people more hours than what they are used to in the near term, but I think we can get there right away. The question is going to be more on the consumer demand is that you know is this going is this going to come back.

And.

All at once or is it going to come back over a period of time as more and more people get comfortable.

You think about the different demographics out there today.

And you know is it going to our people going to as soon as they are vaccinated say, okay. I can I can get out and move or are they still going to be cautious and that's that to us is the unknown, but what I would tell tell everybody on the call and our investors that were going to be prepared to be able to handle this situation.

You know as it unfolds and we're going to be in a situation, where I think that our brands are trusted and beloved by our guest and that people once they once they feel good about being able to have a little bit more mobility, they're going to come back to us quickly and what can be ready to serve them a great.

Great meal and deliver on our expectation.

Great and then gene you touched on those kitchens and extending that congressional brands operating out of existing restaurants more restaurants are developing new virtual caught concept the capital for businesses.

At near term sales I think uncertainty regarding the same tower over the long term last quarter at the right price regard is that failure, you and can you stand on your view on the cost differential France, and whether that's appropriate for any is this concept and the darden portfolio.

It's still our position we believe that we.

But we need to stay focused on running the brands that we spent many many years investing in marketing and building.

And I believe thats the right place to be I believe as I said last last quarter as others have got to do what they think they need to do.

To to run run their business I think the question I would ask is who owns a virtual brand.

As the kitchen or just order to store day shown the virtual Brent.

Great. Thanks.

Our next question comes from the line of John Tower with Wells Fargo. Go ahead. Please your line is open.

Awesome. Thank you appreciate you taking the questions congrats to the team happy Friday, and happy holidays to everybody Joe.

Just to.

Two follow ups really first one when thinking about the targeted 100 to 150 basis point margin improvement over time does that take into account potentially a higher.

Lower level of marketing spend over time or essentially returning back to say the 3% spend and then digging a bit deeper into the unit potential we were discussing a little bit earlier when thinking about it are you contemplating the idea of potentially putting more units in an existing trade area or do you think that.

There's greater opportunity for your brands to move into smaller markets over time.

And is this more about the portfolio or olive garden's specific and then just one more on top of it.

Yes, how much is cannibalization weighed on same store sales and margins historically.

Hey, John this is Rick.

Go go through those questions. So lower marketing is part of the 100 to 150 million 100, 150 basis points and sorry.

But most of that is going to be from our labor efficiencies that we've come come to play.

As sales go back up depending on what the competitive environment looks like you know, we will market and olive garden is a national brand and one of the one of the benefits of olive garden as their scale and their national footprint. So olive garden will be on TV nationally because we think thats, a big competitive advantage for us and so marketing will come back not to the level it was before but most.

Of our 100 150 basis points is going to be on on the labor front.

As it relates to unit potential you know, while we're not going to give a number on unit gene did mentioned olive garden Sue.

Seeing that we could potentially go into smaller markets because of the because of the business model enhancements that weve made.

Other brands are going to fill in markets I mean, one of the things that gene mentioned earlier about Cheddars is you know they don't have scale. They really don't have a whole lot of scale and most of the markets there and either so we really believe in relative market share and we think cheddars as the opportunity long one as the opportunity all of our brands have the opportunity to build scale in some of Mark is there in.

While still growing into new markets.

In regards to cannibalization, we haven't given that number in a long time and most of cannibalization would be at olive garden, and olive garden isn't growing that many restaurants, so the cannibalization isn't that that impactful for us.

And as as it relates to the other brands as we do go into some markets that we already have restaurants, and because we're so especially for cheddars because we're so dispersed on where we where our restaurants are.

When we add in new restaurants, yes, we will have some cannibalization, but the business model is so much better now that we believe that it's the right thing to do placid actually leverages some of the Gionee and other things in that market, even our supply chain. So while our restaurant level margins may may tick down if we cannibalize the cost outside the restaurants will get better.

Great. Thank you.

Our next question comes from the line of Nicole Miller with Piper Sandler Go ahead. Please your line is open Inc.

Thank you good morning.

Brad everybody two quick questions from me. The first is our numbers with the guidance can you talk just a little bit more about what is underlying that I would wonder about two things.

75% of the dining rooms are open so I can't imagine you're contemplating all of those reopening yet you're not contemplating everything closing so what is kind of the spectrum. There and then on the comp is it holding steady for dining rooms open and the momentum that you've achieved and or or.

He also seeing some softness.

Yeah.

Nicole This is Rick as it relates to our guidance and then I'll get into the comp.

We aren't assuming that we're contemplating any significant changes in net capacity restriction. So where we are today is where we're going to expect to be through the quarter.

No other than those that are already that are already contemplated by officials. If there are some new ones coming than than that we already know about but we don't know about any new ones coming now hopefully those things will ease as the quarter as the quarter goes on and so we do have some a little bit of that.

I will give you I want to give you a couple of data points.

So as of Sunday, our quarter to date on a fiscal basis, which is what you all look at our comp sales are down about 26%.

But if you look at it on a cash comparable counter basis, because remember we had a 50 threerd week last year and Thanksgiving shifted were down 35% as gene mentioned over the first two weeks and so our guidance cash.

Takes all that into account it takes into account that we think that our sales are going to maybe grow a little bit on a per op week basis or up or an average unit volume basis, but because were going up against that that high seasonal sales last year, our comps will be a little bit more challenged and so that leads to the second part of your.

Question, what are we seeing in comps for restaurants that still have dining rooms open we're now getting to our seasonal period. So we're getting into that point that we talked about after Q1 and recently mentioned on today's prepared remarks is that our comps are going to be harder.

What I would focus everybody honors our average weekly sales and if you look at.

Our press release that we shared we still have Andrew average weekly sales growing unfortunately, not growing as fast as average weekly sales grew last year, which we knew would happen.

And we highlighted that so we.

We're focusing more on Q4 and next year. We believe we have the business to get us through that and we were really comfortable with the with the guidance that we gave for Q3.

What we're really focusing on getting our business really ready to capitalize on when sales come back.

That's super helpful. Thank you and and to your point, yes, looking for this quarter and looking to the next absolutely that this leads me to my my second and last question is exactly that.

There's not even just the thought process any more about.

The bigger chains like yourselves being able to take share, but it's absolutely model, but say the consensus estimates, that's where we're at and I want to understand what do you think about that what's the opportunity for sales transfer and are you, saying 110000 locations close what's sort of the type in a location in house, what's the problem.

Already in the interim that you pick up those sales I mean, we all hope for independent revival, but that's going to take time has consensus Ben.

Too optimistic on that side or is that what is and is happening is going to happen. Thank you.

Yeah, Nicole I I don't want to comment on what consensus is for Q4 or beyond but what I do want to get everybody understanding as before the pandemic.

The full service restaurants business was about $100 billion category.

We believe after the pandemic, it's going to be a $100 billion or more category.

We also know that unfortunately, there have been a lot of restaurants that have closed and there might be more that are coming.

We really are unhappy with that we really like to see these independence day open as gene mentioned Bill.

Because they do provide some some novelty and flair that we can learn from as well, but you know as we think about our business in the long run full service restaurants was a big category, we had about an 8% share 9% share.

We believe it's going to be yet at least as big but potentially bigger because of the pent up demand and people really understanding and realizing what they missed the cash out of casual dining and full service restaurants.

And so if restaurants station closed for a while we're bound to pick up some of that share how much that is I can't comment on it.

But we believe we are really really well prepared to capture that share and with the business model that we have we believe that we're going to benefit from that.

Thanks again.

Our next question comes from the line of David Palmer with Evercore ISI group.

Please your line is open.

Thanks, Good morning, and congratulations to all of your promotions.

Follow up on your comments, so far about how darden transforming the business model for the long term you mentioned, how simplification and productivity will result.

And in the longer term margin step up and that can lead to greater unit growth opportunities down the road.

That's great and I and I think.

Get that one thing I'm curious about is about this whole crisis and your internal actions.

Has the business been transformed in a way in your major brands.

That is going to bolster sales per restaurant long term, perhaps some year like fiscal 23 might be higher than it would have been without the crisis and your internal actions be curious to hear about that.

Yes, David I think at this crisis has done a few things I think it's not just for the restaurant business, but for all business is not listen to other Ceos talk I mean, we've done it all up by five a lot of non value added activity inside inside organizations that you.

You are funding, but also was creating distractions.

At the operational level, I think thats, a big upside for us and it's something that we're really focused on to ensure that there's not there's not this gravitational pull to to bring us back to to do that type of work. What gives me the most confidence in our ability to get above pre payment per endemics sales is the investments we've made and.

From the minute after the day after April 20th when we raise the $500 million in the equity offering and we knew liquidity wasn't going to be an issue. This management team.

Focus 100% on what do we need to do to ensure our businesses are stronger than they were before we went to the crisis what actions what investments do you want to make what things that you do in history that turned out to be wrong that you want to make right and our businesses have worked hard.

Hard to do that now each one of our brands as it is in a different place on that journey.

I think our bigger brands are much further along at this point and they've made the they've made the moves and what I'm really impressed with is the stuff that they're working on today at the level of detail and trying to improve guest satisfaction to me is absolutely amazing.

Words down too we're spending a lot of time working on how do we improve our the off premise experience and how do we ensure the food at 15 minutes of its not going to go back into a microwave is in its optimal eating point or what's it look like it 30 minutes when it goes back into the microwave so.

There's just a tremendous amount of work in investment being made and what I would call. The second level that I think are going to pay big dividends, we've invested a lot back into quality and value and our brands and I'm really excited about that and the guests are telling us that they are noticing these changes.

It is kitchen capacity in issue at Olive Garden I mean.

Can you.

The step changes happen without you.

Heading into two bottlenecks and thresholds where that the experience is compromised on either off price or on premise no actually the opposite David because we removed a lot of the the extraneous products that were trying to serve that we're getting a half a percentage of sales out of and then we've really we've.

Really through our menu and menu engineering, we are moving the high value high satisfaction more of those items through to our guests and we compete and then what we make in the better we get so actually everything we're working on today speed is taken into account.

And that holds the simplification that process you guys have heard me talk about this flow you probably tar to be talking about a great, Oregon kitchen starts with how the how the product comes in the back door and and he goes streamline almost processes until it gets to the table and during this crisis weve been able to re evaluate all that all that activity.

And all those processes and we're so far along that journey today that day.

What gives me confidence about the future.

Thank you.

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

Thank you and congratulations on all the promotions.

The recent months progressed.

Strength to the consumer.

In the context.

Of the of the dining room capacities was a positive surprise.

Is there a way to tease out that.

How strong the consumer now is.

As as the reversals happen and the dining room closures.

So the rate is there a way to tease out.

Well, they're part of it is also that the customer just spending less.

Yes.

Yes, Nick we haven't really seen a whole lot of difference in our check average. So that's one way to think about the consumer.

How strong they are you know and as you look at our week to week sales in dining rooms that are open they are still growing.

Now, it's really hard to tease out consumer strength versus people.

Going out for holidays or people actually curbing their spending because maybe they were corn sell quarantining before Thanksgiving and those kind of things. So it's really tough to see that other than the fact that our check really hasn't hasn't had a big dip.

Thank you very much.

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

Great. Thank you good morning.

Two things from me the first just in thinking through what.

Off premise sales could look like in a normal operating environment whenever that may be cash.

Can you share where sales were from on the off premise side in markets, where the dine in recovery, maybe was farthest along or anything you've gleaned from your customer data that's informing your thinking around those pandemic off premise sales and then the second question is you mentioned.

Adding brands to the portfolio has.

The covenant environment, either created more or fewer attractive opportunities for acquisitions or multiples less or more of an inhibitor now than they were before just any comments around the M&A environment would be great.

Yes first on the off premise.

On the off premise capacity, what I would say is.

It's hard to get your.

Joe your arms around it because you still have capacity restrictions in your restaurant if you live in with the six feet. So there's still a lot of people to pull up to our doors that realize that we've got an hour away and then they transitioned to an off premise experience.

So we really don't have a feel for where thats going to level out and I think I.

I think I said last quarter, we actually see a scenario where that could actually fall down to below pre pandemic levels. Once you open up the die rooms, because there'll be less demand for and then we believe it will come back at a higher level than it was pre print pandemic, but we don't have a feel for where that's going to settle in right.

Now.

Because I think everybody's behaviors just so so modified in this environment I'm really not going to comment on the M&A environment any further than what I've already said.

Okay, great. Thank you very much.

Our next question comes from the line of Andy Barish with Jefferies. Go ahead. Please your line is open.

Hey, guys.

A lot of kind of medium and long term questions I just wanted to.

Got to think about the fourth quarter.

Given obviously there's.

Impossible, a number of variables to try to try to project at this time, but if the environment kind of stays the same as it is I mean historically your your Fourq you guys looked a lot like your Threeq you is that.

How we should kind of be thinking about things on a high level.

Andy our fourth quarter isn't that different than third quarter. We've got mother's day in Q4, So thats, a really big really big day for us.

Well, it's not as seasonally high as Q3 is not that different.

Okay. Thanks, Rick.

Our next question comes from the line of Brett Levy with MKM Partners go ahead. Please your line is open great. Thanks for taking the time share in all this information.

Congratulations to all of the team members, who were elevated in all the people who actually helped them get there.

I guess, just one day one day to question if you'd be willing to share and then just a second question on the one the first is on market share at would you would you care to share what the olive garden and Longhorn, We're X and if you hadn't yet and any thoughts on positive units just across those two systems and then just said.

Second question.

We've talked a lot about technology and the people how are you thinking about the physical boxes, the existing ones and new ones with all of these transformative issues that you're dealing with whether its cash or people or just have consumers are looking at some of the structural issues you dealt with at Olive Garden, how are you thinking about.

What you need to do to your current and your future boxes. Thank you and good.

Yes, Brett as we get the share information.

Pretty lagging so we're usually a quarter behind to see what what kind of share weve gained in olive garden and longhorn side.

I really can't really comment on that I would assume that we've gained share based on.

Based on industry data I mean, because we're looking at total industry. So a lot of should moderate restaurants are shut down.

As far as our boxes.

I think the biggest thing that we're looking at right now.

And I mentioned this earlier is that we we believe the off premise experience will be driven by curbside enabled by technology.

We were on a pathway in our big brands too.

You know has really developed space, that's consumer facing to deal with the off premise experience, where the consumer came into the building to get it.

So now we're really looking at that and were trying to develop ways to adapt to the current facilities to make thats based non consumer facing and closer to the kitchen.

So it should actually costs less longer term as we as we make these adjustments and we just built a new prototype in Orlando for Olive garden with a dedicated consumer consumer facing off premise experienced more like a what I would call Lee.

Fast casual type restaurants.

And now we've determined that that's not necessary.

So thats good news on that Im not adding and so our teams working real hard to figure out a way.

What these adjustments will look like they'll target those investments in the high high volume off premise locations.

And they'll react and get that done over the next couple of years.

Our next question comes from the line of John Ivanhoe with JP. Morgan Go ahead. Please your line is open.

Hi, Thank you I mean I don't think this was that this was touched on in any of the questions, but you Didnt mentioned technology, you're making and I think it was field level management.

More effective and more efficient so I wanted to explore whether that has been fully implemented in the field and the risk in that manner in the field and the regional manager ranks and exactly I guess, how big that could be and then secondly, you know.

Did you do think about re populating the restaurants is there a possibility of changing the mix between manager an hourly employees do you think you actually may have an opportunity to run a more efficient restaurants from a managerial perspective as you know as we return back to normal.

John Good cool good questions I think from a technology standpoint, there's nothing we're adding to help our supervision we.

We've got some and we got a management information systems that weve been well developed over the years, we continue to evolve those streamline those try to get them. The most important information that they need to run their businesses.

I think the biggest challenge there is how to not giving too much information in parallelism and so I think that I think that will be one thing that I.

I think Rick will look at in his new role, especially with his technology background is how to how to.

Fine tune that platform to ensure that they are getting the information they need.

But not too much information as far as the the team member management mix I don't see any game that we've always been efficient maybe even more efficient than I think a lot of our competitors are at.

That level, we use key employees to supplement.

As a as a supplement to management, but also as a development program as a gateway into our management program. So I think we're pretty lean there I don't see all technologies going to change that at all I mean, I'm always going to want to management person in the business and the facility.

Leading leading leading these large groups of people I think the difference in casual dining and I think it's one of the reasons why it doesnt franchise, all that well that these are complex businesses with lots of team members and it's not you know you're not not you know you're not doing this business over the counter and the one thing that off premise has added is added more complexity.

As you are dealing with 10 or 12 guess the time and your parking lot as you bring in the food out. So the business is in some ways getting getting more complex as you as you try to deliver food through different channels. So I don't see a whole lot of cost savings there.

Thanks.

Our next question comes from the line of Gregory Francfort with Bank of America Go ahead. Please your line is open.

A thanks I'll keep it brief I just had a follow up to to Palmer's question.

About the menu and.

Can you maybe talk about from two quarters ago today, how your thoughts maybe of change on re expanding the menu you shrunk it quite a bit.

And I think customers were okay with that are they still okay with it and just have your thoughts on re expanding a change at all thanks.

Yes. Good question, Greg I think that you know obviously, we shrunk it for many many reasons primarily supply chain and you and then just from a labor productivity standpoint, we've been very judicious as we brought the products back we think we through our source. Our turf studies, we think that we've we've satisfied everybody on them any any consumer and offer them.

In places that they would want to go eat any specific menu. What we've really focused on is eliminating duplicity in the menu where you have a menu item. It does the same thing.

You know I took at someone else's I think that runs a has a very.

Broadly appealing menu, but yet limited number items you have to go to a hillstone or Houston's environment, where they touch every day touch everything in each category that you might want is a consumer but they do it with 15 menu items and so I think thats what were trying to do is to ensure that we don't have duplicative and I think the example, I would use is in.

Longhorn is an appetizer you don't need both wild west shrimp and calamari, it's the same consumers going to by the by the product and so we're working on is how do we will how do we end up with the unique product and that product that you can only get in our restaurant that that's how that's very craveable and that differentiates you and having to.

Products that do the same thing in one's not ones ubiquitous and ones. One is differentiated makes no sense to me and so thats how were thinking about so overtime, yes, Bolivia product here in the product there, yes, but what you have to have you have to have discipline.

And the discipline as you would have to take stuff off and we havent demonstrated that as an industry over the last 15 years, and we need to demonstrate that moving forward.

Thanks Gene.

Our next question comes from the line of Jared Garber with Goldman Sachs. Go ahead. Please your line is open.

Good morning, Thanks, and congratulations to the team on the on the respective promotions as well just a quick one for me I wanted to get an understanding of that potential opportunity in sort of the family ordering or catering business is that something that over the long term when things normalize and consumers tend to come back to the restaurants is that in another business.

It can be maybe bigger than it was in the past as we think about consumers may be adopting more of a non at home occasion and.

In restaurants dining occasion, yes.

Yeah, we're very strong in that and olive garden already are obviously, we sell pendulous on Japan's a fettuccine so.

So that's that's a big part of our business, where we're seeing some growth right now is in Cheddars.

With that business with family packs we.

We've also had some success and our and our upscale brands.

Being able to sell family family Paxar Stakes and size that you can that or.

Stakes on prepared but besides the repair and will give you instructions to reheat and so you know, we're calling family meals or family packs that are working very well. So I think it's something that we had some penetration in olive garden I think you'll be bigger on as we move forward and it's provided us an opportunity in some of our other businesses to get enough in that business.

Our next question comes from the line of James Rutherford with Stephens Inc. Go ahead. Please your line is open.

Hey, Thanks for taking the question just one quick one for me at gene with the technology investments that you all have made around online ordering and curbside has your view changed at all in terms of the long term.

Nics of off premise, where perhaps it doesnt that being a material higher.

Mix longer term compared to where it was pre pandemic or is that you still this is maybe a slight bump but not huge.

Kind of pre and post pandemic. Thank you.

I think it's a slight bump.

You know.

From pre pandemic levels I think that you know.

I mean listen this was this was.

A growing piece of everyone's businesses convenience became more and more important.

Maybe it's an opportunity for us to take more share in Olive Garden, and then I think because the experience is going to be so frictionless, but we're going to see what the consumer demand is what I'm confident and especially on the olive garden side, then somewhat to Cheddars is that.

We will we will we will we will get our share in this business, we will get our share of the off premise pie and I think we'll do a really good job with that and that will continue to grow over time.

Our next question comes from the line of Brian Vaccaro with Raymond James Go ahead. Please your line is open.

Thanks, and I Echo the congrats on your promotions just two quick ones for me I wanted to circle back on the labor discussion and you spoke to some tech investments and I'm curious what role you think server handheld could play in the coming years, with Florida, and others potentially moving towards the past to 15 overhang EPS that or other Ajay.

Since in the service model that you could see maybe implementing while protecting the guest experience just just curious to get your thoughts there yeah.

Yeah, I'm not a big believer in.

Trying to gain too much efficiency on the on the service side I mean, I think every time you say.

You're going to gain efficiency, there, you're really saying you're going to cut service.

And we are full service restaurants.

So when I think about the handheld and technology for the service I'm thinking more about speed of service for for our guest.

Then then saving money.

I just I've been I've been doing this a long time and I am just every time I've tried to improve increased efficiency in that in that part of the restaurants. It doesn't it doesn't doesn't end well for me and so I'm committed to keeping the service levels up I think service is a big part of the value equation, that's a differentiator when you come into our restaurants versus GAAP.

Onto a fast casual or fast food is we got to provide a service and there is a level.

You're going to you want to get to that minimum level, you want to do it better than your competitors and you want to you want to earn your business that way.

So I see the technology solution more as a benefit to the consumer not a benefit to us from a from a cost standpoint.

Understood. That's helpful. And then shifting gears quickly on the store margins Rick could you provide a little more perspective on the other opex line. Some more specifics on costs that are starting to normalize versus the lower spend levels in your fiscal Q2, and it looks like your guidance for Q3 and beds store margins that are in the ballpark of Q2, I know you mentioned it.

Urgency pay but are there other changing cost dynamics that we should be mindful of specifically in Q3 versus Q2. Thank you yes.

Yeah, Brian the one cost that we will continue to go up as repairs and maintenance as I mentioned when we have done who is closed we don't have as much.

Beating of our of our dining room. So we have we will have our NIM start to tick up in it already started to tick up in Q2.

Dining rooms reopened it also gives us the time to actually do some of that repair and maintenance while the dining rooms are closed. So so we will have some of that coming up.

Utilities go up you know as your dining rooms opened and you've got more utilities going that way, but again, that's all contemplated in everything that we have in our guidance.

All right. Thank you.

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Our next question comes from the line of Jake Bartlett with Trust Securities Go ahead. Please your line is open.

Great. Thanks for taking the questions and also congratulations to all.

My first one is a quick one on.

On LTL goes in marketing you meant you mentioned that your marketing dollars with largely recover post Tobin.

Actually go back to the same sort of cadence you had on an LTM goes or are you, we thinking kind of your promotional strategy longer term.

Where we were totally rethinking our promotional strategy and how to effectively use that.

Well there was a lot of good and what we did and we realize there was a lot of bad and what we did and there's a lot of activity that goes into those.

And you know as we evaluate that after the fact.

We believe there is a better way to do that that doesn't mean that we're not going to do LT goes.

But we've been out of them, we were out of Ltos in longhorn for almost two years pre pandemic and we've been able to to make that adjustment.

As we look it at all.

Olive garden.

We will continue to to try to figure out what's the best way to use our scale advantage and market that business effectively but.

But also considering.

Do we need to do six LTL was a year or are there other ways to do that more effectively.

Got it and then my last my second and last question is you talked about improvements to that to the business and kind of coming out of Kobe thinking.

With a better business model how.

How do you think about or I don't know, if you're ready yet to talk about it but how do you think about the long term.

Growth algorithm that you talked.

Talked about in the past.

Pertains unit growth, so maybe margin expansion opportunities or are we still kind of thinking that the 7% to 10%.

You bet.

MBT growth or are you, saying, we should think about that differently longer term.

Jason This is Rick I think if you know as you think about our long term framework, we havent adjusted our long term framework. So as of now we still believe we can get to those numbers over the long run, but as we've always said any one year could be above or below that and so I would hope that F Y 22 would be above that.

You know because of where we were in F 121, but were in fact 20, and we're going to be below it. So in the long run which is what we what we talk about to all of our investors into all of you. We believe we can hit our long term framework.

And I will remind everybody that weve been a public company since 1995.

We've never had a 10 year period, where are where our average annual TSR has been below 10%.

And even when we fiscal so even last year. When we had the worst fourth quarter I think have any industry and anyone at least for us.

We still had a tenure TSR of over 10% on average.

Great. Thanks, a lot.

Our next question comes from the line of Korea, Ohri Gupta with Barclays. Go ahead. Please your line is open.

Great. Thank you so much for anything under index and my congrats.

Wow I wish.

Curious if you could.

Give us some thoughts around how you broadly thinking about the dividend.

I know you mentioned sort of 50%.

Relative to the.

Yes, just in light of.

I mean guidance and some of the continued volatility that we're seeing in the external environment.

How should we anticipate that day.

Evidence sort of progressing going forward. Thank you.

Yes priya.

We know that dividends are important to our shareholders. We also know that the dividend policy is important our bond holders.

And as you think about our dividend and what we do we typically said it within our long term framework of 50% to 60% of our of our earnings.

In the quarter that we just ended was at the low end of that at 50%, we're going to continue to work with the board on what our dividends going forward, but going farther than this quarter, it's kind of hard for me to say because the board is the one that decides the dividend.

But you know we did contemplate what we think our guidance was in Q3, when we set our dividend in Q2. So we always look forward to see what we think our cash flow as you're going to be to ensure that the dividend is safe.

And so that's why we set the dividend at 37 cents this quarter.

That's helpful. Thank you.

Thanks Bryan.

And ladies and gentlemen that concludes today's skewing any session for the call I would like to turn it back over to Mr. Collin pack.

Okay.

Thank you everyone for participating that concludes our call for today I'd like to remind you that we plan to release third quarter results on Thursday March 25th before Mark It opens with a conference call to follow thank you and happy holidays.

Ladies and gentlemen, this concludes today's conference call. We thank you for your participation you may now disconnect.

Yes.

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