Q4 2022 Darden Restaurants Inc Earnings Call
Welcome to the Darden fiscal year 2022 fourth quarter earnings call. Your lines have been placed on listen only until the question and answer session to ask a question you May press star one on your Touchtone phone.
The conference is being recorded if you have any objections. Please disconnect at this time I will now turn the call over to Mr. Kevin Kallikak. Please go ahead you may begin.
Thank you Maureen good morning, everyone and thank you for participating on today's call. Joining me today are Rick Cardenas, Darden's, President and CEO and Rajiv and 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.
Statements are subject to risks and uncertainties that could cause actual results to differ from 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.
Simultaneously broadcasting a presentation. During this call which is posted in the Investor Relations section of our website at Darden Dot Com today's discussion and presentation includes certain non-GAAP measurements and reconciliations of these measurements are included in the presentation.
Any reference to pre Covid when discussing fourth quarter performance as a comparison to the fourth quarter of fiscal 2019. This is because of the results from the fourth quarter of fiscal 2021 and 'twenty 'twenty are not meaningful due to the pandemic impact on the business and the limited capacity environment that we operated in.
During those periods. This will be the final quarter that we provide comparisons to pre COVID-19 moving forward, we will provide comparisons to the prior year.
We plan to release fiscal 'twenty 'twenty three first quarter earnings on Thursday September 22nd before the market opens followed by a conference call.
This morning, Rick will share some brief remarks on the quarter and full year before discussing our focus moving forward.
Raj will provide details on our Q4 and full year financial results and share our fiscal 'twenty to 'twenty three financial outlook and then Rick will close with some final comments now I will turn the call over to Rick.
<unk> you, Kevin and good morning, everyone.
This is our first conference call since genes retirement, so I wanted to take a moment to thank him.
Do you never wanted to spotlight on himself and he's probably listening right now and telling me to move on.
But darden is stronger today and better positioned to navigate any operating environment because of gene's leadership and.
And personally I know I'm better prepared for my role thanks to James Mentorship.
So on behalf of our 180000 team members. Thank you Jean for putting our guests and team members first and for leading Darden with a steady indecisive had.
As you saw from our press release. This morning, we had a very good quarter, even in this highly inflationary environment.
For the quarter, we exceeded our sales expectations and our earnings were in line with our outlook.
Overall fiscal 2022 was a solid year.
Each of our brands strengthen their business models, while our restaurant teams remain disciplined and executed well in a challenging environment.
We stuck to our strategy continue to price below inflation and ended the year with significantly better margins than pre COVID-19.
As a result of this business model improvement and our strong balance sheet, we are well positioned as we begin our new fiscal year.
In what remains an uncertain environment.
Raj will share details for the quarter and the full year in a moment, but first I want to spend my time, reiterating darden's strategy, which is not changing and will remain our focus moving forward.
Our brands benefit from Darden's, four competitive advantages of significant scale extensive data and insights rigorous strategic planning and our results oriented culture.
But none is more evident in our financial results and our scale.
To quickly Dimensionalize our scale advantage for you. Our total sales are more than two times, our closest full service restaurant competitor more than two and a half times. The next closest.
We also have higher than average annual restaurant volumes lower overhead costs, which we achieved by centralizing our support functions.
And margins that are significantly higher than our competitive set.
Our scale creates cost advantages that our brands could not achieve individually.
A great example is the fact that each of our specialty restaurant brands.
Capital grille, and Eddie V's seasons, 52 yard House, and Bahama Breeze achieved record results for the year, even in the midst of a historic inflation.
We will continue to leverage our scale and our superior financial position to make long term investments in our business.
First we will continue to invest in our brands value propositions by under pricing inflation over the long term.
This is the biggest investment we make every year.
Additionally, we will continue to leverage our scale to invest in technology that enhances the guest experience and simplifies operations.
Finally, it is our people who bring our brands to life and we will continue to invest in them. So they can grow and thrive and helped us do the same.
At the restaurant level, our strategy comes to life through our back to basics operating philosophy.
This philosophy anchored in food service and atmosphere has never been more important than it is today.
Our restaurant teams focused on being brilliant with the basics ensures we put the full in full service dining.
The work our brands are doing to drive execution by simplifying our processes and menus puts our restaurant teams in the best position to deliver great guest experiences.
And it's working.
Olive garden's overall guest satisfaction scores are at all time highs.
Additionally, on mother's day, the olive garden team delivered record performance.
Others day was the highest sales day and second highest guest count day in their history.
We are also continuing to make key investments across our portfolio to position each brand for long term success.
For example, longhorn Steakhouse had made significant investments over the past few years and the quality of their food.
They continue to lead the casual dining industry on food quality and taste of food, which propelled them to over $2 billion in annual sales for the first time.
Similarly, Cheddar scratch kitchen is a value leader and the investments they have made to simplify their menu and price below inflation has resulted in improvement in their industry leading value ratings.
Finally, as I mentioned, our specialty brands had record performance for the year, which was due to the investments they made during COVID-19 and the scale advantage of Darden.
Our strategy remains the right one for the company and we will continue to execute it to drive growth and long term shareholder value.
As we begin our new fiscal year, we continue to experience significant inflationary pressures and we will stick to our strategy of pricing below inflation and our competitors over time.
While we can't predict the future we're focused on managing the business for the long term and the power of darden's positions us to navigate this environment better than anyone else now I will turn it over to Raj.
Thank you Rick and good morning, everyone.
Total sales for the fourth quarter were $2 6 billion $14, 2% higher than last year, driven by 11, 7% same restaurant sales growth and the addition of 33 net new restaurants, which included one temporary closure that will reopen in fiscal 2023.
Net earnings per share from continuing operations were $2 24.
Total EBITDA was $431 million and we returned significant cash to shareholders.
$137 million in dividends and repurchasing $237 million in shares for a total of $374 million of cash return to investors in the quarter.
We continue to see increasing cost pressures with total inflation for the fourth quarter of 7.5%.
During the quarter, we took additional pricing to help offset a portion of the growing inflation that brought total pricing to 6% for the quarter and 3% for the full year.
This is well below the annual inflation of just over 6% as we continue to execute our strategy to strengthen our value leadership position.
Turning to the fourth quarter P&L compared to pre Covid food and beverage expenses, what 300 basis points higher.
And by investments in bought pricing below inflation and in food quality for reference food inflation in Q4 was 12% versus last year.
Restaurant Labor was 40 basis points lower driven by hourly labor efficiencies gained from operational simplification.
Which were partially offset by continued wage pressures.
Total restaurant labor inflation was 7% versus last year, primarily driven by hourly wage inflation of approximately 9%.
Marketing spend was $48 million lower as we remain disciplined in our approach to marketing activities, resulting in 230 basis points of favorite ability.
G&A expense was 140 basis points lower driven by our corporate restructuring in fiscal 2021 and sales leverage.
As a result, we achieved restaurant level EBITDA margin of 19, 9% 40 basis points above pre COVID-19 levels and quarterly EBITDA of $431 million.
Total EBITDA margin for the quarter was 16, 6% and 170 basis point improvement to pre Covid.
Our effective tax rate for the quarter was 11, 8%.
We ended the quarter with earnings from continuing operations of 282 million, which was 10.8% of sales.
All of our segments had higher total sales and higher average weekly sales per restaurant.
Segment profit dollars were higher for all segments as well.
Olive garden and fine dining segments also grew their segment profit margin why longhorn and other business segment had lower segment profit margin this quarter driven by higher level of inflation and other investments in those businesses since pre COVID-19.
Fiscal 2022 proved to be another unpredictable here, we experienced strong demand early in the year as capacity restrictions were largely removed. Additionally, we faced reduced demand in staffing challenges as the delta ovarian damage in the fall and the Omicron Radian followed in December and January .
Finally inflation increase throughout the year in fact, our total inflation double from what our original expectation of 3% to just over 6% for the full year.
Despite all of those challenges, we were able to Delaware at $9 $6 billion in total sales and achieved diluted net earnings per share from continuing operations of $7.40 in line with our internal expectations and at the higher end of our annual guidance, we provided at the beginning of the fiscal year.
This is strong top and bottom line performance drove over $1.5 billion in EBITDA from continuing operations, resulting in 15.9% EBITDA margin nearly 200 basis points higher than pre COVID-19.
We also invested almost $400 million of capital in the business returned over $1 $6 billion to shareholders and ended the year with $421 million of cash on the balance sheet.
Our strong operating model generates significant cash flows in fact since 2017, we've averaged EBITDA growth of 9.5% annually our balance sheet is well situated at just one eight times.
Debt to adjusted EBITDAR at the end of the at the end of fiscal 2020 to well below our targeted range of two to two five times and provides us flexibility for the future.
The strong balance sheet, coupled with our disciplined approach to simplifying operations under pricing inflation and driving profitable sales growth positions us well for the future.
Finally, turning to our financial outlook for fiscal 2023, we expect total sales of $10 2 billion to $10 $4 billion, representing growth of 6% to 8% from last year.
Restaurant sales growth of 4% to 6% and 55 to 60 new restaurants.
Capital spending of $500 million to $550 million.
Total inflation of approximately 6% and we plan to continue underpricing total inflation with annual pricing of approximately 5%.
Furthermore, we expect commodity inflation of approximately 7% that's heavily weighted in the first half of the year.
Hourly labor inflation of approximately 8% and annual effective tax rate of approximately 13, 5% and approximately 124 million diluted average shares outstanding for the year.
All resulting in diluted net earnings per share between $7 $48.
Heading into 2023, we expect the commodities inflation rate to increase in the first quarter from the 12%. We had in Q4, and then to moderate significantly ending the year roughly flat. So due to the significant unusual timing, we would like to provide some context on the cadence of quarterly earnings expectations.
With the first quarter commodities inflation in the mid teens, we expect a low double digit percentage decline in EPS from last year for the second quarter commodities inflation eases a bit to the low double digit range, resulting in flat EPS to last year.
And for the back half of the year, we anticipate low single digit commodity inflation and positive EPS growth.
As a result of our strong performance and our fiscal 'twenty 'twenty three outlook, our board approved a 10% increase to our regularly regular quarterly dividend to $1 21 per share implying an annual dividend of $4.84.
This results in a yield of four 2% based on yesterday's closing share price.
And with that I'll turn it back direct.
Thanks, Raj I want to close by thanking our team members in our restaurants and our support center for their outstanding efforts throughout a challenging year.
As a publicly traded company, we strive to earn a profit and create long term shareholder value.
And while we are proud that our average annual total shareholder return has always been at least 10% for any 10 year period as a public company.
There was a larger purpose to what we do and that is to nourish and delight everyone. We serve.
As a restaurant company, we continue to nourish our guests with delicious high quality food.
To us it means more than that we want to nourish the spirit of our guests to delight them with great service and an atmosphere that enables them to reenergize and connect with family and friends over a great meal.
We also want to nourish and delight, our team members by providing competitive wages and benefits, while giving them opportunities to build meaningful careers within our company.
With more than 1850 locations and 8000 leadership positions across our restaurants.
We provide a pathway for thousands of people across the country to transform an entry level job into a lifelong career.
Helping others realize their potential and achieve their dreams is one of the things that makes our industry special and that's why a central tenet of our approach to team member development is a commitment to promote from within.
We are proud that more than half of our restaurant managers positions are filled by our hourly team members.
But their growth doesn't stop at the restaurant manager level in fact more than 15% of our officers began their careers with us as hourly team members.
Finally, we want to nourish and delight communities, where we operate and our team members call home.
When we open a new restaurant, we make a positive impact by creating an average of 100, new jobs and serving the local community.
We aim to make a difference by helping tackle issues that are that we are best equipped to address like fighting hunger and sourcing food with care.
So our purpose to nourish and delight everyone. We serve is not limited to just sales and earnings growth.
Rather it's about sales and earnings growth as a way to make a positive difference in the lives of millions more guests tens of thousands more team members and hundreds more communities.
And by doing so we will continue to create long term value for our shareholders now lets take your questions.
Thank you, ladies and gentlemen, as a reminder to ask a question. Please press star one please pose one question and one follow up question only.
Pause for just a moment to allow everyone to signal.
Okay.
We will take our first question from Jared Garber from Goldman Sachs.
Hi, Thanks for taking the question. This morning, obviously I appreciate all the guidance that you provided.
We're entering.
What may be a more challenging macro environment. So just wanted to get a sense of I guess what are the underlying assumptions in your guidance on both the top line and the cost I know you went through a couple of them on commodities and pricing.
As it relates to consumer spending maybe in the near term what you're seeing and then.
For the balance of the fiscal year, what are some of the assumptions underlying that guidance.
Hey, Jack Good morning, This is Raj Hey.
Look we're this is our best estimate based on the data and information we have today, obviously like everyone else Theres a lot of uncertainty out there and you see that.
We have we have a wide range similar to last year to kind of reflect that underlying uncertainty and with that said you know we've shared information that aren't commodities and you know what we estimate and will we actually even provided the quarterly cadence on that front.
And you know.
We're focused on things, we control and I actually wanted to have Rick chime in on the consumer you know, what we're seeing with the consumer and our expectations high level.
Yes Jared.
I will start by saying you know the consumer sentiment right now is at the lowest it's been in 60 years. According to the University of Michigan.
But one of the benefits of our portfolios you have a wide range of consumers.
Our data indicates that higher end consumer hasnt seen the same impact that.
As consumers at the lower end of the spectrum.
And consumers of lower end, especially of Cheddar has shown signs of check management.
And they do make up a smaller percentage of our current guest base than it did six months ago. So the impact that inflation is having on that lower end consumers is showing a little bit, but we are we incorporated that in our guidance.
Great. Thanks, Thanks for that and I guess, just sort of one follow up there.
Do you think about sort of the tools that you have in the toolbox, if the consumer does slip.
With a little bit more and maybe it's more than just that lower end.
Cheddar is but how are you thinking about them. That's all you have to.
Maintain that higher level of sales growth as we go throughout the year, whether that's discounting or promotion, obviously, you've got a lot of work in the last couple of years limiting some of that particularly at olive garden and longhorn. So just wanted to get a sense of how youre thinking about.
The levers that you have to call for the year. Thanks.
Yes, Jared for competitive reasons, we're not really going to get in too much into detail on our plans, but as you've seen over the last couple of years. Our teams have done a great job being flexible and reacting to changing dynamics.
You know we won't overreact, that's as you know that that's not where we the way we work we won't overreact, but we're going to continue to focus on profitable sales growth and manage the business for the long term.
You know if the consumer's slows dramatically if we see a big slowdown in consumer traffic. We would also expect the rate of inflation do decline as well.
And just to give you an idea 1% decrease in the rate of inflation is more than more than offset that is more more than offset a 2% decrease in traffic and so that should still help us get to within the range of our guidance.
You know as you think about our media message and what we're doing.
Olive garden's scale provides them the opportunity to use media.
To get our message out to many guests that's what the bet one of the benefits of scale.
We believe we can drive traffic by highlighting the value we provide every day.
Through an abundance of our never ending first course.
And if you look at our current media message right now it speaks to one of our most craveable items are Alfredo sauce that we make in house every day.
It reinforces the core advertising in core equity at Olive garden that we've invested in over the last two years.
And that AD is the highest rated adds we've had in years.
And so you know our strong margins give us an optionality if we do promote but we don't expect it to be at a deep discount. So we do believe we have the tools in our toolbox to keep traffic at a better level than the industry, but we won't do things that'll hurt us in the long term for short term benefit.
Okay.
We will now move on to our next question from Nicole Miller from Piper Sandler.
Thank you and good morning could you talk a little bit about the marketing spend embedded within guidance and also more specifically the muscles and thinking around olive garden, which has been about more about brand equity than any call to action in terms of price point. So what are you thinking in terms of marketing. Thanks.
Yes.
Hi, Nicole.
Don't expect a significant increase in marketing you know maybe within 10 basis points of what we had spending in 2022 as a percent of sales.
As we look at Olive garden, specifically as Rick mentioned, we're focused on really further strengthening the core equities. So the advertising the messaging is going to focus on the brand equity that never ending abundance than any message that further enhances dock is really what we're focused on we don't see a need to do like Lexus like Rick said.
A deep discounted promotion, there, but but promotions that actually help elevate the brand equity.
And then just a follow up and last question, what kind of staffing levels I mean, I imagine at the two big brands pretty much.
Where are you at.
Passing out the right way by fully staffed fully staffed.
Staffing levels are embedded.
How does labor and freight if at all in 2023, thanks again.
Okay.
Yeah, Nicole this is Rick.
Right now we have more managers per restaurant than pre COVID-19.
So at the manager level, we're really well staffed.
We're continuing to add two new team members.
But as I said, we have 180000 team members now which is what we had pre COVID-19. So we're back to the level of our team members staffing from pre Covid that said, we still have pockets of restaurants that can improve their staffing levels just like it pre COVID-19. So we still have restaurants that that could have a little bit more staffing level.
But in general were really where staff right, where we were before COVID-19.
And then just on the inflation labor inflation hourly wages at one 8% and total labor is somewhere around six ish is what we have embedded in the guidance.
Okay.
We will now move on to our next question from Jeff Farmer Gordon Haskett. Please go ahead.
Great. Good morning, Thank you.
So it looks like Longhorns average weekly sales were up more than 25% versus pre COVID-19 levels.
Olive garden sales were up about 5% I'm just curious what your view is in terms of the factors that have.
Contributed to that large gap in sales growth across the two concepts over the last couple of years.
Yeah. Jared this is Rick thanks for noticing how how strong Longhorns performance has been in the fact that olive garden is still up versus pre COVID-19.
I'll start by saying if you think about what we started at longhorn and reducing the dependence on price pointed promotions on advertising, we did that before Covid and we had we had almost finished before COVID-19 started.
And throughout Covid, they continue to make significant investments in their food.
And the quality of their food and have improved their overall.
Execution in the restaurants.
You know they've said they've had a great run of sales over the last couple of years versus pre COVID-19 because of the things that we did going into COVID-19 and that we continued during COVID-19.
Olive garden started that process, a little bit later right Olive garden dirt before Covid was still doing significant discounting and price pointed promotions. We had started to wind off of some of those but we still had quite a few of them.
In addition, remember were significantly below our pre COVID-19 levels and marketing at Olive Garden.
And that was driving some guest count that we think whereas in its profitable.
As the guest counts that we're getting today. So the marketing that we've done has helped the marketing we're doing today is still driving some traffic, but it's driving the guests our core guests that come to us because of the everyday value and finally I want to say olive garden's margins are.
A really strong so while their sales may not be as strong as pre COVID-19.
As longhorn they have made a huge improvement in their business model and have the best margins basically in casual dining which gives us flexibility to do the things that we need to do going forward, if we need to.
That's helpful and just a quick follow up you touched on this but with that steep steep decline in consumer confidence.
Is there a relationship is there a relationship between that declining consumer confidence and just sort of a softening of consumer health.
Versus your job applicant flow the pace of hiring.
Talked about staffing levels, but as the consumer comes in it comes under a little bit more pressure how has that actually been a little bit of a silver lining in terms of being able to hire.
Well, we've seen our applicant flow growth grow over time, even before you started to see the decline in consumer sentiment.
As the beginning of the fiscal year at the beginning of the calendar year started we had we had mentioned in our last call that we have seen significant applicant flow and that is helping us on on.
Kind of leveling off or wage inflation over time.
But so I don't I'm, not saying, that's the exact relationship, but as consumer confidence wanes, and maybe people feel a little less less comfortable environment.
They'd be more likely to come back into the job market and that would be a good thing for us.
Okay.
Ladies and gentlemen, we will now move on to our next question from Jeffrey Bernstein from Barclays.
Yeah.
Great. Thank you very much.
Just wondering if you can give us some.
Color on that.
Near term comp trends, just so we can assess that consumer sentiment slowdown.
Whether there was any change in trajectory by brand, perhaps through the fiscal fourth quarter into June or change in purchasing patterns. I think you mentioned, maybe a little bit of mix shift down et cetera, but just wondering if you can give some color on other brands.
All as compared to traffic just trying to get a sense for whether there's any early indication across the broader portfolio.
Of a sign of perhaps slowing consumer spending.
Yeah, Yeah Jeffrey.
I wanted to talk about the trends throughout the quarter and if you think about our comps throughout the quarter. They stayed strong and they actually continue to build for March April to May.
But the industry actually started to see some declines for March April and May in same restaurant sales.
Yeah, I wanted to be clear on the on the check a little bit of a check management at Cheddars, it's not it's not dramatic.
Small we're not seeing it at our other brands as much actually we're not seeing at our other brands, but you know I also the point that I made about the mix of consumers at the lower end of the spectrum that's across all of our brands is not just at Cheddars.
Cross all of our brands.
You know as you know just to give everybody some comfort about the comfort, but just talk about the quarter.
The industry sales have slowed from May to June .
And where we have seen that as well, but some of this might be a return to normal summer seasonality that we didn't see last year.
As the dining rooms, reopen and people felt more comfortable we didn't see the normal seasonal patterns that we typically do.
The industry comps do social softening, but quarter to date across our portfolio, we are exceeding the industry and we are within our annual guidance range.
Okay.
Understood and then just more broadly as you think about full year 'twenty three.
It seems like the midpoint of your earnings range would be maybe in the 4% ish range and then the dividend you mentioned, 4% so.
8% total shareholder return seems to be a little bit below your 10% to 15% long term target.
I know you mentioned that you know over 10 year periods here proud to be consistently delivering within that range.
For fiscal 'twenty three it doesn't seem to necessarily be sales led considering what looks like strong comp growth in the assumptions and the pricing of 5% that's pretty close to the 6% inflation to protect the margins I'm. Just wondering if you can give some color on where you see the shortfall at least within your own guidance again, the sales seem to be strong and it seems like pricing to protect the margins. So just.
Whether it's just conservatism or just key to give it.
To give a wide range just trying to get the assessment for where you see the potential earnings shortfall coming from.
Okay.
Hey, Jeff look.
You know, we we still believe that 10 to 15 is the right target long term.
However, in any given year that might be different and as I mentioned in our in our.
Our prepared remarks, we're choosing not to pass along all the all of our inflation to our guests and for a couple of reasons right. We don't think all of this cost is permanent for example, in our chicken dairy and wheat, which had a significant portion of our basket, especially at olive garden.
Our already highly at a very high levels right now we don't believe that that's that's very sticky for the long term and so we think.
We think it's prudent to be cautious and preserve flexibility.
Rather than pass through these at some costs that may not be permanent and the other part of this is you know when you think about com. Our sales growth is mostly driven by the pricing. We mentioned that we have about 5% pricing for the year and our guidance is 46% on Srs. So we're not assuming a significant.
Traffic growth going into the year at the midpoint.
And so I will just end by saying, where we are really focused on the long term and we do not want to overreact to near term pressures, even if that means that some short term margin erosion or not able to get our long term targets in any given year that all being said I mean, we're still have a pretty strong business model. Our margins are well ahead of where we were.
Pre COVID-19, even in the guidance, we provided that implies margin improvement to pre COVID-19.
Yes.
Thank you we will take our next question from David Palmer from Evercore. Please go ahead.
Thanks helpful call. So far you mentioned that the high income versus middle income factor.
Factor in might be then that might be a differentiator in the trends and the pricing power lately and even that in the softness we're seeing through June I wonder to what degree you think family oriented visits that larger party size paid by one person versus the closer to two people per check is a differentiator.
Well, it's a factor for the Cheddars in olive garden's versus the stake in fine dining lately.
Yeah, David we haven't really seen a big difference in mix of families with family larger families versus smaller families, but what we have seen in our fine dining as some of the urban markets are coming back a little bit.
And we're seeing private dining coming back. So those are large parties too so they're not necessarily families, but they're large parties that private dining is coming back in the urban markets.
Higher end brands, but we haven't seen a real shift down from our families going out to eat even at olive garden and shatters because.
Family visit at Olive Garden chat and Cheddars, there's still a lot less expensive than a family visited other places. So we haven't seen that change very much.
Great. Thank you and then just on food inflation guidance, the second half how what's your visibility there.
And contracted to argue and I know you guys are proud of the fact that you guys have a good balance when you have weakness in the topline in the industry Oftentimes you get some relief. So I'm wondering if you are.
Maybe being less hedged in the second half to allow yourself if the industry does get softer to to benefit from that in terms of your food costs and I'll pass it on.
Yeah, David I'd say, so we are fairly well covered for the first half, but we are choosing to not covered as much for the back half for the part you know we want to stay short given you know where the time charter and given what we think is likely to happen. So we want to preserve preserve that flexibility should should.
Should it should then.
Environment get better on the commodities front and so you saw that I think we shared this morning about 70% coverage for the first half.
Maybe a little bit north of 75 for the first quarter in the second quarter being closer to that 70 or just under.
But we're fairly covered for the first half.
Our next question today comes from Lauren Silberman from Credit Suisse.
Thank you just a couple of quick one are you seeing any regional differences in performance across the brands.
Hey, Lauren.
A little bit of a regional differences, but it's really when we compared to prior year and it's really driven by the fact that some parts of the country opened a lot faster last year than than others. So we're seeing some pretty good performance in California, because they didn't have a whole lot of growth last year, we're seeing some good growth in new England.
Which again was a little bit slower to reopen in the Pacific northwest.
But you know we are positive in all of our regions. It's just a little bit quite a bit more positive and those that didn't open as fast last year.
Okay, Great and then just one on premise versus off premise can you talk about what youre seeing there.
At Olive garden, and longhorn, whereas on premise traffic running versus pre COVID-19.
Over there would be helpful.
Yeah without talking about traffic I think traffic at our and to go a little bit different because of some of the catering. So we don't necessarily talk traffic as much as we do on sales, but if you look at our sales versus pre COVID-19 at both olive garden and longhorn.
Our sales and to go are much higher and they are still higher but in the fourth quarter, our traffic or sales.
To go.
Went down a little bit from the third quarter.
Partly because the third quarter had omicron.
And.
And our in restaurant sales have actually continued to grow so as our sales have gone down from Q4 to Q Q3 to Q4, our in restaurant sales have more than offset that.
We're still seeing strong to go performance across our two big brands and in Cheddars as well.
And olive garden is still above 25% to go for the quarter and longhorn is red at around 15%, which is much higher than they were pre COVID-19.
Okay.
We will now take a question from David Tarantino from Baird. Please go ahead.
Hi, good morning, I wanted to revisit.
How you would approach.
A downturn in consumer spending if we were to get one and if I look back to the the lasse.
A major recession, we had you know olive garden, clearly held up very well and longhorn did not hold up as well in terms of their sales performance. So wondering I know that was early days and your ownership of Longhorn I'm I'm wondering your specific thoughts on on longhorn and what levers.
You would pull for that brand.
This time around if we do get a downturn versus maybe what was the.
The case last time.
Yeah. David This is Rick Thanks for the if you think about where we were back in the last downturn. Yeah. We had just bought longhorn not too long before that so we're still going through integration.
Through the through the challenges of integration and it was our first big acquisition. So there are probably more challenges than we have as we continue to move forward and as <unk> seen when it from every acquisition. We've made since then we have some some initial comp declines in doing so.
Olive garden performed very well for a couple of reasons. One is there a trusted brand and as consumers think about their spending during a time, where they are minimizing their spending they go to brands. They trust and that's something that typically happens in a recession or something along those lines. When people are really trying to figure out where it is.
Their hard earned dollar.
But olive garden was also pricing a little bit during that time.
And we want to make sure that we don't get into that same situation, where we over price and then run into a challenge a couple of years later, which is what happened with olive garden's. So.
What I would also say is the steak category is a great value right. Now if you think about what longhorn has done over the last couple of years as we've said they've increased the size of most of their stakes they've they've increased the quality of the most of their stakes and Theyre executing their stakes better than they ever have there there there's.
In restaurant execution of steaks grilled correctly is at record highs for longhorn and so consumers see the value in what we put on the plate with cost of sales for every every dollar they spend at a steakhouse they get more food on the plate. So theres there are starting to see that a little bit better.
I can't tell you what this if there is a recession or a slowdown what consumer is going to be impacted by that but I can tell you that we've done a lot of things over the last years and even since the last recession to strengthen our business model is to strengthen our brands. So that we can react in whatever way, we need to depending on what happens.
We feel really good about the about what olive garden has done with longhorn has done with all of our brands have done to prepare for anything that could happen to us.
Great. Thank you.
We will now move on to our next question from Dennis Geiger from UBS.
Great. Thank you I wanted to ask a little bit more about any thoughts on the competitive environment. This year or assumptions that you have and if you care to weigh and sort of on whether a more pressured consumer.
Should be a benefit for your business or maybe for larger chains in general just based on some of the commentary you've made already and I don't know if you want to opine here at all but as it relates to delivery given the cost there in a more challenged environment is that again, something where you may you may be sort of underweight that that channel versus.
Some other larger brands.
Could potentially be a benefit for you as well.
If that's at all part of your consideration set if you if you care to weigh in on any of that.
Yeah, Dennis this is Rick.
You know the competitive environment.
Is not the same kind of environment that we had before Covid. If you think about what.
A lot of our competitors have done is to bring in things to drive sales third party delivery ghost kitchens, and those things, which actually maybe down a little bit to hurt their margins, we've simplified our operations to improve our margins over time.
With the margin pressure and inflation pressure that others are seeing it might be more challenging for someone to do some deep discounting to drive traffic.
And so I think you might be right onto something here on if the if the consumer starts feeling more strapped whether they'd be willing to pay the kind of rates. They have for getting food delivered or are they just decide to go pick it up.
And if they do we have what I believe is the best to go pick up experience in casual dining with the investments that we've made in technology to make it easier to order pickup in PE, and we keep making investments in those areas to make it easier for our guests.
It was about 60% of our total.
To go sales were digital.
Which equates to 10% to 12% of our actual sales.
Lately, whether to go or not so we've made some great investments to make it easier for our guests to order pickup in PE and if that means that.
The guess at where you used to do delivery in a downturn they stopped doing it and they still want to get great food at home they can get ours.
So very helpful color, Rick and I guess, just one more as a follow up on the technology piece you touched on it then I think during the prepared remarks that the focus on the investment in technology.
Anything you would highlight as it relates to the biggest opportunities for this year on the digital side of things.
Be it sales, maybe even some some margin efficiency type of of initiatives anything beyond what you've kind of just just framed out there. Thank you.
Yeah, Dennis we where can we continue to make investments in technology without getting into too much detail I'm on for competitive reasons, we continue to strengthen the the consumer proposition and a limit and eliminate friction for our guests and that's something big for US is to take any friction the guest has.
[noise] out by by incorporating technology, that's not directly really in their face, but it takes friction out but we're also doing a lot of investments to make the managers' jobs easier and our team members' jobs easier, which don't show up directly at the guest but it does show up in better execution at the restaurants. So for example.
We are using machine learning and AI to do forecasting.
At our restaurant and that's significantly improving our forecast accuracy at the restaurants, so that the managers can schedule better schedule people when guests are in or coming into the restaurant and order food more more.
More accurately and get food more accurately to reduce waste so that should help in the efficiency side, but those are things that are are set you know are kind of not first level order driving traffic, but it's things that make our restaurant managers jobs easier. So they can spend more time with their team members to train them and <unk>.
More time with their guests to make them feel special so that people come back.
Thank you we will now move on to a question from Andrew Charles from Cowen. Please go ahead.
Great. My first question Rick is just around off premise that this is the fourth quarter now where you guys are running off premise around 25% to 30% sales range holding quite strong quite sticky as the dining business rebound before Covid you guys were saying that olive garden could be at 20% plus optimistic sales mix do you think just given the reach.
Stickiness and strength of that that's more likely we will see this hanging around 25% plus.
Yeah, Andrew you know.
We are running at 25% plus now at Olive Garden, and we have said throughout Covid that we expect our our off premise sales as a percent to be higher than they were pre COVID-19 and probably higher than the 20%, we're still not quite at equilibrium, yet and we wanted to make sure that we get to equilibrium before we kind of give a new a new goal.
But I will say that we expect it to be higher than it was pre COVID-19 and we expect it to be higher than that initial kind of 20% goal.
Mainly because of the investments that we've made and what a great job. Our team members do to make sure that our guests get their food on time and it's accurate.
Those are very important qualities for our to go experience and we're making some more investments for the guests to understand where their where their food is in the process.
And things like that to hopefully keep our to go business.
At the higher end of that range, while our dining rooms continue to build.
But you know.
When we get to equilibrium will have a better idea.
Great. Thanks, and then can you guys compare kind of a historical target for 10% to 15% total shareholder return just given that now were seeing two consecutive years of top line in excess of that target and margins that are probably not going to make that 10 to 30 basis points of expansion.
Recognize that 10% plus is still the target here how would you say the factors are going to be different just given this is the second consecutive year the dynamics that we're seeing.
Okay.
Yeah, I mean look given the uncertainty environment. This probably not the best time to update the components of the framework. We still believe 10 to 15 is the right target how we get there.
Vary year to year and again this is a long term target. This is not a one year target.
So you know when we have better when we get to a better place maybe use rick's word of equilibrium.
We'll put something out there that are that incorporates all of that and not about our assumptions going forward that will lay out the components of how we get to 10 to 15.
Okay.
We will now take a question from Chris <unk> from Stifel.
Thanks, Good morning, guys.
Roger can you help us understand how sensitive margin performance is to various levels of comp sales and I would assume that relationship is not linear so at what point do you see a meaningful margin degradation, if you experienced softness in consumer and consumer spending.
Chris I think I would kind of point back to the comments Rick made earlier about thinking about you know comp without the context of course. It makes it is not the best way to think it because we think that they move in tandem maybe theres a little bit of a lag, but if inflation if if the consumer environment gets.
Really soft that's sure.
You know a kind of make its way into inflation being less than we have in the cost pressures being less than we have so it's not a pretty straightforward linear equation and and and obviously.
What we say is you know you saw how our teams kind of.
Remain flexible and figured out how to walk through the environment that you know whatever the environment, we operate in and so I will just reiterate that we're going to stay disciplined and we're going to not overreact to near term pressures, but focus on making sure we're making the right bets for the long term and I and operate operate the best operate the best way we can.
And I'll give it in the environment that that worked out.
Thank you and then I had a follow up on the commodity outlook, what's giving you confidence that you could see some relief in some of the key commodity costs beyond fiscal the first half of the year with fiscal <unk> at least are there specific factors that you're aware of that make that scenario more likely or is it driven by macro outlook for the consumer like you just mentioned that may be.
That cooling demand helps commodity prices just trying to get some understanding of what gives you confidence you could see flat inflation in the back half or in the fourth quarter.
Sure. So here is what I think the way we think about it is in one first of all you got to remember the wrap on how high they were this year in our second quarter I mean third quarter. This year was a 11% in the fourth quarter was 12% and we're wrapping on those in fourth quarter of this year was wrapping on four and a half a year ago. So on a two year basis.
When you look at where do we want for the fourth quarter were about $16, 517%. So next year or first quarter or this Q1 FY 'twenty three we're starting high so that so one that's the dynamic that we take into consideration right. We're not at the levels of pricing and what are we lapping on when you look at it through that lens. Its we expect that to get better.
The second piece is we are starting to see in some specific products the prices breaking a little bit from the elevated levels. They have been right. So whether it's beef that's come down a little bit even chicken for instance has is not at the highest level. It's been recently, so it's starting to come down a little bit the other factor we have is what.
It happens with the fall harvest on the grain side. So we do expect right now we think from the information we have a better harvest season, and that should help a little bit with the grain. So so these are all factors that we're taking into consideration we don't have a crystal ball, but this is our best estimate at this point.
Okay.
Thank you we will move onto our next question from John Glass from Morgan Stanley .
Thanks, Good morning, first just on pricing in the 5% can you just.
Reconcile with what you said.
Industry is on pricing so how much of your pricing you think below not just inflation, but also your competitors.
And just more broadly how do you think about pricing on a portfolio basis are you pricing.
Brands relative inflation are you willing to take more pricing in certain brands. We just think there's more or less less elasticity you can get it and therefore, we shouldn't think about it as a brand to brand, but it sort of on a portfolio basis is that how you think about pricing.
Yeah, John I'll answer the second part of your question and I'll give Raj the answer to the first part of the question. So when you think about pricing across our portfolio. One of the biggest benefits of Darden is we've got a portfolio and we serve a lot of different consumers and so our pricing will be different depending on the brand.
And depending on kind of the consumer that they that they serve and so we.
We would expect our pricing to be closer to inflation at the brands that can support that which are more likely to the brands at the higher end of the consumer spectrum and our pricing to be below inflation at the brands that we want to protect their value.
And those brands are more like the casual brands, specifically olive garden and Cheddars.
Who've made significant business model improvements. So that we can go ahead and take a little less pricing than inflation.
So that's the way we think about pricing we look at the inflation rates those brands are seeing as well.
And see what kind of level of pricing, we'd like to take but generally generally we would price our higher end brands are more affluent consumer that can that can absorb some of that pricing.
There's little less elastic.
Then we would on the lower end brands and I'll, let Raj talk about the competitive pricing.
Hey, John I'll start with the broader macro overall fsrus CPI. This is not new to you guys. You know this this last you know the published data from last month was 9% on a one year basis and over eight or 12% or 13% close to on a two year basis and then when you look at the breakdown of that from what we understand.
The chains are taking less than the independents. So when we look at it.
Our closest competitors, they're probably close at close to that 6% range.
You know between five to six depending on who you are looking at but the average is closer to 6%. But then these are larger chains, but the small chains and independents is where you're seeing double digit in our pricing.
Again, that's the competitive Intel we have so with that said you know you asked the question of what flexibility. We have I think part of what we've said all along has been that we wanted to be under pricing until we feel like certain things are.
Permanent and then we start to slowly increase.
Increase that we feel great about the pricing level that we have because especially when you look at it versus where the where they end up overall industry is and where our nearest competitors are what are better and now and then actually what even better when you look at it on a two year basis, and so really that's that's kind of what drives us but also it does gives us.
Some flexibility should there be a need and that's what we're trying to do is protect ourselves preserve preserve that flexibility.
And you know if there is any if there is in need and if we feel like we can pass through some more we will do that.
Thank you.
The impact of inflation and then on the build cost of new restaurants, anecdotally some smaller chains, they talked about a pretty material increase in construction cost of new builds what is your view on that in 2023.
Okay.
Hi, Kevin.
Kevin I believe your line might be on mute.
Oh, sorry.
Sorry, [laughter]. Thank you so.
I was saying the construction costs, we're seeing about you know call it low double digit increase in construction costs.
And.
But when we look at our overall returns because of the business model improvements we've made to call where we're still getting pretty strong returns in fact I would argue our returns are better today than they were even before COVID-19, even with the increased construction costs because of the that the improved margins with that said we are starting to see the cost not continue to go up as much.
We're starting to see that rate of change start to kind of plateau, if you will.
And then what we're doing is trying to find opportunities to kind of do conversions that can help to save.
A few hundred thousand dollars on a build right half a million to $600000, if we kind of taken existing shell and and convert that and so we've been doing some of that at all brands. So we're trying to find ways to manage through that but the costs are still pretty elevated.
Okay.
And we will now move on to our next question from John <unk> from Citi.
Great. Thanks, I appreciate you taking the question first.
On the inflation side, I think we hit a pricing quite a bit earlier, but I am curious to dive into the ideas.
During Covid you were able to find quite a few productivity enhancements across the portfolio and I'm. Just curious to know if there is any more opportunity there should say inflation persist.
Above and beyond what your expectations are currently for the year.
Hey, John this is Rick.
Yes, you mentioned that over the last few years of brands have done a great job simplifying their operation and significant with significant productivity enhancements, we're going to continue to look for more I will say during the last year, we had significant training cost that that as we continue to ramp up people, we would hope that the training the training.
Would go down it wouldn't be the same kind of level of productivity enhancement that we had.
Before.
During COVID-19, but there should be some enhancement to help minute mitigate a little bit of wage inflation, but not enough to offset the wage inflation.
Okay and then just following up I think earlier in the call you talked about the company's core competitive advantages and particularly highlighted the scale and in the company's balance sheet has some significant advantages versus the industry. So I'm curious how you see yourselves taking advantage of that particularly.
In an environment, where you might see.
Some some closures of independence.
And or some of your smaller competitors.
Adding to slow down growth I'm, just curious you know in the past I believe you use these slowdowns as an opportunity to.
You'll find some of the best real estate in the industry. How are you thinking about taking advantage of a potential macro slowdown.
Yes, John we are continue to look for more real estate is if especially if the macro environment slows down for the smaller competitors I would say there are some industry estimates that.
That this coming up fiscal year, we'll have.
No net unit growth, we are growing units and so that could give us some more opportunities to find some sites.
No. We have I think we mentioned in our in our guidance 55 to 60, new openings. This year, which is a lot higher than the 37 net we had a year that just ended.
And that'll that will continue to try to get more to that level of growth in units.
And we have the balance sheet and the cash position to do that and just as importantly, we've got the leadership pipeline that we've been developing to get people ready to open those restaurants.
So we feel like.
Putting the stepping.
Stepping the putting our foot on the gas on unit growth, which is what we've always said, we've been saying that for a couple of years, it's something we would do but not to slam the slam the the accelerator down.
We will continue to be measured in our unit growth and our goal would be to get to the higher end of our sales from new units.
In the in the framework that we had announced before.
Our next question today comes from Andrew Charles <unk> from BMO.
Hey, good morning, Thanks for taking the question I'll, just ask ask one and I wanted to follow up on the food inflation in the coverage question and I understand why you don't Wanna be you're starting the year, but the question is really about the ability to get coverage farther out should you have wanted to go that route is that getting any easier with some of the <unk>.
Broader demand uncertainties, if you wanted to do that or those conversations or the asks to extend farther out getting any better even if that hasnt totally converge maybe with your expectations.
Yes, I think I think it's the price certainty is the place that is a little bit of an issue right. When you talk to are so the coverage. Yeah, you can get the product coverage, but we're trying to get that product coverage with price certainty and that's where we still don't believe you know where we are.
We're still not in a place where that is in a great place for the back half as we look at what what did the supplier think we should be paying and what we believe should we should be paying there's a disparity there and that's really why we don't see it we don't feel like we need to do anything right now.
And just have that optionality.
But I guess I guess, the spread or with some of the demand uncertainty you've spoken about maybe some cracks here or there maybe the view on the other side of that conversation is the same but as the spread narrowed at all even if it hasnt converted all the way or it's still kind of state Oh, yeah for sure Yeah, Yeah Yeah.
Is that the spread has narrowed but we you know again, our expectations are going down even more right.
I think thats part of the discussion here, so it's not yet.
Okay.
We will now take a question from Brett Levy and Cam partners.
Great. Thanks for taking my question.
Just going back on the development side.
You talked about a willingness to grow and the ability to grow but you also talked about.
Not wanting to get too far ahead.
Where do you where do you see.
Latest opportunities within the brands right now and also just from a net flat growth environment out there.
Strong balance sheet, how are you thinking about.
Many of the current portfolio with additional brands. Thanks.
Yeah, Brett you know, we would like to see all of our brands continue to grow you know at the at the more specialty brands.
Those sites are specific and we wanted to make sure we have the great sites for them. So it just depends on when a great site comes available.
We may have some higher growth in one year, and maybe a little bit lower growth in the next year, but for more killer casual brands, we'd like to continue to see that ramp up.
Versus the year before and the fact that we're going from 37% to 55% to 60 should tell you that most of our brands are going to see an acceleration in unit growth.
As it relates to your second part of your question on M&A.
I'll say that our biggest competitive advantages what we talked about is our scale.
And one way to build on that is to do an acquisition and so we will continue to speak with our board and US are our strong balance sheet and our cash position to evaluate any alternatives to allocate that capital.
But we do believe that we have the ability to do both to increase the number of units that we're building and to do M&A.
Okay.
Thank you.
Thank you we will now move onto our next question from John <unk> with J P. Morgan.
Hi, Thank you it's actually is a perfect follow up to Brad's question.
On the M&A side, I guess, where are we in that spectrum. They use you announced $1 billion for buyback, which could presumably be used for M&A. You know you do have borrowing capacity at least looking at what your investment grade credit rating is I mean in terms of you know I guess you know.
Darden kind of being excited in being in the market and being proactive looking for things you know versus sellers that you know in all reality will have to accept the price of their business today that was very different in six or 12 months ago. I mean, I guess I guess, how many of you want to talk about it in this term hopefully it's a fair question I guess, how close are we to a deal that really could matter.
You know relative maybe to some previous periods. How are the stars are lining up are not lining up that something could maybe get done and then new York nearer term versus longer term. Thanks.
Hey, John .
I can't tell you, if we're closer or farther away from now versus where we were before you know as as equity prices move quickly.
And on the downward trend.
You got to get to a what's a fair valuation level for the seller.
And so I can't tell you if we're there yet or not I can tell you that we'll continue to evaluate and we would like to continue to build our scale and M&A as one way to do that.
But you know when we when we do a deal everybody will now and where we are.
We're always talking to our board about about M&A and the best ways to allocate our capital.
Fair enough. Thank you.
And our next question comes from Peter Saleh from BTG.
Yeah.
Great. Thanks very helpful calls so far this morning. So thank you just wanted to come back to the conversation around.
The consumer.
You know in the past recessions I think you've seen a trade down at olive garden and some of the brands, but you know trading down.
With fewer appetizers desserts strengths and maybe in some instances consumers trading out of entrees into appetizers as their main meal.
It doesn't sound like you've seen any of that at some of the core brands clearly at Olive garden, just want to confirm that.
Rick I, just love to get your opinion on the probability of a recession or the consumer outlook, given where you sit and what you see in the environment right now.
Hey, Peter to answer the first part of your question, we haven't really seen a lot of check management at at any of our brands, we've seen a little bit of Cheddars.
But part of that is because they also introduced a a great limited time value stake, which might've mean people were trading away from appetizers to this stake on their menu, which is a T bone at a very great value compared to the competition.
But we had seen some management of jacket cheddars.
In regards to the probability of a recession.
I'm I'm not an economist I can tell you what the economists are saying and they're saying somewhere in the 40% range.
At least some of them are saying that over the next 12 months I can tell you we will be prepared for that if and when it comes.
Would hope to not see one, but if we do we're going to be prepared and I think we're better prepared than most of the people we compete with because of the margin differential that we have versus them.
And what we've done over the last few years to simplify our menus.
And what we've done to make sure our restaurants are fully staffed and I would say one last thing is if you think about our management turnover in our restaurants is significantly below the industry. So they've seen more things and others have maybe they havent seen a recession, but they have seen what happens when guest counts turn soft for even if it's a month.
Maybe others haven't so we're gonna be better prepared we believe to handle plus.
Plus we've got great everyday value.
If you think about what we've done over the last couple of years and pricing below inflation and pricing below our competition that means our value differential continues to grow and we've got I think what's what's a great place. We've got olive garden, which is an iconic brand that people trust that is improve their value we've got cheddar.
<unk>, which we didn't have in the last time, there was a recession, that's the value leader in casual dining so while I can't tell you what the probability of a recession is.
I can tell you I believe that we're well prepared to deal with whatever comes our way.
Yeah.
Great. Thank you very much.
And we will now move on to a question from Brian Vaccaro from Raymond James.
Thanks, and good morning, I just wanted to circle back on your industry sales comment that you mentioned about June slowing a bit could you help us level set the magnitude of slowing that we've seen within casual dining over the last few weeks, it's just a little difficult given the father's day shift that youre trying to compare back to the 19 also some differences in the year on year.
Compares I think moving through May and June as the industry recovered last year. So any help there would be much appreciated.
Yeah, Brian when I talked about the kind of the sequential slowdown versus it was versus prior year. So not worrying about pre COVID-19. The only comment I had about pre COVID-19 was the seasonality differences, but youre right father's day is something that we're going up against the same week last year and father's day, so father's day.
The others. They should have been the same and we talk about magnitude.
Couple of hundred basis points of the industry, it's not a it's not like the industry went negative completely but it's closer to closer to flat than it was before in the month of May.
Okay, Great and then circling back on the consumer.
You break it down you talked about the low income versus the other income category and seeing differences in behavior could you just update us on what percentage of your guests or sales are from the low versus middle or upper income consumer for olive garden and Longhorn. However, you kind of bracket that out.
Okay.
Yeah.
Want to get into too much detail on the percent of our guests that are at the low end.
You know the the lower end consumer typically would be in more of an olive garden consumer Cheddars consumer.
More likely it shatters consumer.
And it makes up a portion of their guests, but not <unk>.
A majority of their guests so but the other thing is remember we've got a portfolio of brands.
<unk>.
The impact every segment of the economy and all the different all the different.
Economic stratification of guests so.
We feel like we've got the ability to deal with whatever comes our way as I said.
But don't want to give you the specific percentage of those consumers.
Ladies and gentlemen, we have no further questions that concludes our Q&A session today, and I would like to hand back to Kevin Telecom for any additional or closing remarks.
Thank you that concludes our call I'd like to remind you that we plan to release, our first quarter results on Thursday September 22nd before the market opens with a conference call to follow thanks again for participating in today's call have a good day.
Thank you, ladies and gentlemen that will conclude today's call. Thank you for your participation you may now disconnect.