Q1 2020 Earnings Call
Thank you for standing by me now walk to Darden restaurants first quarter earnings conference call. At this time, all participants are in listen only mode and we will have a question and answer session to ask a question. Please press star followed by the number one. Please take note that will only take one question and one one follow up.
Now, let me hand, the call over to your host Kevin Callicutt, you may begin.
Thank you Ray good morning, everyone and thank you for participating on today's call joining me on the call today.
Our gene Lee Darden, CEO and Rick Cardenas CFO .
As a reminder comments made during this call will include forward looking statements as defined in the private Securities Litigation Reform Act of 1995.
These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the company's press release, which was distributed this morning.
And in its filings with the Securities and Exchange Commission, we're simultaneously broadcasting 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 and reconciliations of these measurements are included in the presentation.
We plan to release fiscal 2022nd quarter earnings on December 19th before the market opens followed by a conference call. This morning.
Gene will share some brief remarks about our quarterly performance and business highlights and Rick will provide more detail on our financial results from the first quarter. As a reminder, all references to the industry benchmark during todays call refer to the estimated Knapp track, excluding darden, specifically olive garden and longhorn.
During our first fiscal quarter industry total sales growth was flat.
Industry same restaurant sales declined 1.2% and industries same restaurant guest counts decreased 3.3% now I'll turn the call over to Jean Thank you, Kevin and good morning, everyone.
You've seen from our press release. This morning, we had a solid quarter total sales from continuing operations were 2.1 billion an increase of 3.5%.
Same restaurant sales increased 2.9.
Percent and diluted net earnings per share were $1.38.
Comparable same restaurant sales for the industry continued to weaken during the quarter as the industry once again face tougher comparisons.
However, the industry Comping negative it's surprising considering unemployment remains at all time low and there continues to be strong wage growth, which historically, it's been a positive for the industry.
I'm, particularly pleased with the performance of all of Garden, and Longhorn Steakhouse, given industry performance and their difficult comparisons over the first quarter of last year.
We remain focused on our back to basics operating philosophy, and leveraging up for competitive advantages and I'm pleased we continued to take share and protect our margins.
Turning to brand highlights for the quarter.
Olive garden as strong quarter, which resulted in its twentyth consecutive quarter same restaurant sales growth total sales grew 3.6% driven by same restaurant sales growth of 2.2%, 1.4% growth from new restaurants.
All of Garden same restaurant sales gap to the industry was 340 basis points this quarter, representing the largest gap to the industry since the first quarter of fiscal 19.
And on a two year basis, Olive garden grew total sales by nearly 10% outperforming the industry benchmark by 840 basis points.
Olive garden's results were driven by the teams ongoing focus on flawless execution everyday value and convenience.
Yes satisfaction ratings remain impressive.
And catering delivery metrics reflect the highest intend to recommend within the brand, giving us confidence that our teams are delivering great experiences inside and outside the four walls of our restaurants.
The olive garden team made a strategic decision to change the order of their first quarter promotions.
This was necessary to separate the two strongest value promotions buy one take one and never ending pasta bowl to more evenly deliver the value messaging throughout the year.
While this change along with associated media shifts and weakening industry trends resulted in lower traffic than last year. There was the right strategic decision for the long term.
Recognizing the strength of buy one take one promotion Olive garden added five dollar take home entre to the everyday value lineup, which was supported with national advertising to drive awareness.
It has been met with strong guest demand and it will be a catalyst to continue to grow the off premise business.
Everyday value is also strengthened with the introduction of a new weekday lunch menu with 21 options under $10, including guest favorites like chicken parmigiana and items from the taste of the Mediterranean menu like chicken Margarita.
This initiative was supported by integrated marketing and resulted in stronger weekday lunch traffic in guest preference.
Finally, the olive garden team remains focused on their off premise capabilities to meet the gifts needs for convenience.
A key part of that focus has been optimizing the digital sales channel for both mobile and desktop.
During the quarter digital sales grew by more than 30% and represented approximately 40% of to go sales overall off premise sales grew 12% representing 14% of total sales.
Olive garden remains a truly iconic and broadly appealing brand and the team is doing an excellent job of focusing on this strategy and competing effectively.
Longhorn Steakhouse had a strong quarter as well total sales grew 4.6% driven by 2% growth from new restaurants, and same restaurant sales growth of 2.6%.
The 26th consecutive quarter same restaurant sales growth.
On a two year basis Longhorn grew total sales by 11% outperforming the industry benchmark by 940 basis points.
The longhorn team remains focused on the long term strategy of investing in the quality of the guest experience.
Simplifying operations to drive execution and leveraging their unique culture to increase team member engagement.
During the quarter, the longhorn team rent to successful menu promotions.
Brewmaster favorite and fire crafted fire crafted flavors, which was supported by their award winning you can't fake steak advertising campaign.
They also supported these promotions by reinforcing the quality story through multiple just touch points.
The team also continued to focus on ensuring the to go experience equals there in restaurant experience for guests who chose choose this convenience.
The team simplified the online ordering process, which significantly reduced the order time.
During the quarter digital sales grew almost 50% and represented more than one third of total to go sales.
Additionally, they have now completed a dedicated to go area and more than half of their restaurants.
These actions led to continued improvement in guest satisfaction scores for order accuracy, and timeliness and help to drive to go sales growth nearly 12%.
Finally, longhorns industry, leading retention rates continue to even get better despite the tight labor market team member turnover during the quarter was 68% compared to approximately 120% for casual dining and management turnover during the quarter was 13% compared to approximately 36% for casual dining.
We know that engage team members provide better guest experiences and the longhorn teams ongoing focus on retention and culture building is a key driver of this strong business performance.
Ted a scratch kitchen total sales decreased 2% driven by same restaurant sales decline of 5.4% and partially offset by sales growth from new restaurants of 3.4%.
The trend change was driven by reduced marketing efforts and overall industry softness in the quarter.
In addition, the same restaurant sales decline continue to be more pronounced in the former franchise locations. These restaurants experienced six experienced significant disruption during the quarter as they were the last restaurants to complete the kitchen transformation project.
While I was disappointed to see the sales trend decline. The chair this team made significant progress against our priorities during the quarter.
At the beginning of the new fiscal year, they established three new strategic priorities.
Create a people focused results oriented culture reduce friction in the guest experience and build a brand people talk about where the goal of building on the progress they've made last year repairing fundamental elements of the business and improving the sales trajectory.
During the quarter the Cheddars team continue to see improvements in both manager and team member turnover trends as they implemented initiatives that led to higher retention levels.
Overall staffing levels for both manager and team members improved during the quarter.
Because of the progress made this quarter in staffing and retention that cheddars team was able to better execute operational improvements designed to enhance the guest experience.
For example, they implemented standards that significantly upgraded their ability to successfully serve large parties.
With these and other improvements they saw a better guest experience results compared to last year across all key metrics.
Near the end of the quarter Cheddars introduced a new menu with more price diversity within categories and a launch launched the a quick pick lunch combo starting at 599.
These combo to generating strong preference at launch and have led to higher value and intend to return ratings compared to last year.
I recognize there is still lot of work to do but the progress that shut his team has made operationally and their improved HR metrics are encouraging.
Now if they feel they are moving in the right direction from an operations and the staffing perspective, they will begin to increase their working media spend.
Cheddars has the highest guest frequency of any Darden brand and this investment is intended to build upon the strong position improve brand awareness and drive trial.
They will be leveraging darden resources and best practices to implement the media plan.
Finally during the quarter, we acquired four previously franchise restaurant locations in Texas.
And I'm pleased to say that each of these four restaurants is performing at a very high level.
In closing I'm pleased with the progress our teams made executing against the strategic initiatives.
Our strategy is working allowing us to continue to grow sales increased market share improve margins and invest in our people and brands all while continuing to return capital to our shareholders of course, none of this would be possible, having the best people in the business. So I want to take this opportunity to thank you are 185000 team members to continue to create memorable dining experiences for our guests now I will turn it over to Rick.
Thank you Jane and good morning, everyone. We had another good quarter with total sales growth of 3.5% driven by 2.6% growth from the addition of 40 net new restaurants and same restaurant sales growth of 0.9%.
First quarter diluted net earnings per share from continuing operations were $1.38, an increase of 3% from last year's diluted net earnings per share.
We paid $108 million in dividends and repurchased $95 million in shares returning over $200 million to shareholders. This quarter.
Before I get into the detailed results from this quarter I want to mention that we adopted the new accounting standard for leases at the beginning of this fiscal year.
Consistent with the expectations discussed on last quarter's call. We estimate that this will negatively impact EPS by approximately five cents in fiscal 2020.
However, the more meaningful impact to our balance sheet as you saw from this mornings press release.
This quarter, we also updated our segment reporting.
Beginning in fiscal 2020, our calculation of segment profit now excludes noncash real estate related expenses and fiscal 2019 has been restated for comparability.
This change allows for more consistent evaluation of our business across segments and fiscal periods.
Now turning to our detailed margin results.
Food and beverage costs were flat to last year as pricing of 2% and continued cost savings initiatives offset commodity inflation of approximately 1.5% and continued investments.
I am impressed with restaurant labor being flat to last year, particularly in light of same restaurant sales growth of 0.9%.
Total labor inflation of 4% was offset by pricing check mix and productivity improvements in new and existing restaurants.
Restaurant expense was unfavorable 10 basis points due to de leverage as our comp sales growth was below inflation.
As a result restaurant level EBITDA margin of 18.1% was 10 basis points unfavorable to last year.
General and administrative expense was 50 basis points lower than last year from favorable mark to market expense, which is generally offset in the tax line.
Lower management incentive expense and sales leverage.
Our Q1 effective tax rate of 9.8% was slightly below the range in our annual guidance.
We still anticipate our effective tax rate to be between 10% and 11% for the fiscal year.
Overall, I'm pleased with our performance this quarter and impressed with our strong EBIT margin of 8.1%.
Turning to our segment performance Olive garden grew sales and profit in the quarter driven by positive same restaurant sales and net new restaurant growth.
Segment profit margin increased 40 basis points by leveraging the same restaurant sales growth and managing cost effectively.
Longhorn also grew sales and profit in the quarter driven by positive same restaurant sales and net new restaurant growth.
Segment profit margin decreased slightly due to elevated beef inflation and continued investments during the quarter.
Fine dining grew sales and profit in the quarter as well driven by positive same restaurant sales and net new restaurant growth.
Segment profit margin decreased because of higher preopening expense and inefficiencies related to three new restaurants.
Sales for our other business segment grew eight 1.8% driven by net new restaurants.
Both segment profit dollars and margin decreased this quarter due to margin deleverage from negative same restaurant sales growth in the quarter.
As you saw in the press release, we reiterated all aspects of our fiscal 2020 outlook.
Looking ahead to our second quarter performance. There are two things I would like to address before we open up the call for questions.
Both of which are contemplated in our annual guidance.
First the timing of the Thanksgiving holiday this year relative to last is shifting from the second quarter into the third quarter.
Since we are closed in the majority of our restaurants on this day. This shift should positively impact darden's second quarter same restaurant sales by approximately 80 to 100 basis points.
With a corresponding offset in the third quarter.
Second given the prolonged media coverage and the storms duration Hurricane Dorian had a meaningful impact on the first two weeks of our fiscal second quarter.
We are currently estimating a drag of 20 to 30 basis points to same restaurant sales in the second quarter.
And with that we'll take your questions.
Thank you we will now begin the question and answer session you'd like to ask a question. Please press star followed by the number one.
Jason nature fraud and record your name clearly when prompted to me draw your costs you may pass towards.
Once again Thats Star one please record your name and also please limit your question to one question and one follow up thank you.
Our first question is from Matt Difrisco from Guggenheim Securities. Your line is open Sir.
Thank you my question is with respect to the Cheddars I guess, a lagging in difference between Olive garden Longhorn. It would you attribute that mostly it sounds like to the marketing spend can you sort of bracket or compare how much or back pullback of marketing spend there was versus last year in either in terms of dollars or terms of weeks of support so we could get a better understanding of that.
And we're not going to get that granular with our spending in charters I would just say that.
We threw a truly we now have enough transactional data to look at look at some things and Cheddars, we hadn't had the opportunity to do before and one of the big insights is that our frequency in cheddars is higher than any other darden brand and we marry that up with some of the research that were doing and we recognize that our awareness for this brand is extremely low.
And our.
Our primary advertising had been more driven towards our frequency play and we decided once we had this insight during the middle of the quarter were pulling we pulled back from that that type of activity.
And now we're going to.
Go out and we're going to test and learn and understand how to increase the best increase our free power re our awareness and are in markets. We also recognize the fact that.
It's going to be more important than ever in this environment.
To continue to build out our markets develop.
Become more efficient in those markets from a from a media standpoint and.
I would say more can use more traditional media to increase our awareness to drive to drive this business and so it was a it was a really good quarter from that standpoint from an insight standpoint for us to really recognize and and we decided we're going to change direction and Thats, where we pulled back a little bit of the the media spend during the quarter.
Okay, and then I guess is there something different to the menu that may be triggered the change in frequency to that the heavy heavy user from the past or.
Is it the channel ownership, but they notice or something of that.
No. It was just the fact that we actually now have the transactional data to be able to analyze and then have that insight and that's why it's so important when we do an acquisition for us to put our systems and so that we can get.
The data and then do our analysis.
Understood. Thank you.
Thank you. Our next question is from David Tarantino from Baird.
Sir your line is open.
Hi, good morning.
She and I just wanted to talk to you about the industry trends that you're seeing it seems like.
Hi, Yeah acknowledged in the prepared remarks that this was a little surprising that we've sold such soft trends.
Especially on the luxury side. So just curious to get your thoughts on why you think thats happening and secondly, do you think you need to adjust any of your marketing or promotional strategies to their environments. So to speak. Thanks.
Good morning, David.
And as I said, my our prepared remarks.
The.
The the backdrop appears to be very strong for the consumer.
We have good wage growth, we have strong employment.
Historically, that's been really good for us as we look at the data and we look at behaviors, we look at confidence.
I have to I personally believe that there is some uncertainty.
Entering into the consumer and it's impacting their confidence.
How long you know I I got to believe there with all the media.
Attention around what's happened.
On.
How long does this continue this environment continues so.
There's there's nothing structural that we see that's changed.
Out there other than it appears to be a little bit more uncertainty today than there were there was in the future.
As far as what do we need to do we need to continue to create compelling guest experiences.
And come up with.
And reinforce our value propositions.
I do think that we have to think about how we're going to market in our smaller brands.
And how do we how do we.
Advertise those brands in different channels and become more effective and compete more effectively I think thats an important change that we need to make in the upcoming quarters. I think we have the luxury of being patient and test and learn.
And really make great long term decisions as we try to figure how to support in those brands and compete more effectively in this marketplace.
We're pleased that we're heading into neverending pasta Bowl and olive garden to great promotion for US we had a lot of buzz around our pasta pass this year.
And so.
I think it's a it's a good promotion going into this time of year and where the consumers out.
Or maybe just a follow it seemed as does the current environment or what you are saying recently in Medicare.
I think differently about the degree is a difficult season and hitting our cost guidance for the year. I know you have maybe lost a difficult comparisons coming up how should we think about.
In the middle of the comp guidance or the upper end of the comp guidance relative to where you were three months ago.
Well I guess, we reiterate our guidance today, we believe our same restaurant sales for the year will be somewhere between one and 2%.
Great. Thank you.
Thank you. Our next question is from will Slabaugh from Stephens.
Your line is open.
Hey, guys. This is actually now on for will thanks for taking the question just a quick one here wondering if you can give any insight into commodity costs. You spoke some elevated beef costs. There just wondering how you feel about discounting forward and whether you've seen any effects from African swine fever.
Thanks.
This is Rick we were about 1.5% inflation in the in the first quarter, which is around where we expected it to be we have seen a little bit of an elevation in beef, but the but the boards are coming back down in our little bit more in our favor. So will we still expect our inflation to be where we thought at the beginning of this fiscal year.
As a result as the answer to your African swine flu question.
We still haven't seen a very big impact on African swine flu as we mentioned in the last call pork is really only about 2% of our sales. So it's a relatively small impact and we havent seen the downstream impacts of of pork prices yet.
Perfect. Thank you.
Thank you next question is from Joshua long from Piper Jaffray. Your line is open.
Great. Thank you for taking my question I wanted to circle back to the trends you've seen here lately and maybe any sort of regional variations.
Or.
Yeah, any regional variations you've seen across the rest of the system.
And then also in terms of your.
Initiatives and kind of that the underlying trends you've seen any sort of differences in the weekday weekend trends you've got some very strong lunch offerings on there, but didn't know if that was maybe moving the needle like you expected or maybe ahead of expectations.
Oh, no I really don't have a lot to add to your question Weve really not seen much from a geographic standpoint, and there's really been no trend change too.
Any of the weekday weekday weekday night weekday lunch our weekend business.
No I would say that the trends of the trends that weekend.
And all in all areas of the business.
Great. Thanks, and then one follow up if I may in terms of your work on the to go business. The strength there is still very promising.
Any sort of learnings you've had as you've stuck with us and worked on the fulfillment internally versus the thought process of working with external partners I know you're always testing it always learning, but curious.
On what you're seeing there theres that any update.
Well I think the biggest thing our teams are doing is that taking friction out of the process and I think we're getting it's like anything else repetitions, a great thing you continue to get better and better with it as you do more business. So I think long warrants made tremendous progress. We've seen this fair. There are scores go up the satisfaction scores go up all of gardens really honed in on this process. They continue to find ways.
Very very impressed with the digital growth in both those businesses, we think Thats a.
Thats something to continue to look at so to me it's really about.
In making that experience is compelling as we possibly can with great value right. I think it's it's you know and that's been our strategy is make sure we have strong value on the off premise and not have and nine have the consumer be willing to come pick it up versus it being delivered.
Great. Thank you.
Thank you. Our next question is from Brett Levy from MKM Partners. Your line is open.
Good morning, Thanks for taking the call gentlemen.
If we could just hone in a little bit more I'm going ask consumer question, a different way and hopefully get some semblance of a different answer when you start to drive.
I'll I'll try.
When you think about the consumer right now are you seeing any changes in how they are using you. Obviously take home is further building out your off premise, but are you seeing any changes in terms of full price value add ons size of parties something like that thank you.
Mel Brett.
No we haven't seen any change at all.
And.
When I look at the quarter, Let me just let me put it back to look at the quarter, let let's let's think about what olive garden is done in the last two years, even though the industry is weekend.
I'm incredibly impressed that we've grown our business approximately 10%.
At Olive garden, where the two year comp did I think is extremely impressive.
And so the industry and a lot of the comments that I've made today about the industry decelerating.
When I look at our two large brands I think there could there competing very effectively.
The gaps of gaps are very very strong to the industry. So I think we have a way to compete very effectively with these two these two brands and I'm excited and yes, we watch the industry and we give you some insight to it but our job and our leaders jobs or to find a way to compete effectively in any environment and I think thats, what our teams have done really well in this first quarter.
Thank you.
Our next question is from John Ivan Kim from JP Morgan Your line is open.
Yes, hi. Thank you also just an industry question Prejean odd you know obviously not all store traffic has actually been negative and what I think you said to the previous question is out.
Relatively strong underlying you consumer environment, especially in terms of.
The topline spending where do you see that consume we're actually going anywhere where that consumer is working and that consumer has higher income where that consumer currently dining winter weather in the house or.
Out of the house is kind of the first question secondly in a DC independent being it's late cycle as we are as potentially taking share versus change in what would you look out maybe a shake out.
Some supply growth that's been added in this space over the last.
Yes, several years and then the final point I think you kind of.
You mentioned, a few times more value at olive garden and in chat or is there any thought of bringing back couponing and doing other things that are going to be direct call to action for the consumer for you to maintain.
Traffic in what you described earlier as any industry environment.
John you get the award for most questions Syed one question.
It's all it's all related I think you can do it in one paragraph.
[laughter], So I got independence I got this kind of what was the first.
Although the first floor, where they where people going John we are we are definitely seeing some strength in limited service, both a fast casual and.
And quick serve this note there is no doubt about that and you think about it there is theres good income growth on the lower end of the curve and those folks those folks seem to be trading or our dining out a little bit more frequently and.
You know I don't know where people are trading out of in casual when you look at or a 10 year period.
That's been a big question I'm not sure we've had we as an industry you have an answer.
Again, we focused on our brands and we seem to be getting more than our fair share.
The data that we're looking at is saying that large chains are still still taking more share.
And they're taking that share from independence.
Where you see independent and small regional chains are in really what I would call the better better trade area is the higher income trade areas.
Where they are having an impact and I think performing well, but I think on a national scale. When you look at it independents are still donating share.
And large large brands continue to do better and take share from both.
Smaller probability older brands and independence.
As far as discounting we're going to continue to use.
Uh huh.
Several levers we can use to grow our business when we look at when we look at incentives we don't look at them.
Just as it is up a one piece we have to look at.
Our overall advertising program, what is going on from a television standpoint, what's going on from a digital and online what are we doing from an incentive standpoint, we have multiple ways to put incentives out there.
And so we have a lot of a lot of levers that we can pull over time, depending on the environment and we will we will use those appropriately to drive our business in a profitable way. The one thing that I think that we are proud of and I'm very proud of our teams is that we continue to drive our business, while protecting our margins and we are we continue to invest in our business invest in quality invest in food vest in portion size invest in our people.
And we're able to do that in a way.
That has protected our margins and as Rick talked about our plus 8% margins are incredibly impressive in this environment.
And so.
You know when we think about incentives, we think about it holistically and all that we're doing to build our brands over the long term.
That's great very helpful excellent Egypt.
Thank you. Our next question is from Andrew Strelzik from BMO capital markets. Your line is open.
Hey, good morning, Thanks for taking the question over the last couple of months, we've been hearing a lot more about delivery takes rate take rates coming down being renegotiated lower wondering if that changes your perspective on the viability of delivery for for Darden at all.
Especially you know as you've kind of highlighted some of the changes on the digital side and the willingness.
Given the numbers that you cited for customers to engage with the brands digitally hedged if your thoughts are evolving it on on delivery.
No. We haven't we really haven't haven't have any current thoughts haven't involved at all.
We will acknowledge that the cost burden does appear to be shifting from the from the company to the consumer.
And we're going to watch that closely but I think the I have a lot of concerns about this is this is still you know we're still it's still both value and how much how much of the overall experience are you willing to dedicate towards convenience.
And so it's something to watch it's definitely this is a shift that we internally predicted that would happen.
And we'll watch it but all I want to pivot back to what I said earlier, our job is to create a compelling off premise experience right now that the consumer which so much value to the consumer is willing to come get it that seems to be working for us and we're going to continue to focus on that.
If I could just follow up on the value piece, then I'll just quickly the olive garden price Oh, it was above 2% for the quarter was that what the underlying price was not that it's a huge deviation from where you've been prior but should we be thinking about it a little bit more price broadly at olive garden going forward.
Andrew This is Rick the price there was a 2.2% I believe in the first quarter and Thats, just due to timing of pricing year over year, we still expect our price to be below 2%, which is our long term goal to keep pricing.
Below are our inflation and below our competitors to increase our value perception in the marketplace, while still making great investments. So yeah. This was just a little bit of a timing anomaly for the quarter.
Great. Thank you very much.
Thank you. Our next question is from Stephen Anderson from Maxim Your line is open.
Yes, hi, good morning, I would actually wanted to ask about the tests you have under way for your rewards program to see a multi concept as I recall its about 70% of your stores you're testing that out right now I want to ask about how the test is progressing and we are youre ready to roll that out to additional locations or potentially higher system. Thank you.
Hey, Stephen This is Rick again, thanks for the question.
We as you said, yes, we have our loyalty program and about 7% of our restaurants, a net across the nation. We're still monitoring that test as we have said quite a few times. This is going to take a long time to understand the frequency driving nature of the loyalty program and how much we'd have to provide discounts to our most loyal consumers to come to us versus other incentives for them to come.
The test is going okay, it's going well.
But we're not ready to pull the trigger on adding more restaurants were going nationally.
And when we do I'm sure all of you will be the first to know, but right now we were kind of holding steady on our test.
The fact that it's still out there tells you that it's not not going well, but we want to just make sure that it's the right thing to do in the long run as part of GE of what genes as our overall strategy of how do we market to our consumers.
Thank you.
Thank you let me just remind everyone if you'd like to ask a question press star one and record today.
Also please limit your question to one question and one follow up. Thank you. Our next question is from Dennis Geiger from.
Your line is open.
Great. Thank you just wanted to ask about mix and I guess, specifically on olive garden, if the impact that you saw in the quarter was roughly in line with expectation prior to the quarter and then more importantly, just looking out over the next few quarters anything that would make you think the mix contribution could remain above kind of a long term steady state I guess, if you could just kind of highlight some of the mix considerations. This year or some of the puts and takes thinking about incentives trade up promos catering delivery catering off premise et cetera. Thanks.
Yes, two things I think that will will probably drive mix, maybe a little bit above our target will be continued growth in catering catering delivery and the addition of the the five dollar take homes those two things I'm, probably going to drive that mix slightly above our long term expectations. The five dollar take the five dollar take home is a great value offering and is something that we think the real catalyst to continue to drive the off premise business, which should have a little bit more of a positive mix then what we want to try to do for a long term.
Great. Thank you.
Our next question is from Eric Gonzalez from Keybanc capital markets. Your line is open.
Hey, good morning, Thanks for taking the question I think in the first quarter you benefited from a few extra weeks of the buy one take one is as you pull that forward.
But I think you said in your comment that it was a drag on traffic to the media show. So I was wondering if you can maybe clarify what you meant there and I know you had hurricane impact, but perhaps you can quantify what the impact of not having those extra weeks violent take one in the early part of the second quarter. Thanks.
Oh, no I'm not going to we're not going to talk about the second quarter and the impact on we shifted and we shifted some media we move we move things around which is always going to move our comparisons somewhat but I'll go back to my statement. This was something we think strategically needed to needed to be done.
And it is again I would also add this also always shifts in our media media spending as we try and it's the only way you can really discern what is working and what is not working and what when and where to where to put more weight against whether its promotion or lunch or value is that you have to change the media spend to learn and so we shifted a little bit inside the quarter.
Well wouldn't get caught up in that I'd point back to a great two year stack, great outperformance of the industry, we made a strategic a big strategic choice to separate the two value promotions that gives us more balance in our value messaging throughout the year, which is really important.
What's not get hung up on a week to week media shifts.
If I could maybe sneak in a follow up there on the you know the five dollar take home into buy one take one or a similar type of sort of similar programs are you moving away from buy one take one next year or is that something is that something that's on the table.
No I think that this similar but different and so there are different different types of value offerings and our team will continue to reenergize buy one take one its important part of our value proposition.
And if it is done right it will continue to support.
The five dollar take home not it shouldn't be a cannibalistic thing it should it really should support it and move it.
After you run buy one take one that should be the springboard for $5 take homes. The rest of the year and then you can you can re energize the promotion each year. So that's how we're thinking about that so it should be additive not so that shouldnt be dilutive at all.
That's helpful. Thanks.
Our next question is from John Glass from Morgan Stanley . Your line is open.
Thanks, Thanks, very much first just on the the other brands and the continued softness there I think you commented last quarter that there is increased competition. So maybe what we're seeing here is just more of that but can you talk about how you think about what is the breakthrough strategy to help market those brands better if you can achieve national advertising scale of those brands.
It does delivery makes sense in some but we talk about delivery holistically or who do you like delivery or not but does it make sense in some brands maybe some of these smaller brands, it's worth giving a trial given that they don't have that scale in delivery through the aggregators sort of provide scale that they don't otherwise have.
Well, it's an interesting.
The concept John or as you think as you think about the smaller brands.
We've been reluctant to really add a lot of marketing cost of these businesses that they're unique theyve got great strong value propositions.
But I think in this environment I think weve finally come to grips with.
That we're probably going to have to spend a little bit more money in become and try to find which channels in the digital environment can work best for them. I think you know there's not one channel that would work across all our small brands and so we each of them are so unique we have to figure out.
What's the best way to talk to the consumer.
Well as far as off premise, our third party delivery for for these smaller brands.
I really don't see that as a upside that we do have one of our test is in the majority of the yard houses we are using a provider.
Just think about where a yard houses located.
It's it's embedded in a lifestyle center with no parking and so there is it's it's more difficult even for the last mile provider to get in there and pick up the food. So it's not a big part of the business.
So I don't really think about that.
As a way to grow the business I think that.
You know I think that we need to make really good long term decisions, we've been able to protect our margins in these businesses.
We've got to continue to innovate make them make them.
Make him the attractive we also have to recognize there's a lot of volatility in these businesses and I and it goes back to.
If you open an another restaurant that just looks like you in this same development, it's going to have a one year impact on the comps and we have that once in a while.
These are great brands.
We're going to we're going to obviously.
Try to compete a little differently as we go forward I wouldn't look for a big change here in the next couple of quarters, because we're going to test and learn and we're going to do it responsibly.
Needs, a strong business models and I'm not going to put the brands on sale to get a headline number I'm gonna can tech, we're going to protect the overall business for the long term.
Hi, Thank you I am sorry to belabor the value of <unk> point on the Olive Garden I, just want to make sure I'm I'm I understand this correctly you spent last year sort of a debt, reducing some of the couponing or discounting and preserving that value power. If you needed in the future are you now, suggesting you need that today or is this still it's in reserve, but we are not really changing your view on the increased value promotions in 2020 as it stands stands today.
And then as it stands today I think our position is exactly the same as it was for the past couple of quarters that that olive garden continues to perform extremely well.
You know over 300 basis point gap to the industry.
Well, we'll continue to look at each promotion, what kind of support that promotion needs depending on what we're doing from a television standpoint.
I do think that.
No the analyst community and Investor community is is looking at things too much in isolation. You don't you don't have the whole picture of.
What's happening from overall media our media spend.
And because we run a TV I or a TV test, we read into a situation that things must be bad well I think thats a.
That's that's not the way to look at to analyze our business. It's just one of many.
Levers that we have to pull to support our business and right now I think we're looking at the Olive garden business is being.
Competing extremely well and the environment.
Great. That's very helpful. Thank you.
Thank you. Our next question is from Jake Bartlett from Suntrust. Your line is open.
Great. Thanks for taking the question. My question was about Cheddars and I'm wondering where you think you are now in the kind of the the integration of the business. The turnaround of operations improved mentioned it in the context of your acquisition strategy I'm going forward.
Do you feel like you're in a in a position now where were you make it more active on acquisitions.
Well, it's a two part question I think we're at where are we on shutters I think today I'm more optimistic than I've ever been I think you know as I acknowledge in my opening comments is this still a ton of work to do here. This is a high volume complex operation.
That has offered some operational challenges that aren't systemic where we have strong leadership and great human resource metrics were running great businesses, we have to stabilize some of these other businesses. It starts with getting that right general manager in place managing partner and then building a great team.
So I think that.
I'm very encouraged at the HR metrics are really starting to improve I'm encouraged that our operation metrics are improving I'm encouraged that our controls are better today than ever I am encouraged that our restaurants are staffed.
I am encouraged with the new insight that that we've really uncovered that we've got a real awareness problem, even and then awareness problem is with people within 10 miles of our restaurants. So I'm encouraged that we can solve that.
But we're going to solve these problems for the long term, we're going to build a strong foundation and we're going to do a REIT. This represents less than 8% of our overall business and I'm really resolute and the fact that I want to fix this and fix it right for the long term I think this is still a huge opportunity and as much urgency is on putting behind it.
I'm more concerned about doing it right as far as M&A activity, you know use a standard statement. The management. The board are going to continue to look at opportunities to add to our portfolio when it when it's appropriate and I really have no further comment on that at this point in time.
Got it and I had a follow up question on your level of incentives in your approach to incentives and your traffic has been negative for the last two quarters at Olive Garden, obviously outperforming the space I'm in a significantly.
As you look at that are you focused more on on the outperformance or your absolute level and I'm I'm kind of wondering how long you you're going to you would kind of tolerate negative traffic versus kind of trying to insert more incentives to try to drive that positive.
First first of all let's let's let's look at the magnitude of the negative traffic I mean half of the negative traffic that we reported last month. This just due to catering delivery and as off you know that that piece of the off premise business grows we're not giving ourselves any guest counts for that we're not you know we're just we're not we're not going to we're not doing that for for multiple reasons.
We could we could go ahead and and changed our methodology and how positive traffic if we chose to do that.
I think that when we look at traffic and we look at the overall business there are going to be times that this traffic available to you and it's worth driving there are other times. When you look at the you look at the business and you say.
I'm, Okay with moves in 10, or or 15, 20 guess, a week and being able to protect our business model and so I don't think you can just haven't let's do everything we can to grow traffic.
Or let's do everything we can to protect our business model I think it all has to be done in balance and I think our management teams and his leadership team have done an outstanding job over the last four years of really balancing these efforts.
Great. Thanks for taking the question.
Thank you once again, if youd like to ask a question perhaps Taiwan.
Our next question is from Chris O'connell from Stifel. Your line is open.
Thanks, Good morning.
First just a point of clarification.
Question is the five dollar take home Entre promotion considered a new off premise transaction or is it just an add on to the dining check and then gene can you provide some more detail about how cheddars plans to broaden reach with its advertising and when we might start to see that investment.
Yes, the five dollar take home isn't as an off premise transaction.
Oh and as far as shutters goes I mean, we're we're out there testing and learning with with different.
The digital vehicles to see.
And other traditional media to see.
What we can and what kind of awareness, we can generate with that so.
We've been out well, they're a small scale and we'll continue to see increased at scale as we learn.
Okay, great. Thanks.
Our next question is from Peters delay from BTIG. Your line is open.
Great. Thanks.
Couple of questions on shutters.
Yes satisfaction scores, maybe direction that you're seeing there are those.
I'll start backwards and then on the term charters.
Manager.
Oh.
How far those off from started average how much.
Yes. Thanks, Good question Peter guest satisfaction scores are increasing across the board.
As Weve improved management employee staffing.
And there's still opportunity there and as I would say that.
The divergence or the differential between the better operating stores and the ones with challenges is to still too great and we got to close that gap down.
As far as turnover the metrics are still outside darden norms, but they're inside industry norms for the first time, which is you know I think you know is a really good trend and it's going to take US could you know, it's going to take us a while to get them hopefully get them to darden norms, but they are on their way and again inside industry trends at this point in time.
Thank you.
Thank you. Our next question is from Jeffrey Bernstein from Barclays. Your line is open.
Great. Thank you very much [laughter] one clarification first gene in your prepared remarks, you mentioned in the industry comps continue to weaken and then you did mention I wasn't I'm just trying to gauge where do you think it's all due to a tough compare because I think that was what you mentioned initially as the rationale or whether you do see that there is some sort of change in the consumer behavior because.
When we look at the past couple of quarters. It seems like the two year trend comp and traffic seems relatively stable. So I don't know if maybe youre looking at broader industry data that we don't get a chance to see more holistically or whether you think it's again more just the two year comp compare being more difficult or whether there's actual change in the consumer.
Well I think that I think it's a combination of both I think thats, what I was trying to allude to in the comment was that the the.
With that the industry was facing some tougher comparisons I think you all talked about that is that overall industry comparisons were little bit more difficult.
But I think what I was trying to get at is we were surprised that went all the way to negative.
We thought.
Our our view was that the industry would stay positive in this environment. It may not you know the growth rate would have come back just like if you look at GDP growth, it's still still strong but it has it has decelerated. So we were just I think a little surprised that the industry went all the way back to negative.
Understood and then just all the talk about Cheddars I'm just wondering it seems like the under the Hood metrics are getting better and you seem.
Excited about the opportunity longer term just wondering whether the frustration on the sales on a short term might lead you to delay when you would otherwise ramp up the new unit growth, which seem like that was the big opportunity over time, I'm, just wondering whether that timeframe might have changed or been pushed back at all.
Only the timeframe just chat I think I've been pretty consistent with our talking point around that is.
The biggest thing.
For new unit ramp up growth will be human resources and I'm not so sure that.
Having said that we've won that battle yet.
And so every time you open a new restaurant you make that investment you got to have a great managing partner.
And I don't think that we're there at that point, yet that we can ramp up growth, we're still doing five or six a year, which is the right number at this point in time.
And.
I want to I really want to see the management depth continue to build.
And that and when you get to that point. That's when you can start to ramp up ramp up growth, but don't so I don't think thats, we haven't given a timeline to that and I'm not going to give a timeline today I'm focused on really really getting great managing partners in these restaurants and I know when we do that our likelihood of success increases dramatically.
Thank you.
Thank you no more questions at this time, let me now hand, the call back to Kevin Calix.
Thank you Ray that concludes our call I want to remind you all that we plan to release second quarter results on Thursday December 19, before the market opens with a conference call to follow Thank you all for participating in today's call.
Thank you that concludes today's conference. Thank you for participating you may now disconnect.