DARDEN RESTAURANTS INC Q2 FY2025 earnings call

Management Statement and Operational Highlights

• Strong quarter with three of four segments having positive same restaurant sales; brands focused on back to basics operating philosophy anchored in food, service, and atmosphere.
• Olive Garden: Extended Never-Ending Pasta Bowl, successful Uber Direct pilot in ~100 restaurants, updated menu with return of fan favorites (Steak Gorgonzola and Stuffed Chicken Marsala).
• LongHorn Steakhouse: Exceeded expectations with great guest value, hosted steak cutter summit with suppliers, achieved all-time high steaks grilled correctly score.
• Yard House: Built competitive advantage with distinctive culinary offerings, e.g., Bratwurst sliders during Oktoberfest, with new food news in Q3.
• Cheddar’s Scratch Kitchen: Leverages efficiency and purchasing power, LTOs (Texas T-bone, Bone in Ribeye), achieved best ever retention level, value score outperforms casual dining.
• Chuy's Integration: Successfully closed acquisition; integration process led by same team as Ruth's Chris integration, focused on preserving employee and guest experience, migrating to Darden platform.
• Hurricane Impact: Operations teams prepared restaurants for hurricanes; one restaurant expected to reopen next fiscal year; Darden supported Red Cross and team members via Darden Dimes, providing $1.1M in grants to over 5,600 impacted team members.

Segment Performance

• Olive Garden: Total sales increased by 3.3% driven by same-restaurant sales of 2%, outperforming the industry benchmark by 100 basis points. Segment profit margin was 21.4% (40 basis points higher than last year).
• LongHorn Steakhouse: Total sales increased 10.4% driven mostly by same restaurant sales growth of 7.5%, outperforming the industry benchmark by 650 basis points. Segment profit margin was 18.9% (150 basis points above last year).
• Yard House: Contributed to positive comps with distinctive culinary offerings, e.g., Bratwurst sliders during Oktoberfest, with new food news in Q3.
• Cheddar’s Scratch Kitchen: Comped positively, leveraging efficiency and purchasing power, achieved best ever retention level, and value score outperformed the casual dining category.
• Fine Dining Segment: Total sales decreased 3.8% as same restaurant sales were negative at all brands, impacted by Thanksgiving shift and hurricanes.
• Other Business Segment (Chuy's): Sales increased by 12.9% driven by acquisition of 103 restaurants and positive same restaurant sales of 0.7%. Segment profit margin was 13.6% (70 basis points better than last year).

Guidance

• Fiscal 2025 Outlook: Total sales expected to be approximately $12.1 billion (including ~$300 million from Chuy's), same restaurant sales growth of approximately 1.5%, 50-55 new restaurants, capital spending of approximately $650 million, total inflation of approximately 2.5%. Adjusted diluted net earnings per share outlook remains $9.40 to $9.60 (excluding approximately $47 million of pre-tax transaction and integration related costs).
• Chuy's Integration: Early stages of integration, expect run rate synergies of approximately $17 million ($2 million realized in fiscal 2025, balance in fiscal 2026); transaction neutral to adjusted earnings per share for the fiscal year, not including transaction and integration related expenses.

Risks

• Operational Risks: Impact of hurricanes on restaurant operations; challenges associated with integrating Chuy's into the Darden platform; potential labor market changes affecting staffing and labor costs.
• Market Risks: Consumer sentiment changes impacting dining habits; competitive pricing pressures; impact of GLP-1 drugs on fine dining brands, potentially reducing visits to higher-end restaurants.

Question and Answer Q: David Palmer from Evercore ISI on Olive Garden's sales gap and advertising spend A: Rick Cardenas and Raj Vennam discuss the sales gap, noting it's narrower than prior years but still confident in long-term strategy; marketing spend for Olive Garden is not half of pre-COVID levels, with LongHorn spending much less.

Q: Eric Gonzalez from KeyBanc Capital Markets on Olive Garden's advertising and marketing A: Rick Cardenas mentions Olive Garden's advertising will look different in Q3 with return of fan favorites and a compelling price point.

Q: Jim Salera from Stephens on LongHorn's marketing and comps A: Rick Cardenas and Raj Vennam discuss LongHorn's strong comps driven by quality investments, traffic ~4.3-4.4, and check ~$2.8-2.9.

Q: Peter Saleh from BTIG on Uber Eats partnership and unit growth A: Raj Vennam states Uber Eats partnership impact is minimal (single basis points), unit growth guidance driven by inclusion of Chuy's.

Q: Jeffrey Bernstein from Barclays on fiscal '25 comp guidance A: Raj Vennam explains tightened same restaurant sales guidance reflects increased confidence in more stable trends, with Olive Garden and LongHorn expected to contribute positively.

Q: Sara Senatore from Bank of America on consumer environment and Cheddar's A: Rick Cardenas discusses consumer sentiment trends, trade-down potential from higher-end to casual brands, and Cheddar's unit growth progress.

Q: Andrew Charles from TD Cowen on G&A, interest, and depreciation post-Chuy's acquisition A: Raj Vennam provides details on G&A (~$470 million), interest expense, and depreciation trends post-Chuy's acquisition.

Q: Andrew Strelzick from BMO Capital Markets on Olive Garden's promotion and beef inflation A: Rick Cardenas mentions Olive Garden's Never Ending Pasta promotion had positive mix with record refills and protein add-ons; Raj Vennam discusses beef inflation outlook for the back half.

Q: Brian Harbour from Morgan Stanley on Uber Eats and Olive Garden pricing A: Rick Cardenas and Raj Vennam discuss Uber Eats pilot performance (1.5% of sales across pilot restaurants, average order size bigger than pickup), and Olive Garden pricing ~2.8-2.9%.

Q: Lauren Silberman from Deutsche Bank on cadence and underlying trends A: Raj Vennam discusses quarter trends, underlying traffic improvements adjusted for weather and holidays, and positive trends vs pre-COVID.

Q: Jon Tower from Citi on speed of service and technology A: Rick Cardenas talks about progress on speed of service improvements across brands, with next-gen point-of-sale system aiding faster execution.

Q: Dennis Geiger from UBS on Uber Direct and menu innovation A: Rick Cardenas discusses Uber Direct pilot success and future menu innovation plans at Olive Garden.

Q: Gregory Francfort from Guggenheim on data and AI A: Raj Vennam talks about Darden's data strategy, leveraging cloud-based technologies and early GenAI pilots.

Q: Danilo Gargiulo from Bernstein on labor market and pricing A: Rick Cardenas discusses labor market impact, pricing strategy focused on keeping prices below competitors, and confidence in long-term strategies.

Q: David Tarantino from Baird on CapEx guidance A: Raj Vennam explains CapEx guidance driven by Chuy's integration and pipeline building for future unit growth.

Q: Rahul Krotthapalli from JPMorgan on industry policies and fast casual A: Rick Cardenas discusses neutral stance on potential industry policies, and focus on full-service model rather than fast casual via M&A.

Q: Jake Bartlett from Truist Securities on labor efficiencies and selling expenses A: Raj Vennam talks about labor efficiencies from improved turnover and Thanksgiving shifting, and selling expenses trends.