DARDEN RESTAURANTS INC Q1 FY2027 earnings call

• Operational Discipline & Guest Satisfaction: Management emphasized that teams remained focused on operating fundamentals, maintaining guest satisfaction scores at or near record highs across all brands despite external headwinds.
• Olive Garden Strategy: The brand successfully launched the 'Never Ending Pasta Bowl' promotion, selling out 10,000 passes immediately. Management highlighted the success of protein-forward options and the introduction of lighter portion sizes as long-term value drivers. They also announced plans to reactivate marketing for unlimited soup, salad, and breadsticks lunch offerings after delaying it due to lettuce concerns.
• Longhorn Momentum: Longhorn continued its streak of positive same-restaurant sales growth, attributed to disciplined execution of quality and simplicity strategies. The team is investing in new menu items to strengthen value and variety.
• Yardhouse Growth: Yardhouse achieved significant growth, driven by World Cup viewership and new menu platforms. It became Darden’s third billion-dollar brand and has plans to open 13 new locations this fiscal year, utilizing a smaller, cost-effective prototype.
• Community & Philanthropy: The Darden Foundation partnered with Penske to add refrigerated trucks to Feeding America food banks, aiming to help end hunger in communities with significant need.
• Portfolio Strength: Management reiterated confidence in the portfolio’s ability to navigate headwinds through distinctive brand strategies and scale advantages.

Total Darden sales reached $3.2 billion, a 5.1% increase year-over-year, driven by positive same-restaurant sales and net new restaurant additions. On a comparable calendar basis, same-restaurant sales grew 3.2%. Olive Garden reported total sales growth of 2.2%, with same-restaurant sales increasing 1% on a comparable calendar basis; the brand holds an industry-leading segment profit margin of 20.4%, though this declined 20 basis points year-over-year due to menu investments. Longhorn Steakhouse delivered strong momentum with total sales up 10.9% and same-restaurant sales growth of 6.8%; its segment profit margin expanded 60 basis points to 18%. The Fine Dining segment saw total sales rise 6.2% with 1% same-restaurant sales growth, but segment profit margin decreased 50 basis points. The Other Business segment (primarily Yardhouse and Cheddar's) posted total sales growth of 3.6% and same-restaurant sales growth of 4.5%, with a segment profit margin of 15.8%, down 30 basis points due to winding down Bahama Breeze.

• Full-Year EPS: Management reaffirmed diluted net earnings per share guidance between $11.10 and $11.35 for fiscal 2027.
• Calendar Shift Impact: Due to the shift from a 53-week to a 52-week fiscal year, Thanksgiving moves from Q3 last year to Q2 this year. This creates an approximate 1% headwind to second-quarter sales for most brands, with an offsetting benefit in the third quarter.
• Commodity Inflation: The company maintains its expectation for full-year commodity inflation at approximately 3%, with Q2 expected to be in the 2.5% to 3% range.
• Pricing Expectations: Pricing is expected to moderate throughout the year, moving from 3.7% in Q1 to low-to-mid twos by Q4.

• External Headwinds: The World Cup negatively impacted traffic for non-Yardhouse brands, and heightened consumer concerns regarding lettuce temporarily affected Olive Garden’s planned marketing campaigns.
• Menu Investment Costs: The introduction of lighter portion sizes at Olive Garden created a mixed headwind to checks and contributed to a decline in segment profit margins.
• Fuel Surcharges: Elevated diesel prices could impact distributor fuel surcharges, potentially adding 10-15 basis points to commodity costs if prices remain elevated above $6/gallon for the full year.
• Consumer Resilience: While current trends are strong, management noted that sustained high gas prices or deteriorating macro conditions could eventually weigh on casual dining demand, particularly among lower-income demographics.

Q: Analyst asked about Olive Garden's pricing strategy for the Never Ending Pasta Bowl and whether price increases were due to consumer strength.

A: CFO Raj Vennam explained that while the base price increased slightly, they added more value (e.g., Spicy Alfredo, shrimp fritter) without raising the price for unlimited protein buy-ups ($4.99). He noted that performance indicates this was a good decision, balancing value perception with necessary pricing adjustments over time.

Q: Analyst inquired about the drivers behind improving trends in late Q1 and into September, specifically separating external factors from internal actions.

A: CFO Vennam stated that easing headwinds like the World Cup and lettuce concerns helped, but internal actions like the NEPB launch and protein-focused menu items also drove improvement. CEO Rick Cardenas added that underlying business trends accelerated positively into September.

Q: Analyst asked if Olive Garden's smaller portions were driven by GLP-1 usage or price sensitivity, and if lunch cannibalizes dinner.

A: CEO Cardenas clarified that the initiative is about "right portion, right price" rather than targeting GLP-1 users specifically, though some preference exists. He noted no significant cannibalization risk, citing Longhorn’s successful lunch/dinner coexistence, and expects total traffic to increase as fixed costs are leveraged.

Q: Analyst sought details on beef market dynamics and supply chain performance given negative headlines about screwworm and supply issues.

A: CFO Vennam highlighted that Darden’s supply chain team continues to outperform the market on beef prices. Externally, he noted that cattle weights are increasing, imports are helping, and packers are profitable, suggesting the market may improve. He confirmed no active screwworm cases in the US and that their inflation outlook remains aligned with low single-digit expectations.

Q: Analyst asked about unit growth rates for Yardhouse and Cheddar's and the rationale behind not growing faster.

A: CEO Cardenas explained that while Yardhouse aims for higher single-digit growth (not double digits) to ensure operational capacity and brand understanding, Cheddar's will grow in mid-single digits focusing on markets where it already has strong presence. He emphasized that staying below 10% growth helps maintain quality and ROI, supported by strong returns from existing assets.