Darden Restaurants : Fourth Quarter 2024 Transcript

Corrected Transcript

20-Jun-2024

Darden Restaurants, Inc. (DRI)

Q4 2024 Earnings Call

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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

CORPORATE PARTICIPANTS

Courtney Aquilla	Rajesh Vennam
Senior Director-Corporate Finance & Investor Relations, Darden	Senior Vice President & Chief Financial Officer, Darden Restaurants,
Restaurants, Inc.	Inc.
Ricardo Cardenas
President, Chief Executive Officer & Director, Darden Restaurants, Inc.

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OTHER PARTICIPANTS

Brian Harbour	Peter Saleh
Analyst, Morgan Stanley & Co. LLC	Analyst, BTIG LLC
Lauren Silberman	Jeff Farmer
Analyst, Deutsche Bank Securities, Inc.	Analyst, Gordon Haskett Research Advisors
Eric Gonzalez	Jon Tower
Analyst, KeyBanc Capital Markets, Inc.	Analyst, Citigroup Global Markets, Inc.
Andrew M. Charles	Chris O'Cull
Analyst, TD Cowen	Analyst, Stifel, Nicolaus & Co., Inc.
David E. Tarantino	Danilo Gargiulo
Analyst, Robert W. Baird & Co., Inc.	Analyst, Sanford C. Bernstein & Co. LLC
Jim Salera	Andy Barish
Analyst, Stephens, Inc.	Analyst, Jefferies LLC
Sara H. Senatore	Brian M. Vaccaro
Analyst, BofA Securities, Inc.	Analyst, Raymond James & Associates, Inc.
Jeffrey A. Bernstein	Jake Rowland Bartlett
Analyst, Barclays Capital, Inc.	Analyst, Truist Securities, Inc.
David Palmer	Gregory Francfort
Analyst, Evercore Group LLC	Analyst, Guggenheim Securities LLC
Dennis Geiger	Andrew Strelzik
Analyst, UBS Securities LLC	Analyst, BMO Capital Markets Corp.

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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

MANAGEMENT DISCUSSION SECTION

Operator: Welcome to the Darden Fiscal Year 2024 Fourth Quarter Earnings Call. Your lines have been placed on listen-only until the question-and-answer session. [Operator Instructions] This conference is being recorded. If you have any objections, please disconnect at this time.

I'll now turn the call over to Ms. Courtney Aquilla. Thank you. You may begin.

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Courtney Aquilla

Senior Director-Corporate Finance & Investor Relations, Darden Restaurants, Inc.

Thank you, Daryl. Good morning, everyone, and thank you for participating on today's call. Joining me today are Rick Cardenas, Darden's President and CEO; and Raj Vennam, 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 were distributed this morning and in its filings with the Securities and Exchange Commission.

We are simultaneously broadcasting a presentation during this call, which is posted in the Investor Relations section of our website at darden.com. Today's discussion and presentation include non-GAAP measurements and reconciliations of these measurements are included in the presentation. Looking ahead, we plan to release fiscal 2025 first quarter earnings on Thursday, September 19, before the market opens, followed by a conference call.

During today's call, any reference to pre-COVID when discussing fourth quarter performance is a comparison to the fourth quarter of fiscal 2019 and any reference to annual pre-COVID performance is the trailing 12 months ending February of fiscal year 2020. Additionally, all references to industry results during today's call refer to Black Box Intelligence's Casual Dining benchmark excluding Darden's Casual Dining brands.

During our fiscal fourth quarter, industry same-restaurant sales decreased 0.8% and industry same-restaurant guest counts decreased 3.5%. And during our full fiscal year 2024, industry same-restaurant sales decreased 1.4% and industry same-restaurant guest counts decreased 4.7%.

This morning, Rick will share some brief remarks recapping the fiscal year, Raj will provide details on the fourth quarter and full year financial results and share our fiscal 2025 financial outlook, and then Rick will close with some final comments.

Now, I will turn it over to Rick.

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Ricardo Cardenas

President, Chief Executive Officer & Director, Darden Restaurants, Inc.

Thank you, Courtney. Before I begin, I would like to thank Kevin Kalicak for his leadership of Investor Relations for close to 10 years. As many of you know, Kevin has moved to lead finance for Olive Garden. We are excited for his new opportunity and equally excited to have Courtney transition into leading Investor Relations. I'm confident you will find Courtney a worthy successor. Thank you, Kevin, and good morning, everyone.

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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

I'm proud of our ability to stay disciplined and control what we can control. This continued focus enabled us to have a strong year in what became an increasingly weaker consumer environment, especially for consumers below the median household income.

For the full year, we grew total sales by 8.6% to $11.4 billion; delivered adjusted diluted net earnings per share of $8.88, an increase of 11%, exceeding the high end of the EPS range we provided at the beginning of the fiscal year despite the challenging sales environment that emerged in the back half of the year. We opened 53 new restaurants in 24 states, eight of which were reopenings, and acquired and completed the integration of Ruth's Chris Steak House.

Throughout the year, we strengthened and defended our four competitive advantages, and our restaurants remain focused on being brilliant with the basics. This has enabled us to successfully navigate whatever comes our way, including the increased discounting and marketing pressure we've seen recently. And when evaluating our performance within the context of our long-term framework of 10% to 15% total shareholder return, as measured by EPS growth plus dividend yield, we delivered a TSR of 14.2% for fiscal 2024, which is near the high end of our target.

And as I said, our teams are focused on controlling what they can control. One of the ways we do that is by having well-trained tenured team members. Our manager and team member retention is at or above pre-COVID levels, and our teams are benefiting from this staffing consistency, which helps create great guest experiences.

We also provide our teams with training programs that not only enhance their skill sets, but build on the unique culture of our brands, further strengthening engagement. For example, LongHorn recently completed their seventh Steak Master Series. Over the course of two months, thousands of culinary team members competed in this highly engaging grilling competition and training program for the right to be crowned champion and received the $15,000 prize. Congratulations to this year's champion, Jacob Montgomery from the LongHorn Steakhouse in Cape Coral, Florida.

Beyond providing strong labor and cost management, our operators are ensuring their teams remain focused on being brilliant with the basics, which is driving record guest satisfaction. Several of our brands reached all new time highs for overall guest satisfaction for the full fiscal year, including Olive Garden, Cheddar's Scratch Kitchen, Yard House, Seasons 52 and Bahama Breeze.

Additionally, within the Casual Dining segment of Technomic's industry tracking tool, LongHorn ended the fiscal year ranked number one for food, service, atmosphere and overall perceptions, as well as brand fit and loyalty.

Now let me provide a final update on the integration of Ruth's Chris Steak House. During the quarter, we completed the transition of all company-owned restaurants on to both our proprietary point-of-sale and labor management systems, which were the final major changes for the restaurants. We also acquired a single franchise location in Destin, Florida during the quarter. Thanks to the hard work and collaboration between the Ruth's Chris team and our integration team, we closed on the acquisition and completed the integration during the same fiscal year. This included onboarding 5,000 new team members, with no turnover among our nine Directors of Operations.

We also achieved the expected synergies, resulting in EPS accretion of $0.10. Integration is not easy, and I'm particularly proud of the focus the restaurant teams maintained on the guest and team member experience throughout the process.

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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

Overall, I'm pleased with our performance for the fiscal year. We successfully navigated a challenging environment and our proven strategy, combined with the strength of our business, ensures we are well positioned regardless of the operating environment.

As we begin fiscal 2025, we remain focused on managing our business for the long term by executing our strategy that drives long - drives growth and long-term shareholder value. We have also taken steps to further position Darden and our brands for future growth and success through several leadership changes. We are fortunate to have a deep bench of talent, and these changes are designed to allow two of our most seasoned Presidents to devote more time to developing our newest brand Presidents.

After nine years of leading LongHorn Steakhouse to record performance, Todd Burrowes has transitioned to a new role as President of Business Development. Todd now has responsibility for our new restaurant development and facilities team, our International and Franchising business, and Ruth's Chris, our newest brand. Reporting to Todd are Marc Braun, Senior Vice President of Development; Brad Smith, President of International and Franchising; and Rik Jenkins, President of Ruth's Chris, who previously led operations for the brand.

Todd is well suited to lead this work. He brings an operator's perspective to new restaurant development and our growing franchise business. Further, Todd was with LongHorn when we acquired RARE Hospitality 17 years ago, and he will be a valuable leader and resource for Rik as the Ruth's Chris team continues to acclimate to Darden.

Todd's replacement at LongHorn is Laura Williamson. Laura is well respected across LongHorn, having served as our finance leader for nine years. She will report to me. We also named three new brand presidents within our Specialty Restaurant Group, who will report directly to John Martin, who continues to serve as President of the Specialty Restaurant Group.

Bryan Clements, the former Head of Operations at Olive Garden is now President of Yard House. Falon Farrell, who led operations for Eddie V's, has been named President of The Capital Grille and Eddie V's. And Mark Cooper, who led finance for the Specialty Restaurant Group, is now President of Seasons 52 and Bahama Breeze.

I'm excited about these changes and confident we have the right leaders in place to drive future growth. I'm also proud that three of our seven brand Presidents began their careers as hourly team members at our restaurants and the average tenure of all of our brand Presidents is 27 years.

Now, I'll turn it over to Raj.

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Rajesh Vennam

Senior Vice President & Chief Financial Officer, Darden Restaurants, Inc.

Thank you, Rick, and good morning, everyone. Fiscal 2024 was another strong year for Darden, and I'm proud of the results our teams achieved. Despite sales results that were weaker than we anticipated, earnings exceeded our initial expectations for the year. Strong cost management by our teams and easing commodities and labor inflation drove this earnings outperformance.

Now looking at the fourth quarter, we generated $3 billion of total sales, 6.8% higher than last year, driven by the addition of 80 company-owned Ruth's Chris Steak House restaurants and 37 net new restaurants from our legacy brands.

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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

Our same-restaurant sales were flat for the quarter, outpacing the industry by 80 basis points, and same- restaurant guest counts exceeded the industry by 130 basis points. Throughout the quarter, our casual dining brands maintained their relative share of guest visits.

Olive Garden guest count growth was near the top quartile of the industry and LongHorn Steakhouse was at the top decile of the industry. This is impressive when you consider the increased levels of discounting and promotional activity by some competitors within casual dining.

Our same-restaurant guest count outperformance to the industry exceeded our same-restaurant sales outperformance due to our lower levels of pricing relative to the industry this quarter.

Adjusted diluted net earnings per share from continuing operations increased 2.7% to $2.65. We generated $523 million in adjusted EBITDA and returned $254 million to shareholders through $156 million in dividends and $97 million of share repurchases.

Turning to the fourth quarter P&L compared to last year, food and beverage expenses were 20 basis points better, as commodities inflation was better than expected at approximately 2%. Seafood deflation this quarter helped partially offset mid-single-digit beef and produce inflation.

Restaurant labor was 10 basis points better, driven by productivity improvement and favorability in other benefits, which more than offset the impact of pricing below labor inflation, which was approximately 4%.

Restaurant expenses were 10 basis points better than last year, driven by strong cost management and lower pre-opening expenses. Marketing expense was 1.3% of sales, consistent with our expectations and 20 basis points higher than last year. This all resulted in restaurant-level EBITDA improving 20 basis points to 20.9%.

Adjusted G&A expenses were 40 basis points lower and the total expense was slightly favorable to our previous guidance. This was driven by ongoing synergies from the integration of Ruth's Chris and favorable mark-to-market expense on our deferred compensation. Due to the way we hedge mark-to-market expense, this favorability is largely offset on the tax line.

Interest expense increased 40 basis points due to the financing expenses related to the Ruth's Chris acquisition. Our adjusted effective tax rate for the quarter was 13.4%, 40 basis points higher, driven by the mark-to-market hedge impact I referenced earlier. And we generated $318 million in adjusted earnings from continuing operations, which was 10.8% of sales.

Looking at our segments for the quarter, Olive Garden increased total sales 0.7% driven by new restaurant growth, partially offset by negative same-restaurant sales of 1.5%. While Olive Garden same-restaurant sales were below the industry, same-restaurant guest counts outperformed the industry benchmark by 60 basis points. This dynamic was due to our decision to minimize pricing. For the quarter, Olive Garden pricing was approximately 1%. Olive Garden segment profit margin of 22.8% continues to be industry-leading.

At LongHorn, total sales increased 7.2%, driven by same-restaurant sales growth of 4% and new restaurant growth. LongHorn same-restaurant sales outperformed the industry by 480 basis points. Segment profit margin of 19.1% was 50 basis points above last year. Strong cost management, including improved labor productivity, drove LongHorn's margin growth this quarter as pricing was below inflation.

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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

Total sales at the Fine Dining segment increased with the addition of Ruth's Chris company-owned restaurants. And despite negative same-restaurant sales at Capital Grille and Eddie V's, the Fine Dining segment's profit margin expanded in the fourth quarter, driven by improvement in our cost base.

The Other Business segment sales increased with the addition of Ruth's Chris franchised and managed location revenue. This was partially offset by combined negative same-restaurant sales of 1.1% for the brands in the Other segment. Segment profit margin of 17.4% was 160 basis points better than last year, driven by the sales leverage from the additional royalty revenue.

As we look at our annual results for fiscal 2024, we had same-restaurant sales growth of 1.6%, outperforming the industry in same-restaurant sales and traffic by about 300 basis points. And this is on top of 500 basis points of outperformance in traffic last year.

We delivered $1.8 billion in adjusted EBITDA from continuing operations. This is an increase of over 50% compared to five years ago. Additionally, we returned $1.1 billion to shareholders, with $628 million in dividends and $454 million in share repurchases.

Looking at our fiscal 2024 full year P&L, we had restaurant-level EBITDA growth of 120 basis points, driven by strong cost management by our teams and pricing leverage. This favorability was partially offset by increased depreciation and amortization expense and the impairment expense related to eight permanent closures that occurred during the year. This resulted in operating income margin that was 50 basis points higher than last year.

Additional financing expenses primarily related to the Ruth's Chris acquisition drove adjusted interest expense 40 basis points higher than last year. This all resulted in adjusted earnings from continuing operations of 9.4%, flat to last year.

Looking at our performance since 2019 relative to our long-term framework, we generated annualized EAT growth of 8% and cash returns of 3.7%, culminating in total shareholder returns of 11.7%, as measured by EPS growth plus dividend yield. This is well within our targeted range despite the issuance of 9 million shares of common stock in fiscal 2020 and Other Business disruptions from COVID.

Our strong operating model generates significant and durable cash flows. Since 2019, we have delivered 9% annualized adjusted EBITDA growth. Our balance sheet at the end of fiscal 2024 is well positioned, with adjusted debt-to-EBITDAR at 1.9 times. This is below our targeted range of 2 times to 2.5 times, even with the additional debt related to Ruth's Chris acquisition.

Now turning to our financial outlook for fiscal 2025, we expect total sales of $11.8 billion to $11.9 billion, driven by same-restaurant sales growth of 1% to 2% and 45 to 50 gross new restaurants; capital spending of $550 million to $600 million; total inflation of approximately 3%, which includes commodities inflation of approximately 2% and labor inflation of approximately 4%; an annual effective tax rate of approximately 13%; and approximately 119 million diluted average shares outstanding for the year. All of this results in diluted net earnings per share between $9.40 and $9.60.

Finally, our board approved a 7% increase to our regular quarterly dividend to $1.40 per share implying an annual dividend of $5.60.

And with that, I'll turn it back to Rick.
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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

Ricardo Cardenas

President, Chief Executive Officer & Director, Darden Restaurants, Inc.

Thanks, Raj. All of us at Darden continue to work together in pursuit of our higher purpose to nourish and delight everyone we serve, our guests, team members and communities.

During the year, we had the privilege of serving 420 million guests, more than 1 million per day, providing great food and drinks with attentive service in an engaging atmosphere. We also promoted 1,100 hourly team members into our Manager in Training program and promoted nearly 300 managers to general manager or managing partner positions.

And we continue to invest in our team members with programs like Fast Fluency, which provides the opportunity to learn English for free and our Next Course Scholarship program that, through the Darden Foundation, has awarded 200 scholarships or $3,000 each over the past two years to children of our team members.

We also remain committed to nourishing and delighting the communities we serve through our ongoing efforts to fight hunger. As part of our Harvest food donation program, our restaurants donated 4.5 million meals to local food banks in fiscal 2024.

We also continued our successful partnership with Feeding America with another $2 million donation from the Darden Foundation that helped provide mobile food trucks to 10 more Feeding America food banks, bringing the total to 45 trucks provided over the last four years.

To wrap up, I want to thank our team members in our restaurants and our support center for their outstanding efforts throughout the year. Their disciplined approach in executing our strategy is what enables us to succeed, regardless of the operating environment.

Now, I will take your questions.

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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

QUESTION AND ANSWER SECTION

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first question is coming from the line of Brian Harbour with Morgan Stanley. Please proceed with your questions.

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Brian Harbour

Analyst, Morgan Stanley & Co. LLC

Q

Yeah. Thank you. Good morning, guys. Maybe first just on your sales outlook for the year. Could you comment on how you see kind of the different brands feeding into that? And you obviously have very different kind of comparisons as we think about the start of the year versus the end of the year. What - presumably, there's kind of some pickup in Olive Garden. How do you think about the drivers of that?

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Rajesh Vennam

Senior Vice President & Chief Financial Officer, Darden Restaurants, Inc.

A

Hey, Brian. This is Raj. Good morning. So let's just start with the guidance at a high level from a sales outlook, right, without - before we get into the brand level. So when we take a look at the upcoming year, we look at the information that's out there and where the macro is expected to be. And as you all know, most economists are expecting weakening GDP growth. So that's taken into consideration. Then we're also taking into consideration what we're cycling through, right? We started to see a little bit more weakness in the back half of this fiscal year. So we're taking that into consideration as we look at next year.

So when we look at how we built this estimate and guidance, we are - we expect underlying traffic trends to gradually improve throughout the year. And so that's really how we built it. I don't want to get into the exact details on the brands. But at a blended level, we're thinking 1% to 2% same-restaurant sales growth for the fiscal - for the full year. And as I said, gradual improvement through the year on the underlying trends.

And then there's just one callout is Thanksgiving shifts out of Q2 into Q3. So Q2 [ph] print (00:22:15) might look better than the underlying trends and Q3 will be the opposite. So that's typically about somewhere around 80 to 100 basis points impact on sales in the quarter, positive for Q2, negative for Q3. And so all that said, in this current environment, there's more variability around our sales guide, but we have higher levels of confidence in our earnings outlook. And so that's kind of where we are.

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Brian Harbour

Analyst, Morgan Stanley & Co. LLC

Q

Okay. Thank you. And maybe could you just comment on your pricing thoughts at this point within that? Is there anything we should keep in mind with respect to timing? Is there perhaps some that you would delay in an effort to keep it more modest at the start of the year?

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Rajesh Vennam

Senior Vice President & Chief Financial Officer, Darden Restaurants, Inc.

A

Yeah. Brian, the good news on pricing is we've actually kept pricing very modest over the last five years, right? So we do expect pricing for this year to be more in line with inflation. So in that 2.5% to 3% range, probably. But as we think about how that's going to be spread, we expect it to be more consistent quarter-to-quarter. Now there may be a 10 basis points, 20 basis points movement between quarters. But if you look at over the last five years, we were underpriced a lot and that gives us some flexibility. And we've talked about that before.

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Darden Restaurants, Inc. (DRI)	Corrected Transcript
Q4 2024 Earnings Call	20-Jun-2024

So we've only priced about 20% over the last five years compared to where the overall CPI is, which I think was close to 23% on the same five-year basis and then full-service is at 28%, so - and underpriced grocery as well. So we feel like we've done a lot of work on keeping prices low, and we're going to continue to do that. And as you saw that in the fourth quarter, too, we talked about Olive Garden closer to 1% pricing in the fourth quarter.

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Brian Harbour

Analyst, Morgan Stanley & Co. LLC

Sounds good. Thank you.

Q

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Operator: Thank you. Our next question is coming from the line of Lauren Silberman from Deutsche Bank. Please proceed with your questions.

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Lauren Silberman

Analyst, Deutsche Bank Securities, Inc.

Q

Great. Thank you. Just first on your approach to marketing. So Olive Garden comps have been weak over the past couple of quarters. Some share loss this quarter, I understand, on a traffic basis, you outperformed. But as you think about your approach to marketing and promos, how did that influence your decision to increase marketing, and what are you expecting for fiscal 2025?

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Ricardo Cardenas

President, Chief Executive Officer & Director, Darden Restaurants, Inc.

A

Yeah, Lauren. In regards to marketing, we've said in the past that we'd probably tick it up a couple of tenths a year, and that's probably what we'll do in fiscal 2025. But we're going to continue to focusing on our marketing efforts on our filters, which we've talked about many times. And we're not going to do things to buy sales, even with the increasing discounting our competitors are doing. Our best way to drive sales is our focus on our back-to- basics operating philosophy and our guests telling others what a great value they have when they come to our restaurants. I mean, just remember, we do have levers to pull. We do have more marketing to pull if we want to, but our focus is on profitable sales growth.

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Lauren Silberman

Analyst, Deutsche Bank Securities, Inc.

Q

Great. Thank you for that. And just a follow-up on the consumer environment. Is this mostly related to the low- income consumer? Just what are you seeing across the middle-income,high-income, across the breadth of your brands? Thanks so much.

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Ricardo Cardenas

President, Chief Executive Officer & Director, Darden Restaurants, Inc.

A

Yeah, Lauren. It is mostly the income - the consumer below the median household income, which is about $75,000. Consumers are generally concerned about inflation, and they're becoming more concerned about the job market. And what we're seeing are some behavior shifts that we had already started to see. So for Q4, transactions from households below - with incomes below the median were lower than last year. So - and that's more pronounced with consumers below $50,000 in income. And these impacts were even greater in our Fine Dining brands. So that's why you saw Fine Dining had a little bit more negative comp than others. But at the same time, our guests aren't managing their check like we've seen in prior quarters.

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