Yahoo Finance Darden Restaurants, Inc. (NYSE:DRI) Q2 2024 Earnings Call Transcript
Darden Restaurants, Inc. (NYSE:DRI) Q2 2024 Earnings Call Transcript December 15, 2023
Darden Restaurants, Inc. beats earnings expectations. Reported EPS is $1.84, expectations were $1.71.
Operator: Hello, and welcome to the Darden Fiscal Year 2024 Second Quarter Earnings Call. Your lines have been placed on a listen-only mode 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 Mr. Kevin Kalicak. Thank you. You may begin.
Kevin Kalicak: Thank you, Kevin. 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 the 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 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 includes certain non-GAAP measurements, and reconciliations of these measurements are included in that presentation. Looking ahead, we plan to release fiscal 2024 third quarter earnings on Thursday, March 21st, before the market opens, followed by a conference call. During today's call, any reference to pre-COVID when discussing second quarter performance is a comparison to the second quarter of fiscal 2020. Additionally, all references to industry results during today's call refer to Black Box Intelligence, casual dining benchmark, excluding Darden, specifically Olive Garden, LongHorn Steakhouse, and Cheddar's Scratch Kitchen. During our second fiscal quarter, industry same-restaurant sales decreased 1.3% and industry same-restaurant guest counts decreased 4.8%.
This morning, Rick will share some brief remarks on the quarter, and Raj will provide details on our financial results and an update to our fiscal 2024 financial outlook. Now, I'll turn the call over to Rick.
Rick Cardenas: Thank you, Kevin. Good morning, everyone. I'm pleased with our results this quarter, which outperformed the industry benchmark for same-restaurant sales and traffic. Total sales were $2.7 billion, an increase of 9.7%, and adjusted diluted net earnings per share were $1.84. We opened 17 restaurants during the quarter. Fiscal year to date, we have opened 27 restaurants in 16 states, four of which were re-openings. We continue to stick to our strategy, driven by our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning and a results-oriented culture. And our brands are relentlessly focused on executing our back-to-basics operating philosophy, anchored in food, service and atmosphere.
This focus on being brilliant with the basics enables our brands to consistently perform at a high level. Our internal guest satisfaction metrics remain strong across all of our brands. In fact, Olive Garden, LongHorn Steakhouse, Yard House, Cheddar's Scratch Kitchen, Seasons 52 and Bahama Breeze reached all-time highs for overall guest satisfaction during the quarter. LongHorn also ranked number one among major casual dining brands in six of the seven key measurement categories within Technomic's industry tracking tool, including food, service, atmosphere and value. LongHorn's continued adherence to their strategy is driving strong execution, which can also be seen in the fact that they established an all-time high stakes grilled correctly score.
During the quarter, Olive Garden ran Never Ending Pasta Bowl. It was offered at the same price point as last year, making it an even stronger value. Guest demand was higher this year and our restaurant teams did a great job delivering outstanding guest experiences, achieving the highest refill rate ever. This performance was driven by our focus on ensuring every guest is offered a refill, whether it's a limited time offer like Never Ending Pasta Bowl, or our Never Ending First Course, which is offered every day. This iconic promotion also satisfies all three of our marketing activity filters. It elevates brand equity, it's simple to execute, and it's not at a deep discount. Also, I'm excited to share that during the second quarter, and for the first time in their history, Olive Garden surpassed $5 billion in sales on a trailing 52-week basis.
The holidays are the busiest time of the year for all of our restaurant teams, and they embrace the opportunity to perform at their best. On Thanksgiving Day, our teams at Ruth's Chris, The Capital Grille, Eddie V's and Seasons 52 did just that, with each setting a new daily sales record. And while we experienced some softness at our fine dining brands during the quarter, we are encouraged by the strong holiday bookings we are seeing. Now, let me provide a brief update on Ruth's Chris. Even in the midst of the integration, I'm really proud of how the entire team has remained focused on the guest experience. During the quarter, Ruth's Chris achieved the top box -- top overall rating score among all full-service dining brands within Technomic's industry tracking tool.
From an integration perspective, things are progressing well, and we are on track to complete the major systems changes by the end of the fiscal year. During the quarter, we closed their former corporate office and the Ruth's Chris support team moved into our restaurant support center. We are excited to have them here. In October, we successfully transitioned 21 restaurants to one of our distribution centers, and we plan to transition the remaining company operated restaurants to our distribution system between January and March. This phased approach allows us to gather learnings and improve the transition for the other restaurants, while capturing supply chain synergies. We are deliberate with the timing of any changes to ensure that we minimize the operational impact as much as possible.
We are on track to deploy our people management systems by the end of the calendar year and beginning -- begin rolling out our proprietary point of sale system after Valentine's Day with the goal of completing all systems integration by the end of the fiscal year. As part of the investments we announced on our last call, we have made some strategic decisions at company owned restaurants that will impact total sales in the third quarter. First, we stopped third-party delivery. Second, we eliminated lunch wherever possible, and we will be closing most restaurants on Christmas Day. I can't say enough about the tremendous partnership between the Ruth's Chris team and our integration team. Integration is never easy, but it has been a collaborative process, and I’m happy with the progress we are making.
We have reached the halfway point in our fiscal year, and I'm pleased with our performance thus far. All of our brands remain focused on managing the business for the long term and the power of Darden positions us well for the future. We also continue to work in pursuit of our shared purpose, to nourish and delight everyone we serve. One of the ways we do this for our team members and their families is through our Next Course Scholarship program. Applications opened last month for the program, which awards post-secondary education scholarships worth $3,000 each to children or dependents of Darden team members. Last year, we awarded nearly 100 scholarships to children of team members at both our restaurants and our support center. The Next Course Scholarship creates a lasting impact on the lives of our team members' families, and I'm excited that we are offering the program for a second year.
Finally, as I said earlier, the holidays are the busiest time of the year for our restaurant teams. I am so proud of the focus and commitment that all our teams continue to have every day. On behalf of our senior leadership team and Board of Directors, I want to thank our more than 190,000 team members for everything you do to delight our guests and help create special holiday memories. I wish you and your families a wonderful holiday season. Now, I will turn it over to Raj.
Raj Vennam: Thank you, Rick. And good morning, everyone. Our teams did a great job managing their businesses again this quarter, resulting in meaningful restaurant level and total margin growth. This margin growth was driven by positive same-restaurant sales growth, strong labor management and lower than anticipated restaurant and commodities' expenses. We generated $2.7 billion of total sales for the second quarter, 9.7% higher than last year, driven by the addition of 78 company-owned Ruth's Chris Steak House restaurants, 45 legacy Darden new restaurants, and same-restaurant sales growth of 2.8%. Our same-restaurant sales for the quarter outpaced the industry by 410 basis points and same-restaurant guest counts exceeded the industry by 370 basis points.
Our focus on managing the business and controlling costs resulted in adjusted diluted net earnings per share from continuing operations of $1.84 in the second quarter, an increase of 21% from last year's reported earnings per share. We generated $403 million of adjusted EBITDA and returned approximately $340 million of capital to our shareholders through $158 million in dividends and $181 million of share repurchases. Now, looking at our adjusted margin analysis compared to last year, food and beverage expenses were 190 basis points better, driven by pricing leverage. Total commodities inflation was flat to prior year for the quarter and slightly better than our expectations, while beef inflation continues to track in line with our expectations, most other categories are seeing some favorability.
Restaurant labor was 20 basis points better than last year, driven by productivity improvements at our brands as pricing and inflation were roughly equal at 5%. Restaurant expenses were 30 basis points favorable, primarily due to lower workers' compensation expense and deflation in utilities. Marketing expenses were 10 basis points higher than last year, consistent with our expectations. All of these factors resulted in restaurant level EBITDA of 18.8%, 230 basis points higher than last year. G&A expenses were $109 million, which was consistent with what we previously communicated. G&A as a percent of sales was unfavorable 40 basis points to last year. This unfavorability is primarily driven by higher incentive compensation expense due to the strong growth in sales and EPS for the quarter and wrapping a low incentive accrual in the second quarter of last year.
Impairments were 40 basis points unfavorable to last year as we are wrapping on a $9 million gain from the sale of restaurant assets. Interest expense increased 50 basis points versus last year due to the financing expenses related to Ruth's Chris acquisition and the increase in short term debt as the second quarter is typically our peak funding need period for the year. And for the quarter, adjusted earnings from continuing operations were 8.1% of sales, 60 basis points better than last year. Looking at our segments, Olive Garden increased total sales by 6.3%, driven by same-restaurant sales growth of 4.1%, outperforming the industry benchmark by 540 basis points. The strength of Never Ending Pasta Bowl contributed to flat same-restaurant guest counts for the quarter, 480 basis points above the industry.
This sales growth, along with improved labor productivity and higher pricing related with inflation drove segment profit margin increase of 240 basis points at Olive Garden. At LongHorn, total sales increased 7.1%, driven by same-restaurant sales growth of 4.9%, outperforming the industry by 620 basis points. Segment profit margin of 17.4% was 310 basis points above last year. Pricing leverage, favorable menu mix and improved labor productivity drove LongHorn's strong margin growth this quarter. Total sales at Fine Dining segment increased with the addition of Ruth's Chris company-owned restaurants. Same-restaurant sales at both The Capital Grille and Eddie V's were negative as the Fine Dining category as a whole continues to be challenged year-over-year.
This resulted in lower segment profit margin than last year. The other business segment sales increased slightly with the addition of Ruth's Chris franchised and managed location revenue. This was mostly offset by combined negative same-restaurant sales of 1.1% for the brands in the other segment. However, this was still 20 basis points above the industry benchmark. Segment profit margin of 12.9% was 130 basis points better than last year, driven by the additional royalty revenues and pricing relative to inflation. Now, turning to our financial outlook for fiscal 2024. We've updated our guidance to reflect our year-to-date results and expectations for the back half of the year. We now expect total sales of approximately $11.5 billion, same-restaurant sales growth of 2.5% to 3%, 50 to 55 new restaurants, capital spending of approximately $600 million, total inflation of 3% to 3.5% including commodities inflation of approximately 2%, an annual effective tax rate of 12% to 12.5%, and approximately 121 million diluted average shares outstanding for the year.
This results in an increased or adjusted diluted net earnings per share outlook of $8.75 to $8.90. It excludes approximately $55 million of pretax transaction and integration related costs. Looking at the third and fourth quarters, we expect the EPS growth rate to be consistent with what we previously shared. We expect third quarter growth rate to be similar to the first quarter and the fourth quarter to have the lowest EPS growth rate for the year. This is primarily a function of the pricing cadence we communicated at the beginning of the year. We anticipate pricing and inflation to be relatively equal in the third quarter, and we expect to price significantly below inflation in the fourth quarter. So, to wrap up, we continue to be very pleased with how our teams are managing their businesses and delivering strong results.
We remain disciplined in adhering to our strategy and we're confident in the strength of our business model. And, with that, we'll take your questions.
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