Darden FY 3Q15 Earnings Call Notes

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“Before we begin, let me say I’m thrilled to have been chosen by the board to be the next CEO of Darden. The board and I’ve established a terrific relationship, and I’m excited to continue to work with them and the talented team members throughout this great company.”

Getting back to basics

“we’re focused on culinary innovation and execution inside each of our brands, delivering attentive service to each and every one of our guests, and creating an engaging atmosphere inside our restaurants.”

Food costs higher than last year, but moderated from 2Q

“Food and beverage costs as a percentage of sales this quarter were higher than last year, driven by continued elevated beef inflation. Dairy costs are also higher on a year-over-year basis, but have moderated significantly from the second quarter. The impact of this inflation was partially offset by improvements in food waste.”

Labor costs were down

“Restaurant labor costs were approximately 50 basis points lower than last year, as a percentage of sales, due to sales leverage and improved hourly labor productivity at Olive Garden, that more than offset wage rate and benefit cost inflation.”

Restaurants and real estate

“Right now, our strategic focus is on two fronts. It’s running our restaurants better, and second, it’s the real estate.

As I said last quarter, everything is still on the table. We will come back and analyze other strategic alternatives that are available to us but right now, we’re focused on those two initiatives”

Revisiting the real estate possibilities

“I’ll take the real estate question and Brad’s looking up the answer for the marketing spend. What’s different is that we’re just taking a fresh look at this and a comprehensive look with a new set of advisors and looking at the marketplace and seeing what’s available to us. We’re encouraged at this point in time. We’re moving away – or moving towards more of a asset-light approach to the business, if it makes financial sense; and I think that’s how we’re thinking about it, and it’s what’s a little different. These cap rates that we’re getting for our properties today are below or better than what we thought we would get when we originally did analysis of this 12 months to 18 months ago. And so, we’re just taking a fresh look at what the possibilities are.”

We’ve got to improve traffic but not at all costs

“But back to your question, we know we’ve got to change the momentum in guest traffic as we move forward, but we’re not going to do it at all costs. We have a wonderful P&L at Olive Garden, a wonderful business model and we need to keep it more in balance. ”

Customers getting a little bit less price sensitive

“And the one thing that we’re seeing from the consumer today is we are seeing the consumer’s willingness to buy less on deal and actually for the first time in a very long time, we’re seeing alcoholic beverage sales growth, we are seeing add-on sales growth, we are seeing more dessert sales. All these dynamics are coming together at once, and is really helping the Olive Garden business model.”

A capital light strategy

” We want to keep the capital structure in balance and over time, that should lift shareholder value. We see this as a bigger than just a treasury function. We see this is really moving to a more asset-light approach and setting up our capital structure in a way that we can get the greatest return for our shareholder. One thing that I want to keep coming back to is that these properties we’re selling, we’re selling them at market rents with strong lease terms for OpCo, so we think this is – again, we’re using this just to inform us on a broader real estate strategy.”

Healthier consumer

“the point I was trying to make is that we are seeing a little bit healthier of a consumer. We’re not seeing a direct impact on traffic, as you think back to discretionary income increasing, but we are seeing for the first time through Crest Data, through our own data, the guest is buying less on deal, and that’s allowing us to grow our check average, and improve our overall profitability. We’ve been in this space for a long time. We’ve been trying to create value through deals for consumers to entice them to come see us and dine with us.”