Darden Restaurants FY 4Q15 Earnings Call Notes

Focus on service, simplification, menu evolution

“Our Olive Garden strategy has been to focus on our core guests and the frequency of their visits by concentrating on the following areas: First, ongoing service and culinary simplifications that allow our restaurant teams to deliver great food and service. Second, continued menu evolution that focuses on our core brand equities; the improving appeal of Cucina Mia provides a great everyday value option for our guests, thereby allowing us to be more balanced with our promotional offerings.”

Separating a portion of our real estate

“let’s spend a few minutes discussing the real estate announcement we made this morning. The Board and I are excited about our announcement to separate a significant portion of our real estate and create a separate real estate business, which can grow in its own right. This decision was the result of a comprehensive analysis that we performed along with the support of our advisors. The plan is intended to optimize the value of our real estate by separating approximately 500 of our real estate properties utilizing three different steps”

Retiring $1B in debt

“after receipt of the proceeds, we intend to retire $1 billion of debt. This debt retirement will be sourced by the sale leaseback proceeds, a REIT distribution back to Darden at the separation funded by debt raised at the REIT, and cash on our balance sheet.”

Darden has a lot more concepts besides just Olive Garden

“The four segments are Olive Garden, LongHorn, Fine Dining, which includes The Capital Grille and Eddie V’s, and our other businesses which includes Yard House, Season 52, Bahama Breeze, Consumer Packaged Goods, and franchise revenues”

Normalized inflation environment

“We anticipate fiscal 2016 to be a more normalized inflation environment, resulting in overall inflation of 1.5% to 2%, with commodity inflation of 0.50% to 1%, and we expect the price at the low end of the overall inflation range.”

New CEO this year

“I want to share a couple of final thoughts. Fiscal 2015 was a year of meaningful transition at Darden with the election of a new Board of Directors, as well as my appointment to CEO.’

Flat traffic beats the market by a point to point and a half next year?

“right now we’re expecting traffic to be flattish for next year, which we think is going to end up beating the market by a point to point and a half. I’ve always said that the first barrier for us was to breakthrough and for Olive Garden to start to beat the market.”

Remodels doing 7 points better than the rest of the system

“we got a lot going on with remodels. I’ll start off by saying the initial 13 that we did which were pretty extensive remodels are trending in the mid-seven range above the system average. So in a six-way analysis they are performing, it’s a little over 7% in same-restaurant sales growth above the system”

We’ve significantly outperformed Knapp Track over the last 16 weeks

“We had one week in there, which was Easter week, the prior year that was for some reason we had a really bad week. That may have had more to do with promotional way to some other timing, but over the last 15, start of 16 weeks Olive Garden has significantly outperformed Knapp-Track. So I am pleased, I am not caught up any sequential trends where we continue to move our marketing spend to try to understand what’s working and what’s not. And when you make some commitments, sometimes it takes three to four weeks to adjust after you try something that might not be working as well as you like.”

Wage inflation may be in the high end of the 2-3% range

“we put that in the all others, in that 2% to 3%. I would say the wage rate is probably in the upper-half of that range, but there’s many other items that when you look at our P&L that would be bringing that overall inflation rate to the middle of that range at this point.”

Cutting costs by cleaning carpets less frequently

“I think our operating teams are doing a great job of going in and saying, for example, how many times do we really need to clean the carpets in a restaurant? There is a protocol, that you clean carpets once a month. If you do it more than that you end up actually destroying the carpet, and see really not a whole lot of benefit there. So we found a lot of restaurants that were cleaning carpets twice-a-month. So we’ve been able to find — that’s just one example of the costs the operating teams have been able to find over time.’

Consumers aren’t as deal driven as they have been

“I think we’re getting a little bit of help from the consumer. I do think the consumer is looking for less discounting activity today than they were a year ago, or two years ago. We’ve had a lot of discussion around the gas, what we call the gas dividend that’s going back to the consumer. I think there’s a lot of expectation that that was going to stimulate traffic. What I’ve been saying is, we haven’t seen it stimulate traffic, but we have seen it change the consumer behavior once they’re in our building, and they’re not seeking the deals the way they were years ago.”

People are picking up more add ons

“We’re seeing some more –- the consumers buy more add-ons. They’re buying wine, dessert, apps. So I think that that is the environment, is helping us somewhat move away from these constructs, and we’re just not finding them to be as successful as they once were, so we’re able to do that.”

It’s boosting our margins

“From a margin perspective, I would say that we’re picking up at probably well over a 100 basis point from reducing this heavy discount mentality or strategy, and you see that in every line in the P&L. So you have less discounts, the food cost improves, your labor cost improves.”