Darden Restaurants, Inc. Q4 FY2025 earnings call

Management Statement and Operational Highlights

• Quarter Performance: Strong quarter with same-restaurant sales and earnings growth exceeding expectations. Olive Garden's buy one take one offer (last seen 5 years ago) and off-premise strength drove sales; several brands set Mother's Day sales records. Multiple brands achieved all-time high guest satisfaction scores.
• Brand Strategies:
  • Olive Garden: Marketing strategy focused on value, urgency, and food news; delivery via Uber Direct boosted sales and mix.
  • LongHorn: Focus on quality, simplicity, and culture; ended the year with all-time high steak correct score and guest satisfaction.
  • Cheddar's: Successful Uber Direct pilot; debut of first 30-second CTV spot.
• Portfolio Changes: Closed 15 underperforming Bahama Breeze locations; considering strategic alternatives for Bahama Breeze (sale or conversion to other brands); sold 8 Olive Garden locations in Canada to Recipe Unlimited, with plans to open 30 more Olive Gardens in Canada over 10 years via area development agreement.
• Leadership Transitions: John Wilkerson named President of Olive Garden; Mark Cooper named President of Cheddar's; Lorie Kessler named President of Seasons 52; Thomas Hall named President of Chuy's.

Segment Performance

• Olive Garden: Total sales increased 8.1% in Q4, with same-restaurant sales growth of 6.9% and 15 net new restaurants added. Segment profit margin was 23.8%, 100 basis points higher than the prior year. Uber Direct delivery fees positively impacted check mix by ~40 basis points.
• LongHorn: Total sales grew 9.3%, driven by same-restaurant sales growth of 6.7% and 16 net new restaurants. Segment profit margin was 20.1%, 80 basis points above the prior year. Same-restaurant sales outperformed the industry benchmark by 370 basis points this quarter and 850 basis points over 2 years.
• Fine Dining: Total sales increased 2.3% due to 6 net new restaurants (including closure of 2 underperforming ones). Same-restaurant sales were negative, and segment profit margin was lower than the prior year. However, sequential improvement in guest traffic from households earning $150,000+ was noted.
• Other Business: Total sales grew 22.4% due to the Chuy's acquisition and positive same-restaurant sales at Yard House and Cheddar's. Segment profit margin was 17.5%, 10 basis points higher than the prior year. The integration of Chuy's is on track with neutral impact to EPS for fiscal 2025.

Guidance

• Fiscal 2026 Outlook:
  • Total sales growth expected 7%-8% (including ~2% from additional week in 53-week year).
  • Same-restaurant sales growth 2%-3.5%.
  • Plan to open 60-65 new restaurants.
  • Capital spending $700M-$750M.
  • Total inflation 2.5%-3% (commodities ~2.5%, labor ~3.5%).
  • EBITDA $2.16B-$2.19B.
  • Diluted net earnings per share $10.50-$10.70.
  • Board approved 7% increase in quarterly dividend to $1.50 per share, annualizing to $6.
• Long-Term Framework: Updated to focus on sales growth with appropriate investments; new restaurant growth 3%-4%, same-restaurant sales growth 1.5%-3.5%; margin expansion redefined to after-tax earnings margin; target 10%-15% total shareholder return via EPS growth plus dividend yield.

Risks

• Macro Uncertainty: Impact of macroeconomic factors (e.g., inflation, consumer spending) on same-restaurant sales and business performance.
• Brand Performance: Challenges in the Fine Dining segment and potential negative impacts from strategic alternatives for Bahama Breeze if not executed as planned.
• Labor and Inflation: Potential labor inflation exceeding projections and commodity cost fluctuations affecting margins.

Question and Answer

• Q: Congrats on the really strong same-store sales results. Well, obviously, you're executing at a very high level. It's really hard to deny the fact that the industry seems to be in a strong position, particularly some of the larger chains in full service. So perhaps you can give us your perspective on why casual dining is having a bit of a moment right now. And relatedly, I'm curious what your thoughts on how some of the smaller chains [indiscernible] that you're sharing in this environment? Whether you think the independents are struggling with the same affordability perception issues that you might have in fast food?

A: Yes, Eric, thanks for the question. Thanks for the comments on our quarter. As we look across what's been going on over the last 5 or 6 years, as you recall, we've been very prudent in keeping our pricing below inflation because we knew that over time, pricing matters, if you take it too much. And what we believe is happening right now in the casual dining space is consumers are figuring out that casual dining is a great value. And so they're coming to casual dining more. And we're starting -- we're seeing that across our brands and some of the industry. And so without commenting on what's happened in other places, we think that's a big part of it. consumers want to go out and spend their hard-earned money. And we think we're taking some wallet share from fast food and fast casual.

• Q: Maybe if I could, as a follow-up, ask about the unit growth outlook, the 60 to 65 units this year. Your long-term range in your algorithm is 3% to 4%. So I think the 60 to 65 implies 2.7% to 3%. So I guess I'm curious when we might see a ramp in unit growth and which brands might be the largest contributor?

A: Yes, Eric, I'd say from -- when you look at 60 to 65, you're right, it could imply 2.7% to 3%. But as you look at actually how we're ramping up growth from where we're starting. We're actually building the pipeline. Our development team has done a great job. We expect to be in the 3-plus range over the next 5 years. And we are actually -- we have a pretty strong pipeline. As you know, these things take time to build up. But I think we have new practices and processes in place. And from a brand mix, as we've said, initially, as you look at next year, I'd say between Olive Garden and LongHorn, we're going to probably have 40 to 45 openings and then Yard House might be in the mid-single digits, and then you have all the other brands contributing probably another 15 or so. But as we look into the future, we expect the other brands to become a bigger part of the mix. But we do think there's a huge opportunity for still Longhorn to be in the 25 to 30 openings a year. And then Olive Garden to be in the 20-ish range for the foreseeable future. But then we're also, as I said, the other brands will start to contribute even more as we move into the next few years.

• Q: Regarding the updated long-term framework. Does the new margin expansion target reflect a different view on the long-term restaurant margin opportunity or even the rate of reinvestment you expect to make in the business?

A: Yes, Chris, it does a little bit, right? What we're trying to figure out is, one, let me just start with the -- just by changing the definition, we're getting a more holistic view because there's a lot of contraction between the G&A, D&A and then tax and interest. So that's why we wanted to get to a bottom line number. So that's one. But two, does it imply restaurant level EBITDA maybe not growing at the rate we've targeted in the past? Yes, because we're saying that we are going to make investments with a greater emphasis on sales grade -- sales growth. And if sales growth drives even more margin, that's good, but we're going to try to find ways to reinvest to get for the long term.

• Q: Regarding Uber Direct at Olive Garden, curious about what you can share about mix and same-store sales contribution in the in fiscal 4Q and what you're contemplating for mix and same-store sales contribution from it in fiscal '26? And also is there anything different about the incremental margin from that from the base business?

A: David, so I think we said on -- for Q4, the mix impact from just the fees was about 40 basis points. Uber [indiscernible] was about 3.5% of total sales at Olive Garden. So -- and I think we talked about in the past what the total contribution would be to incremental sales, and we said it's 40% to 50%. So if you kind of go with that and taking the impact of the fees, it's roughly about 2% incremental sales impact to the quarter. We are not ready to talk about the future in terms of what the impact would be for next year. But when we did the advertise, the exit rate was about 5% of total sales. That included the free delivery offer. And from a margin perspective, we do not expect this to have a meaningful impact of negative -- on margin -- any negative impact or positive impact on margin. Because if you look at how we structured the deal, a lot of the fees are just passed on to Uber but there isn't any margin difference on the base. And the minimal -- the geography impact is pretty minimal. We're talking about maybe 10 basis points at best. But then there's also a positive. People are buying more through that, that helps offset. And you saw that in the fourth quarter. Olive Garden has a pretty strong positive mix. And I think as we signaled a few times, if Uber -- Uber Direct contributes even more than we expect going into this year, we're going to reinvest some of that into the business to drive long-term growth.

• Q: What -- Raj, what -- roughly what pricing do you expect to run in the coming year? And I guess just how about like longer term? I mean is sort of continuing to restrain that sort of key to all the brands as we think about the long-term plan?

A: Yes, Brian. For fiscal 2026, I would expect us to be in the mid-2s for pricing. I think first quarter is going to be close to 2, and then we'll probably get into the mid- to high teens as we get through the year. Obviously, it depends on how inflation comes in. But our bias -- but it will still likely be below total inflation. And our bias is, as Rick just mentioned earlier, we've been very disciplined with respect to pricing, and that is not going to change anytime soon. That's just -- that's the philosophy. We try to price as little as possible and still get better returns we could get. And it's worked well for us, and we always play the long game, and we'll continue to do that.