Darden Restaurants, Inc. (NYSE:DRI) Q3 2024 Earnings Call Transcript
Darden Restaurants, Inc. (NYSE:DRI) Q3 2024 Earnings Call Transcript March 21, 2024
Darden Restaurants, Inc. misses on earnings expectations. Reported EPS is $2.62 EPS, expectations were $2.64. DRI isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Hello, and welcome to the Darden Fiscal Year 2024 Third 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.
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 the presentation. Looking ahead, we plan to release fiscal 2024 fourth quarter earnings on Thursday, June 20, before the market opens, followed by a conference call. During today's call, any reference to pre-COVID when discussing third quarter performance is a comparison to the third 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 fiscal third quarter, industry same-restaurant sales decreased 4.2% and industry same-restaurant guest counts decreased 6.5%.
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 proud of our results this quarter. Each one of our segments grew total sales and profit in an operating environment that was tougher than we anticipated. We continued to outperform the industry benchmarks for same-restaurant sales and traffic. Total sales were $3 billion, an increase of 6.8%, and adjusted diluted net earnings per share were $2.62, which was in line with our expectations. We opened 16 restaurants during this quarter. Fiscal year-to-date, we have opened 43 restaurants in 22 states, seven of which were reopenings. The quarter started well with strong holiday performance in December, but unfavorable winter weather negatively impacted January traffic. And while February results improved, we experienced some underlying softness we had not seen in the months leading up to January.
The lower income consumer does appear to be pulling back, and the mix of guests based on income is now in line with pre-COVID. I am proud that even as industry traffic trends weakened, we were able to gain share. We continue to focus on controlling what we can control, leveraging and strengthening our four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning, and our results-oriented culture, and executing our back-to-basics operating philosophy anchored in food, service, and atmosphere. Our restaurant teams continue to perform at their best, especially during our busiest times. In December, the Capital Grille set their all-time total monthly sales record. In February, Eddie V’s set their all-time total weekly sales record, and Olive Garden established a new sales record for Valentine's Day.
Our internal guest satisfaction metrics reflect our team's focus on being brilliant with the basics. All of our brands remained at or near all-time highs for overall guest satisfaction during the quarter. Additionally, within the casual dining, polished casual and fine dining segments of Technomic's industry tracking tool, the Darden brand was ranked number one for overall experience. The brands were LongHorn Steakhouse, Seasons 52, and Ruth's Chris Steak House. Our team's ability to execute at a high level is driven by strong leadership and team member engagement across our brands. We work hard to ensure our results-oriented culture is a competitive advantage for us, and our industry-leading retention rates confirm it is in an area of strength.
During the quarter, we completed our biannual engagement survey, and a result showed that our overall level of engagement is at an all-time high. Also, during the quarter, three of our brands were recognized as industry leaders in Black Box Intelligence, LongHorn, the Capital Grille, and Seasons 52 each received the Employer of Choice Award. Now let me provide a quick update on Ruth Chris. We are in the final stage of integration and remain on track to complete the major changes by the end of the fiscal year. We successfully completed the migration onto our HR platform at the end of December, and all restaurants have now successfully transitioned to our distribution network. Currently, we are halfway through converting the restaurants over to our point of sale system, and we are on track to complete that work by the end of May.
This is the most challenging part of integration, and I'm really proud of the focus the Ruth’s Chris team continues to have on delivering exceptional guest experiences. This can be seen in the fact that Ruth's Chris was named America's favorite chain restaurant in Technomic's annual survey that was released during the quarter. The survey measures perceptions of service and hospitality, unit appearance and ambiance, food and beverage, convenience and value. In addition to Ruth's Chris, Seasons 52, Bahama Breeze, LongHorn and the Capital Grille were all ranked in the top 10. Overall, I am pleased with our performance this quarter. We continue to manage the business for the long-term by executing against our strategy and controlling what we can control.
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 is for our team members and their families is through our Next Course Scholarship program. Earlier this month the Darden Foundation awarded more than 100 post-secondary education scholarships worth $3,000 each to children of Darden team members. Education is one of the greatest equalizers in our country, and I'm thrilled that we can create a lasting impact on the lives of our team members' families through this program. Finally, I want to thank our 190,000 team members for everything you do to create exceptional experiences for our guests. You are the reason brands continue to be recognized as great places to work and top dining destinations.
Now, I will turn it over to Raj.
Raj Vennam: Thank you, Rick, and good morning, everyone. Third quarter earnings were in line with our expectations, although our sales were softer than we anticipated. We were pleased with December's strong holiday performance as the month's same-restaurant sales were in line with our second quarter results. However, winter weather in January negatively impacted traffic results by approximately 100 basis points for the quarter. As we moved into February, sales trends improved, but were below our expectations, exposing some underlying consumer weakness. Despite the unexpected variability in our sales trends, our teams did a great job managing their businesses. In the third quarter, we generated $3 billion of total sales, 6.8% higher than last year, driven by the acquisition of Ruth's Chris Steak House and 55 net new restaurants, which was partially offset by negative same-restaurant sales of 1%.
We outperformed the industry again this quarter with same-restaurant sales that were 320 basis points better than the industry and same-restaurant guest counts that were 270 basis points better. And on a two-year basis, we have outperformed on same-restaurant sales by 770 basis points and by 970 basis points on same-restaurant guest counts. Our focus on managing the business and controlling costs resulted in adjusted diluted net earnings per share from continuing operations of $2.62 in the quarter, an increase of 12% from last year's reported earnings per share. We generated $512 million of adjusted EBITDA and returned approximately $190 million of capital to our shareholders through $157 million in dividends and $33 million of share repurchases.
Now looking at our adjusted margin analysis, compared to last year, food and beverage expenses were 90 basis points better, driven by pricing leverage. Total commodities inflation of approximately 1.5% was below our total pricing of approximately 3.5%. Restaurant labor was 10 basis points unfavorable to last year due to total labor inflation of approximately 4.5%, partially offset by pricing and productivity improvements at our brand. Restaurant expenses were 10 basis points higher as sales deal average was partially offset by strong cost management by our teams. Marketing expenses were 10 basis points higher than last year, consistent with our expectations. All of this resulted in restaurant-level EBITDA of 20.6%, 70 basis points better than last year.
G&A as a percent of sales was 40 basis points lower than last year, and total expense was slightly favorable to our previous guidance related to lower incentive compensation and ongoing synergies from the integration of Ruth's Chris. Interest expense increased 50 basis points versus last year, due to the financing expenses related to the Ruth's Chris acquisition. And for the quarter, adjusted earnings from continuing operations was 10.6% of sales, 30 basis points better than last year. Looking at our segments, Olive Garden increased total sales by 0.7%, driven by new restaurant growth, partially offset by negative same-restaurant sales of 1.8%. Olive Garden same-restaurant sales outperformed the industry benchmark by 240 basis points, and their traffic outperformed the industry by 270 basis points.
Despite the negative same-restaurant sales, Olive Garden segment profit margin of 22.5% was flat to last year. At LongHorn, total sales increased 5.1%, driven by new restaurant growth and same-restaurant sales growth of 2.3%. LongHorn same-restaurant sales outperformed the industry by 650 basis points. Segment profit margin of 18.7% was 130 basis points above last year, driven by pricing leverage and improved labor productivity. Total sales at fine dining segment increased with the addition of Ruth's Chris company-owned restaurants. Same-restaurant sales at both Capital Grille and Eddie V’s were negative as the fine dining category continued to be challenged year-over-year. Fine dining segment profit margin was flat year-over-year at 21.8%.
The other business segment sales increased with the addition of Ruth's Chris franchise and managed location revenue, but was partially offset by combined negative same-restaurant sales of 2.6% for the brands in the other segment. However, this was still 160 basis points above the industry benchmark. Segment profit margin of 14.9% was 90 basis points better than last year, driven by the additional royalty revenues and higher overall pricing relative to inflation. Turning to our financial outlook for fiscal 2024, we have updated our guidance to reflect our year-to-date results and expectations for the fourth quarter. We now expect total sales of approximately $11.4 billion, same-restaurant sales growth of 1.5% to 2%, 50 to 55 new restaurants, capital spending of approximately $600 million, total inflation of approximately 3%, including commodities inflation of approximately 1.5%, an annual effective tax rate of 12% to 12.5%, and approximately 121 million diluted average share outstanding for the year.
This results in an increased or adjusted diluted net earnings per share outlook of $8.80 to $8.90, which excludes approximately $55 million of pre-tax transaction and integration related costs. For the fourth quarter specifically, our annual outlook implies sales of $2.95 billion to $2.99 billion, same-restaurant sales between negative 0.5% and positive 1%, and adjusted diluted net earnings per share between $2.58 and $2.68. Now looking forward into fiscal 2025, we plan on opening between 45 and 50 new restaurants and spending between $250 million and $300 million of capital for those new restaurants. Additionally, we anticipate approximately $300 million of capital spending related to ongoing restaurant maintenance, refresh, and technology.
And finally, we anticipated effective tax rate of approximately 13% for fiscal 2025. And now I'd like to close by saying that we continue to be very proud of how our teams are managing their businesses to deliver strong results in this dynamic environment. With that, we'll open the call for questions.
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