Darden Restaurants, Inc. (NYSE:DRI) Q4 2023 Earnings Call Transcript

Darden Restaurants, Inc. (NYSE:DRI) Q4 2023 Earnings Call Transcript June 22, 2023

Darden Restaurants, Inc. beats earnings expectations. Reported EPS is $2.58, expectations were $2.54.

Operator: Good morning. Welcome to the Darden Fiscal Year 2023 Fourth Quarter Earnings Call. Your lines have been placed on listen-only until the question-and-answer session. [Operator Instructions] As a reminder, the conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin.

Kevin Kalicak: Thank you, Darryl. 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 this 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 include certain non-GAAP measurements and reconciliations of these measurements are included in the presentation. Looking ahead, we plan to release fiscal 2024 first quarter earnings on Thursday, September 21, before the market opens, followed by a conference call. During today’s call, any reference to pre-COVID when discussing fourth quarter performance is a comparison to the fourth quarter of fiscal 2019. And any reference to annual pre-COVID performance is a comparison to the trailing 12 months ending February of fiscal 2020. Additionally, all references to industry results today refer to Black Box Intelligence’s casual dining benchmark excluding Darden, specifically Olive Garden, LongHorn Steakhouse and Cheddar’s Scratch Kitchen.

During our fourth fiscal quarter, industry same-restaurant sales decreased 0.7% and industry same-restaurant guest counts decreased 7%. And during our full fiscal year 2023, industry same-restaurant sales increased 2.7% and industry same-restaurant guest counts decreased 5.5%. This morning, Rick will share some brief remarks recapping the fiscal year, Raj will provide details on our fourth quarter and full year financial results and share our fiscal 2024 financial outlook and then, Rick will close with some final comments. Now I will turn the call over to Rick.

Rick Cardenas: Thank you, Kevin, and good morning, everyone. We had a solid quarter to conclude what was a very strong year. Despite a tough environment, we significantly outperformed the industry benchmark for same-restaurant sales and traffic and met or exceeded the financial outlook we provided at the outset of the year. For the full fiscal year, we grew sales by 8.9% to $10.5 billion, delivered diluted net earnings per share of $8 and opened 57 new restaurants. We also opened nine new international franchise restaurants in six different countries, which is the most we’ve ever opened in a fiscal year. The market responded positively to our performance, leading to a total shareholder return of 32.6% for the fiscal year. We have consistently delivered strong long-term shareholder returns.

In fact, since Darden was spun off from General Mills 28 years ago, a period which spans multiple business cycles, the company has achieved an annualized TSR of 10% or greater over any 10 fiscal year period. Our restaurant teams continue to execute at a high level by remaining focused on our back-to-basics operating philosophy anchored in food, service and atmosphere. Our brand’s ongoing efforts to drive execution through simplification enable our restaurant teams to create great guest experiences as evidenced by a record-level performance we saw from many of our brands on key holidays throughout the year. Nowhere is it more apparent than at Olive Garden, which achieved the highest sales day and sales week in their history during the week of Mother’s Day.

This focus on being brilliant [4:33] with the basics leads to strong guest satisfaction scores and our internal guest satisfaction metrics remain at or near all-time highs across our brands. At LongHorn Steakhouse, one of their most important metrics is their steaks grilled correctly score which is at an all-time high. To continue to drive these results, LongHorn recently completed their sixth Stake Master Series, which is their annual grilling competition and training program. Over the course of two months, thousands of culinary team members competed in this highly engaging training program for the right to be crowned champion and receive the $15,000 grand price. Congratulations to this year’s Steak Masters champion, Kylie Hall from the LongHorn Steakhouse in Farragut, Tennessee.

I am particularly proud of everything the teams in our restaurants and at the support center accomplished in fiscal 2023. For example, Olive Garden successfully introduced Never-Ending Pasta Bowl, which leveraged their iconic brand equity, was much simpler to execute and significantly improved margin while still providing tremendous value for their guests. Throughout the year, several of our brands ranked number one among major casual dining brands in key measurement categories within Technomic’s industry tracking tool including LongHorn for food quality and Cheddar’s Scratch Kitchen for value. And several of our brands were recognized as industry leaders in employment practices by Black Box Intelligence. Olive Garden, The Capital Grille and Seasons 52 were honored with the Employer of Choice Award and LongHorn and Eddie V’s received the Best Practices Award.

Throughout fiscal 2023, our strategy served us well. In addition to our back-to-basics operating philosophy, driving strong execution in our restaurants, Darden’s four competitive advantages of significant scale, extensive data and insights, rigorous strategic planning and results oriented culture enabled our brands to compete more effectively and provide even greater value to their guests. Our significant scale allowed our teams to successfully manage through the highly unpredictable inflationary environment, while continuing to under price inflation over the long-term. All four of our advantages are unmatched within the restaurant full-service industry. These advantages are leveraged by our portfolio of iconic brands, all generating high average unit volumes with extensive geographic footprints.

Our strategy is the right one for our company and our advantages were further strengthened last week with the completion of the acquisition of Ruth’s Chris Steak House. Ruth’s Chris enhances our scale advantage, fits our culture and complements our portfolio of iconic brands. We are so thrilled to add such an outstanding brand and high-caliber talent. And our experienced team is working hard to integrate Ruth’s Chris into Darden with as little disruption as possible. I am proud of the results we achieved in fiscal 2023, and we will continue to execute our strategy to drive growth and long-term shareholder value. Now, I will turn it over to Raj.

Raj Vennam: Thank you, Rick, and good morning, everyone. Total sales for the fourth quarter were $2.8 billion, 6.4% higher than last year, driven by same-restaurant sales growth of 4% and the addition of 47 net new restaurants. Our same-restaurant sales for the quarter outpaced the industry by 470 basis points and same restaurant guest counts exceeded the industry by 540 basis points. Diluted net earnings per share from continuing operations increased 15.2% from last year to $2.58. We generated $472 million in EBITDA and returned $183 million to shareholders. Total inflation slowed meaningfully this quarter to 4.4%, 270 basis points less than the third quarter, while the rate of pricing decreased from last quarter to 5.9%. Turning to the fourth quarter P&L compared to last year, food and beverage expenses were 30 basis points better driven by pricing above commodities inflation of roughly 3%.

Chicken and seafood experienced deflation this quarter, helping offset high-single digit beef and beat inflation. Restaurant labor was 40 basis points better driven by productivity improvements. Restaurant expenses were 30 basis points better than last year, driven by sales leverage. Marketing expense was 1% of sales, consistent with our expectations and 30 basis points higher than last year. This all resulted in restaurant level EBITDA improving 80 basis points to 20.7%. Our general and administrative expenses were 40 basis points higher than last year, driven by the timing of our incentive compensation accrual as well as unfavorable year-over-year mark-to-market expense on our deferred compensation. Due to the way we hedge this expense, this unfavorability is largely offset on the tax line.

Our effective tax rate for the quarter was 10.4% and we generated $316 million in earnings from continuing operations, which was 11.4% of sales. Looking at our segments. Olive Garden, LongHorn and our other segment increased same-restaurant sales by 4.4%, 7.1% and 2.2%, respectively, each significantly outperformed the industry benchmark. The strong same restaurant sales performance drove segment profit margin at each of these segments higher than last year, especially at LongHorn, where segment profit margin of 18.6% was 70 basis points higher than last year. Same restaurant sales at our Fine Dining segment decreased by 1.9%, still outperforming the Black Box fine dining benchmark, excluding Darden, by more than 200 basis points. This resulted in segment profit margin below last year at the Fine Dining segment.

This year-over-year sales decline was more the result of a wrapping on resurgence of demand in the fourth quarter of last year, which drove traffic retention to 108% of pre-COVID levels. Looking at traffic retention trends over the past three quarters, Fine Dining has been consistently between 101% to 102% of pre-COVID levels. We expect continued year-over-year traffic softness in our Fine Dining segment as we wrap on the first quarter traffic in fiscal 2023 that was at 107% of pre-COVID traffic levels. We expect traffic to stabilize on a year-over-year basis after the first quarter. As we look at our annual results for fiscal 2023, we had strong same-restaurant sales of 6.8% which outperformed the industry by 410 basis points and our same-restaurant traffic was 510 basis points above the industry.

The strong top line performance drove $1.6 billion in EBITDA from continuing operations. We returned $1.1 billion to shareholders and ended the year with $368 million of cash. Looking at our fiscal 2023 full year results compared to pre-COVID, operating income margins have grown 140 basis points. Food and beverage as percent of sales increased 380 basis points driven by investments in food quality and pricing well below commodities inflation. Offsetting this unfavorability were improvements in labor productivity, reduced restaurant and marketing expenses and G&A efficiencies. Our strong operating model generates significant and durable cash flows. Since 2018 we have delivered approximately 8% annualized EBITDA growth. At the end of fiscal 2023, our balance sheet was well-positioned at just 1.8 times adjusted debt-to-EBITDAR well below our targeted range of 2 times to 2.5 times.

And when we look at our performance compared to our long-term framework over the last five years, we’ve been achieved — we’ve been able to achieve annualized total shareholder returns of 14.2% as measured by EPS growth plus dividend yield. This is near the high end of our target and was driven by annualized earnings after tax growth of 10.2% above the high end of our framework. Cash returns were 4% which is at the middle of our framework. As we look to the future, we still believe that over time our 10% to 15% target for total shareholder returns is appropriate. However, we’re increasing the share repurchase range to better reflect the impact of our share price appreciation since we last updated the framework five years ago. The updated share repurchase range is $300 million to $500 million.

Before we get into our outlook for fiscal 2024, I want to provide an update on the acquisition of Ruth’s Chris which we completed last week. This was financed through a $600 million term loan and cash on our balance sheet, bringing our adjusted debt-to-EBITDAR to approximately 2 times. As we move forward into 2024, sales and profits from Ruth’s Chris company-owned and operated locations will be included in our Fine Dining segment, while revenues and profits from the franchise locations will reside in our other segment, consistent with the treatment of our existing franchise locations. However, Fine Dining same-restaurant sales results will not include Ruth’s Chris until they have been owned and operated by us for a period of 16 months. As we mentioned in our conference call in early May, we expect to achieve run rate synergies of approximately $20 million by the end of fiscal 2025 primarily through supply chain and G&A savings.

We also expect Ruth’s Chris will be accretive to our earnings per share by approximately $0.10 to $0.12 in fiscal 2024 and $0.20 to $0.25 in fiscal 2025. We anticipate total acquisition and integration-related expense of approximately $55 million pre-tax. Now turning to our financial outlook for fiscal 2024 which includes Ruth’s Chris operating results, but excludes the aforementioned acquisition and integration related expense. We expect total sales of $11.5 billion to $11.6 billion driven by the addition of Ruth’s Chris store portfolio, same-restaurant sales growth of 2.5% to 3.5% and approximately 50 gross new restaurant openings, including four relocations. Capital spending of $550 million to $600 million, total inflation of approximately 3% to 4% which includes commodities inflation of approximately 2.5% driven primarily by beef and produce, while most other categories are flat to deflationary and hourly labor inflation in the mid-single digits.

And annual effective tax-rate of approximately 12% to 12.5% and approximately 121.5 million diluted average shares outstanding for the year, all resulting in diluted net earnings per share between $8.55 and $8.85. And finally, our Board approved an 8% increase to our regular quarterly dividend to $1.31 per share, implying an annual dividend of $5.24. And with that, I will turn it back to Rick.

Rick Cardenas: Thanks, Raj. All of us at Darden continue to work together in pursuit of our higher purpose to nourish and delight everyone we serve. During the year, we served more than 410 million guests. We also promoted nearly 1,300 hourly team members into our manager in training program and promoted 320 managers to General Manager or Managing Partner positions. And we continue to invest in our team members’ development with new programs like Fast Fluency, which allows them to learn English for free. And our Next Course scholarship program that awarded post-secondary education scholarships worth $3,000 each to nearly 100 children or dependents of Darden team members. We also remain committed to nourishing and delighting the communities we serve through our ongoing efforts to fight hunger.

As part of our Darden Harvest food donation program, our restaurants donated 4.4 million meals to local food banks in fiscal 2023. We also continued our successful partnership with Feeding America with another $2 million donation from the Darden Foundation that helped provide mobile food trucks to 10 different Feeding America food banks, bringing the total to 25 food banks across the country. The addition of Ruth’s Chris gives us the opportunity to nourish and delight even more guests, more team members and more communities. As I said earlier, they are an excellent addition to our portfolio. And I want to welcome, Cheryl Henry and the nearly 5,000 team members from Ruth’s Chris. We are excited that you are now officially part of the Darden family.

I also want to thank our team members in our restaurants and our support center for their outstanding efforts throughout the year. We are fortunate to have the best people in the industry and I am proud of their commitment to caring for our guests and each other. Now, we’ll take your questions.

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Q&A Session

Operator: Thank you. We will now be conducting a question-and-answer session. [Operator Instructions] Our first questions come from the line of Jon Tower with Citigroup. Please proceed with your questions.

Jon Tower: Great. Thanks. I guess I’ll start off, I’m curious to — you had mentioned in your release the idea that the environment has gotten a little bit choppier in the fourth quarter. So I’m curious to see what you would — if you could articulate what exactly you saw in the backdrop with respect to consumer behavior specifically at your own brands and perhaps industry-wide. And then, I got a follow-up on that, please.

Rick Cardenas: Hey, Jon. This is Rick. I mean as we’ve talked about the choppiness of Q4, it was really fine dining going up against last year’s very strong bounce back from Omicron. And so this quarter, as we alluded to at the end of — in the third quarter, was this quarter is going be a little bit tougher for fine dining because of how they bounced back. And actually, Raj already alluded to the Q1, will probably be the same kind of toughness because of the bounce back last year. But that said, the consumer seems pretty strong overall. And within the restaurant industry and based on our internal and external data sources, there appears to be only minimal switching between lower priced occasions at this point. Not all that is switching, but some.

And overall, we’re not seeing anything concerning. What I will say, as you think about mix, we’ve talked about this before, we’re not seeing material changes in our check trends across our core casual brands. There is no negative mix at Cheddar’s. And we are watching add-ons and trying to understand if there is some cracks there. But we don’t see any real cracks there. And — but one area we’re seeing a little bit of check management is with alcohol sales primarily at our higher end brands. And we think part of this is because of the function of last year, similar to the guest count trends we saw in last year, there was probably a little bit of euphoria in check last year. So that’s kind of where we think about the consumer. And we didn’t really think the quarter was choppy.

We expected that to happen and that’s what happened.

Jon Tower: Got it. Thanks for the clarification. I appreciate it. I’m just curious on the unit growth outlook as well. It looks like you’re expecting slower unit growth openings versus what you had previously thought. Is that just a function of integrating Ruth’s and at the same time CapEx went a little bit higher. So could you explain what’s going on there as well?

Rick Cardenas: Yeah. I think it’s not necessarily integration of Ruth’s. You think about what we’re seeing on openings, CapEx was higher and where we wanted to be prudent as Raj said in the last call, we want to be prudent and making sure that we are earning a return that we really want to earn in our restaurants. And we’ve had some contractor starting to come back in and bid for sites that they stopped bidding for during the pandemic and even after the pandemic which should make bidding more competitive. We’re starting to see that. And so we wanted to be prudent and make sure that we have the right returns and we still have great returns in all of our restaurants and that’s kind of where it is. It’s not really because of risks.

Jon Tower: Got it. Thanks. I appreciate the question.

Operator: Thank you. Our next questions come from the line of Chris O’Cull with Stifel. Please proceed with your questions.