Darden Restaurants Q3 2024 Earnings Call Transcript

Participants

Corporate Executives

• Rick Cardenas, President and Chief Executive Officer
• Raj Vennam, Chief Financial Officer
• Kevin Kalicak, Investor Relations

Analysts

• Eric Gonzalez, KeyBanc Capital Markets
• Brian Bittner, Oppenheimer Holdings Inc.
• Dennis Geiger, UBS Group AG
• Jon Tower, Smith Barney Citigroup
• David Tarantino, Robert W. Baird
• Jeffrey Bernstein, Barclays PLC
• Jeffrey Farmer, Gordon Haskett
• Andrew Strelzik, BMO Capital Markets
• John Ivankoe, JPMorgan Chase & Co.
• Danilo Gargiulo, Bernstein Research
• Sara Senatore, Bank of America Co.
• Gregory Francfort, Guggenheim Security
• Patrick Johnson, Stifel Nicolaus
• Lauren Silberman, Deutsche Bank Aktiengesellschaft
• Peter Saleh, BTIG Research
• Brian Vaccaro, Raymond James

Presentation

[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. 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 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 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 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[phonetic]. Additionally, all references to industry results during today's call refer to Black Box Intelligence's 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, President and Chief Executive Officer at Darden Restaurants]

Thank you Kevin. Good morning everyone. I am proud of our results this quarter. Each one of our segments grew total sales and profit in an operating environment that was tough although we anticipated. We continued to outperform the industry benchmarks for same restaurant sales and traffic. Total sales grew $3 billion an increase of 6.8% and adjusted diluted net earnings per share of $2.62 which was in line with out expectations. We opened 16 restaurants during this quarter. Fiscal year to date we have opened 43 restaurants in 22 states, seven of which were reopened. 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 gas based on income is now in line with pre-COVID. I am proud that even as industry traffic trends weaken 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 continued to perform at their best especially during our busiest times. In December, the capital growth set their all time total monthly sales revenue. 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 Technomics industry tracking tool, a Darden brand was ranked number one for overall experience. The brands were Longhorn Steakhouse, Seasons 52, and Ruth's Chris Steakhouse. 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's 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 Technomics 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 ten. 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 postsecondary 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, Chief Financial Officer at Darden Restaurants]

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 strengths 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 Steakhouse 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 ten basis points unfavorable to last year due to total labor inflation of approximately 4.5%, partially offset by pricing and productivity improvements at our brands.

Restaurant expenses were ten basis points higher as sales deleverage was partially offset by strong cost management by our teams. Marketing expenses were ten 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 franchised 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 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 shares outstanding for the year.

This results in an increased or adjusted diluted net earnings per share outlook $8.80 to $8.90 which excludes approximately $55 million of pretax 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 anticipate an 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.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question today is coming from Eric Gonzalez from KeyBank Capital Markets. Your line is now live.

[Eric Gonzalez, Analyst at KeyBanc Capital Markets]

Hey, thanks for taking the question. Maybe if you could unpack the comments about the low income consumer pulling back and maybe specifically talking about what behaviors you're seeing that lead you to that conclusion, and how the brands are differing from Olive Garden to Cheddar as to maybe some of the higher end brands, how that low income consumer is changing their usage of those brands. Thanks.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Hey Eric, we're clearly seeing consumer behavior shifts. Our data shows we're essentially back to our normal pre COVID mix across all income groups. But specifically your question for the third quarter, transactions from households with incomes above $150,000 were higher than last year. Transactions from incomes below $75,000 were much lower than last year, and at every brand -- and at every brand, transactions fell from incomes below $50,000. Similar to Q2 this shift was most pronounced in our fine dining segment.

[Eric Gonzalez, Analyst at KeyBanc Capital Markets]

Great. And then just follow up. If you could just talk about from a margin perspective, this year has been pretty strong. I'm wondering if you could maybe tease out how much of that margin improvement is related to commodities versus what you've achieved from a productivity perspective. And as you look to next year, do you see that being a year of additional productivity gains or is some of that pulled forward into this year?

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

Hey Eric, this is Raj. So from a margin perspective, if you look at what we talked about at the beginning of the year, this was one of the years where we had a pricing a little bit above inflation going into the fiscal year. But as the year progressed, inflation came down. Inflation came in better than we expected for both commodities and labor. And then that combined with our team's strong cost management, that improved productivity on the labor front, we also improved our waste. We had some favorability on the mix in terms of how the trading happened between the items.

So all of these were contributors to our margin improvement versus our plan. Now as we look at next year, we'll share more details in June. But the way we look at, we're going through the planning process right now, but we always use our long term framework as a guidepost to inform how we think about plan. So we'll share more details in June, but if you look back over the last four years, we've underpriced a lot.

[Operator]

Thank you. Our next question is coming from Brian Bittner from Oppenheimer. Your line is now live.

[Brian Bittner, Analyst at Oppenheimer]

Thank you. Good morning. I wanted to follow up on the lower income consumer and your comments about this cohort pulling back because it was a pretty pronounced commentary there. And I know you talked to Eric's question about what you're seeing, but I think this is reflected in your 4Q, same store sales outlook. But do you anticipate this dynamic that you're seeing with the low-end consumer to be powerful enough to impact industry sales throughout the rest of the calendar year? And if so, how are you thinking about updating your strategy to deal with this?

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Hey Brian. Yeah, we can't determine whether it's going to be impacting the rest of the year. What I can say is that impact to the low end consumer was a year over year phenomenon and now we're back to our pre COVID mix. And so if you think about where we were before COVID what percent of our guests were below 50,000, what percent of our guests were below 75, et cetera, across all of our segments, all of our brands, it's almost exactly the same as it was before COVID. So at least that makes us feel like we know how to operate in this environment. The other thing is, if you look at Black Box, according to Black Box, every segment in the industry, from QSR and up was negative in same restaurant traffic in our third quarter, every one of them so and that's also a year over year phenomenon.

So we'll continue to monitor what we see with the guest and what we see on that lower end consumer, but we're pleased that it's back to our normal pre COVID levels. And in respect to marketing, as we've talked about often we're focused on profitable sales growth and our brands all of our segments improved sales and profits for the quarter year over year. And even with the increase in competitive activity we expected -- we exceeded, I'm sorry, industry traffic by 270 basis points on top of the 700 basis point gap we had in Q3 last year. So almost 1000 points. So 970 point gap in two years.

So we're going to stick to our strategy of everyday value to our guests and continue to use our filters to evaluate any marketing activity. If that means that we're going to spend a little bit more in a quarter or a little bit less in a quarter, that's what we'll do. But we're going to focus on our strategy and stick to it as long as we can. Thanks.

[Brian Bittner, Analyst at Oppenheimer]

And just as my follow up, as it relates to the third quarter specifically, your ability to manage the margins was very impressive despite where the comp shook out. Can you just talk a little more specifically about how you nimbly manage that labor and other operating expense line? And just Raj, as we look to 4Q I think you had previously said you expect to underprice inflation by about 150 to 200 basis points in the fourth quarter. Is that still kind of the range you want us thinking about pricing versus inflation for 4Q. Thanks.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Hey, Brian, I'll start with how we manage labor and productivity, and then I'll let Raj answer the question on the pricing. So if you think about what we've been doing over the years, we've been improving our technology on guest count forecasting by using machine learning and AI tools to help the brands write better schedules and manage their business better, and we're able to react quicker to impacts that we see in our restaurants. But we're also continuing to find ways to improve productivity. And one of the ways and the benefits that we had this quarter is continued improvement in turnover. And so we've had less training expense for new team members, and we've got better retention so the team members know how to do their job better.

In the turnover ranks where we are today, across Darden, our turnover went down by about 20% points versus last year, and almost 30% points better than the industry. And now our turnover is much closer to pre COVID levels, except for Yard House and Cheddars, which actually, we believe are at a level lower than they've ever had in their history. So those things helped with labor and food costs and other parts of the P&L. And I'll let Raj answer the other part about inflation.

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

Yeah. Brian. For Q4, we're still expecting that gap to be in the 100 to 150. So overall inflation is expected to be in the mid 3s for us. And the pricing is probably going to be in the 2 to 2.5. So we still expect to underprice inflation by -- in that range of 100 to 150 in Q4.

[Operator]

Thank you. Next question is coming from Dennis Geiger from UBS. Your line is now live.

[Dennis Geiger, Analyst at UBS Group]

Great. Thanks, guys. Wondering if you could speak to what you're seeing from a customer average check standpoint, anything with respect to alcohol or other mix contributions that you saw in the quarter or that have changed relative to prior quarters?

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

Yeah, we were actually, for the third quarter, we actually saw the mix moderate from the levels we saw in terms of what we saw in Q2. So if you look at our casual brands, the negative mix was around 40 basis points. In Q2, it was closer to 60 basis points. And then from a fine dining, we saw a huge improvement. I think fine dining in the second quarter was north of 200 basis points negative mix, we're now seeing in the low 100 basis points negative mix. So that's almost half.

So we are seeing some improvement in terms of check mix, and part of that could be a wrap. But also the holidays were pretty and so that -- on that front, we're actually seeing a positive momentum, I guess quarter to quarter.

[Dennis Geiger, Analyst at UBS Group]

That's great. Thanks, Raj. Just one other quick one. Just as it relates to off premise, anything to call out there in the quarter, what you're seeing, how your strategy has been effective despite some of the consumer pressures out there on the off premise side of things. Thanks, guys.

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

Yeah. From an off premise perspective, our sales as a percent of sales was slightly below last year, but not a lot. This is typically a high season for Olive Garden off premise. So Q3 was closer to 26%. Last year was also in that range. We were probably 40, 50 basis points lower, but not a lot. And Longhorn was around 13%, which was also about 40 or 30 basis points lower. But overall, I think it goes back to the execution. Our focus has been staying on, just ensuring that we execute at the highest levels for off premise, and that's helped contribute to maintaining this stability.

[Operator]

Thank you. Our next question today is coming from Jon Tower from Citigroup. Your line is now live.

[Jon Tower, Analyst at Smith Barney Citigroup]

Great, thanks. I appreciate that. I guess the first one is, and I understand you guys want to stay true to the operating philosophy, but how do you keep your brands top of mind and invisible in front of consumers when the industry is getting more aggressive with getting in front of them? By spending a lot more dollars than they have in the past several years on marketing.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Hey Jon, if you think about the amount we spend, even with the spending that we had this quarter, Olive Garden, most of the weeks were in the top three in share of voice. And so we're still in front of our consumer. We have other ways to get in front of the consumer with our E-club and with other digital spend, but at the end of the day, the best way to get people to come into our restaurants is to have guests recommend us to others. And so that's what we're continuing to focus on.

We will continue to use marketing with our filters to talk about our core equities and to continue to drive results in the long term. And we do have great everyday value. And as we think about what we want to do in the future, I don't want to get into the details, but we have levers to pull and if we pull them, you'll know after we pull them.

[Jon Tower, Analyst at Smith Barney Citigroup]

Okay, I appreciate that. And then just on the '25 outlook for the unit growth, I was surprised it was lower than at least this year from a gross opening or planned opening perspective. Can you speak to why as of right now you're expecting kind of 45 to 50 versus what we've been seeing the past several years?

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah, Jon, you said it. The new restaurant projection we have for next year, it is within our long term framework, but it's lower than we'd like it to be. We're going to keep working on getting to the high end of that framework over time, but it'll take a little bit of time, I would say construction costs were quite a bit higher than pre COVID levels. And we have walked away from some deals because of the construction costs. And they've come back to us after we walked away. And so we're willing to slow it down a little bit to get a better result in the long term. But the good news is, at least the construction costs are stabilized.

The other thing is, it's still taking longer to get construction starts than it was four years ago. It's also taking longer to get to completion than it was in the past. And so if you think about the time it'll take to build a restaurant, it's longer than it was. A lot of that's driven by developers, utilities, hookups, and time for permitting, and also time for getting certificates of occupancy. So if you think about the time that we have openings, we've got a lot of our openings next year towards the end, which could slip. And that's what we're just wanting to make sure that we get the number.

And we tell you a number that we're going to hit, but we want to get closer to that high end over the long term. And the other thing is, I want everybody to remember we do include M and A as part of those new restaurants. And we didn't talk about that. But Ruth's Chris, we added 77 restaurants this year. So it gave us a little bit of a relief valve to not be so aggressive if we didn't need to be aggressive.

[Operator]

Thank you. Our next question today is coming from David Tarantino from Baird, your line is now.

[David Tarantino, Analyst at Robert W. Baird]

Hi. Good morning. Rick I want to come back to the question of how you would manage the business if the environment were to get worse from here and in particular, you mentioned you had some levers to pull, and I know you don't want to share details around that, but I was wondering if you could just comment on whether anything would change if things got worse and then specifically on the pricing question, just wondering, your pricing philosophy in the current environment and whether you'll continue to be conservative relative to your inflation levels.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah David, as we think about the levers we can pull, as we've talked over the years, we've brought our marketing down. We've actually focused more on our core equities. And every year we might tick marketing up a little bit, but we're not going to change our strategy. We're not going to become a discount kind of heavily promotional brand. We worked really hard through COVID and before to get to what we think is a better, stable, stronger business for us, for the long term, and we would be willing to deal with short term pressures to not change our strategy to get to the long term.

Now, again, we have some tactics that we can do which would still stick to our strategy, but we don't plan on getting to be a promotional deep discounting brand. Again, Olive Garden, which had less marketing in Q3 than it did in Q2, while they had less marketing than last year. And then in the second quarter, our competitors had more. Olive Garden still gained share, and that's what our focus is, share gain, sales and profit growth over the time. We're going to continue to focus on execution, our food, our service, and our atmosphere to increase frequency with our core guests and we love our core guests.

We think they're great for us and we'll continue to build over time. We're just not going to fight gravity on what's going on in the environment. We're going to stick to what we want to do. And then on the pricing side, our strategy is to continue to price below inflation over time. And we've taken a lot less pricing than the competitive set. We've taken a lot less pricing than CPI, a lot less pricing than full service limited service over the last four years. So it gives us some room to continue to price if we need to. But our plan is still over the long term to price below inflation.

[David Tarantino, Analyst at Robert W. Baird]

Great. Makes sense. Thank you.

[Operator]

Thank you. Next question today is coming from Jeffrey Bernstein from Barclays. Your line is now live.

[Jeffrey Bernstein, Analyst at Barclays]

Great. Thank you. My first question, Rick, you mentioned the operating environment tougher than anticipated. Just wondering how would you size up how much of that is the broader macro versus maybe whether you'd say there were any internal missteps. I mean, I'm assuming your data is showing that the broader industry pullback, it was not just Darden in February that you're seeing the broader industry see the very same directional trend in February. Is that fair to say? Any thoughts there would be great.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah. Jeff, I think it's a broader market versus any specific missteps we had. Our gap increased from January to February. Our traffic and sales gap increased. Both of those increased between January and February. And as I said, every category in the industry from QSR and up had negative traffic in the quarter. And so I think there's a little bit of a bigger challenge, at least a year over year challenge for our consumer, and we're going to see how that plays out over the next couple of quarters and see if there's anything we need to change but it won't be dramatic change.

[Jeffrey Bernstein, Analyst at Barclays]

Understood. And then just to follow up the February sounds like you said it improved but below plan, did that underlying consumer weakness persist into March? I mean, I know we're talking about short periods, but February is a short period and now we're pretty far into March. I'm just wondering whether you've seen any change for the better or the worse. And just curious from your perspective, because you do have, I believe, up to nine brands now. What do you think drove that change in behavior? Is there anything in particular you're seeing? Because it does seem like January was weather, but then really was just February and potentially into March. So I'm just wondering what your perspective is in terms of what drove that pullback. Thank you.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah, I would say, first of all, our guidance contemplates everything we know about March. I don't want to get into March. We have a lot of challenges forecasting three weeks in a month when you've got spring break shifts and those kind of things happen. And so we're going to continue to watch. I think I've read a little bit on tax returns being a little bit delayed, but we're not going to read too much into that. We improved our gap between January and February. And so that's what we feel good about. We're not going to talk about March yet.

[Operator]

Thank you. Next question is coming from Jeff Farmer from Gordon Haskett. Your line is now.

[Jeffrey Farmer, Analyst at Gordon Haskett]

Great, great. Thanks. Just following up on Jeff's question there. So again, you had made some reference to the lower income consumer, but in terms of thinking about just maybe a little bit softer trends than you had expected, how much of that would you put at the feet of the lower income consumer as opposed to the balance of potential drivers?

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah, I would say that if you think about our results being a little bit softer than we thought, I would put it more at the feet at the lower end than the higher end, our higher end consumer was up versus last year. So that would tell you that it was really more on the lower end consumer. But as I think about what the consumer trends are, I just want to remind everybody that we believe that operators that can deliver on their brand promise with value can continue to appeal consumers despite economic challenges.

And that's what we're going to continue to focus on doing. I remain confident that we're well positioned and prepared for whatever we have to deal with. Thanks to the breadth of those nine brands that Jeff talked about, the strategic decision we made to price well below inflation and CPI over the last four years, and those outstanding team members we have in our restaurants who are committed to create exceptional guest experiences for our guests. And so, yeah, the lower end consumer probably drove a little bit more of our miss to what we thought when we talked to you before. But we're going to continue to focus on what we do and take care of every guest that walks in a door the best that we can to have them to come back.

[Jeffrey Farmer, Analyst at Gordon Haskett]

And then the second question you just touched on, you gave me a pretty good segue there. But in terms of your more conservative pricing strategy relative to your peers, from what you've seen, has that driven traffic outperformance, market share outperformance? Is that strategy actually pay dividends to these customers, casual dining customers, appreciate that the Darden brand portfolio is actually a better price value than a lot of other concepts from what you've seen?

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah. Jeff, I think if you look at our gap over two years, our gap to the industry, as I said, being almost 1000 basis points, I'm sorry, 10% gap over the three years, it's been strong. And that's what we do. We're taking this price below inflation, having a great everyday value and we think over the long term that continues to build the value differential we have. We've got value leaders across and that helps build the traffic gap.

[Jeffrey Farmer, Analyst at Gordon Haskett]

All right, thank you.

[Operator]

Thank you. Next question today is coming from Andrew Strelzik from BMO Capital Markets. Your line is now live.

[Andrew Strelzik, Analyst at BMO Capital Markets]

Hey, good morning. Thanks for taking the question. I wanted to ask about industry capacity, particularly given what you're talking about with more challenged kind of traffic backdrop. And I think initially during COVID Darden talked about maybe a 10% decline in locations because of closures and feels like from a lot of the public companies we hear from, there's a desire to accelerate unit growth there has been, and I'm not exactly sure what's going on the independent side. So I guess I'm just curious if you have a sense where capacity is now versus that 10% reduction. Are you seeing it come back in any of your markets or any specific regions? And maybe if you could touch on the independent side as well. Thanks.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Andrew, I think we're still in that ballpark of 10 plus percent. But if you actually look at the last year or so, there have been more closures than openings from the data we've seen. So there is net closings even in the last 9 to 12 month data that we're looking at. When you think about the environment today with all the regulation around where things are, it's very hard for someone to open a new restaurant. The financing costs have gone up. There is less developments happening. That's actually part of the reason we talked about some growth being constrained a little bit in the near term for us on the unit opening. So we would say it's not that different. It has not gotten much better. Maybe, let's put it that way.

[Andrew Strelzik, Analyst at BMO Capital Markets]

Okay, great. And then maybe on your unit growth expectations for next year. Just curious where we should expect the fewer openings to come from, I guess does it just match based on the size of the portfolio or any of the brands in particular? Thanks.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah, I'd say assume that two-thirds of the growth is going to come from Olive Garden and Longhorn combined, and then the rest is -- a third is from all the other brands. I don't know that we would say there's a huge difference year over year. It's a little bit of a change. But as we look forward, as Rick said, we'll continue to try to get that ramped up further.

[Operator]

Thank you. Next question is coming from John Ivankoe from JPMorgan. Your line is now live.

[John Ivankoe, Analyst at JPMorgan Chase & Co.]

Hi. Thank you. I remember in past periods there are a number of things that you've done that aren't necessarily operationally difficult. And I don't think overly discounts the brands. Things like dinners for two, buy one, take one, maybe even highly targeted couponing to certain lower income consumers to bring them back. Those types of things did prove effective to the Darden of the past. I mean, I wonder if ideas like that are on the table, is the first part of the question. And secondly, a lot of the higher income consumers, obviously getting more price resistant about some of the restaurants that they visit. Is there a way to invite some of the higher income consumer, maybe through different types of promotions back into Olive Garden as well, that you haven't been doing in the past couple of years? Thank you.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Hey, John. Yeah, that was the deep discounting couponing. A lot of promotions was kind of the Darden pre COVID. This is the Darden post COVID, which is when we're talking about marketing being things that elevate brand equity, that are easy to execute and they're not at a deep discount. Doesn't mean that we won't have price points on things over time, but that's kind of more of our everyday low price or around that price. You think about never ending possible. We ran that this year at $13.99[phonetic]. It was a great promotion for us and that was at $13.99. So we can think about doing those things again next year with never ending possible.

We already have buy one, take one on our menu, basically with the $6 take homes. So there's a lot of everyday value already. In terms of kind of talking to the higher end consumer. As I mentioned, we actually grew at the higher end consumer at all of our segments. The 200,000 plus, 150 plus was up year over year. But I think you could see a few signs of some consumers trading down within our brands. Longhorn did really well as they grew, even at the high end consumer at a little bit lower, the 150 and 125 and they had actually positive check. We're seeing some of that shift in some ways and so we think as long as we execute great and we have great word of mouth that will get that higher end consumer maybe to trade to one of our brands from someone else, even if it trades from one of our current brands to one of our brands, that's fine with us, too.

But again, long term, every day, talk about what our core equities are, execute better than the restaurant next door and we'll win and we'll deal with short term challenges.

[John Ivankoe, Analyst at JPMorgan Chase & Co.]

And is the company discussing kind of reintroducing or at least thinking about a more effective way to approach loyalty? Is that something that becomes table stakes in '24 and '25, or are we happy with the current approach?

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

No, we're happy with the current approach. If you think about loyalty in full service restaurants, frequency isn't super high, and we've learned that when we did loyalty before, and so it's a little bit less valuable for a consumer we believe. Now there's other ways to get that data. The value of loyalty is the data that you get, and we have other ways to grab that data. Doesn't mean that we won't think about loyalty in the future. We're just focusing on what we can do right now to continue to execute better, to drive results and not to drive something that's just buying sales, because we'll have to keep buying it next year and the year after that. We don't want to go out and buy sales. We want to go out and earn those sales.

[Operator]

Thank you. Next question today is coming from Danilo Gargiulo from Bernstein Research. Your line is now live.

[Danilo Gargiulo, Analyst at Bernstein Research]

Great. Thank you. So, first of all, it appears that Longhorn weathered these challenges of this tough operating environment better than other brands. So I'm wondering what caused that and what learnings could be applied to the other brands.

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

So, Danilo, I think as we talked about in the past, there's a lot of things, right. First of all, let's start with the big picture, we've talked about how in general, steak does a little bit better when beef prices are higher, just because the relative gap between the consumer would rather not take risk on cooking something that's expensive. So let's start with that big picture. With that said, within the steak category, not everybody is winning. So if you look at Longhorn, our performance has been driven by our execution.

We talk about simple operations, quality investments in quality. So our team -- Todd and the team have done a great job over the last four years, continuing to invest in the food and in service. And so if you look at overall, you get a better value today than you ever did. So if you look at their pricing has been a lot lower in the industry versus the industry, and especially for a steakhouse, their pricing has been much lower than the competition. So the value equation is much better and a great execution. Really, those are the two things.

[Danilo Gargiulo, Analyst at Bernstein Research]

Great. Thank you, Raj. And I want to follow up on one of the comments that Rick was just making on the level of attraction of your customers over the long period of time. And I wonder if you can provide some updates on your customer trends with regards to the frequency at which they are spending in your brands. And maybe if you can offer also some insight on the size of your E-club members today versus the past and the total addressable market that you have. So how many customers you're seeing on a monthly basis at any of your brands?

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

Well, let me start by saying I think we serve about a million guests a day across all of our brands, or more than that, actually. And so we get a lot of people coming in. Our frequency hasn't dramatically changed over the last year and our E-club is roughly between 25 and 30 million guests. That's active E-club. We have more members, but that are active and so we have ways to communicate with that. And that's across all of our brands. And so we're really confident now that we've got our, as I said earlier on the income demographic back to where we were pre-COVID, we know how to operate in that environment. We're seeing some shifts at the above 65 years old. We've talked about that before. They're shifting a little bit more to lunch, a little bit earlier to dine, and that's great. Those are the only real major shifts we've seen.

[Operator]

Thank you. Next question is coming from Sara Senatore from Bank of America. Your line is now live.

[Sara Senatore, Analyst at Bank of America]

Great, thank you very much. Just a couple of clarifications, please. The first is in terms of the gap to the industry, I know you mentioned that it widened from January to February, but I was curious if it also had been widening before that from the fiscal 2Q to 3Q. I think historically the gap has tended to widen when trends -- industry gets tougher because of that sort of more selective consumer. But I wanted to see if that was the case, kind of stepping back. And then the other question I have is obviously gotten a lot of questions about the low income. I wanted to understand how perhaps this normalization will serve as a headwind in the coming quarters. So, for example, you're back at the pre COVID levels now, does that continue to be a bit of a headwind for the next three quarters until you lap this quarter? And are you thinking about offsets in the form of better mix? So perhaps that normalization continues to show up from a traffic perspective, by the same token, less of a mixed headwind. Thanks.

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

Okay, let's start with the gap itself. So if you look at the gap in January, the gap narrowed a bit. We think primarily because of the geography and the footprint we have that has disproportionately impacted by weather. If you look at the concentration of where the weather was, that was a higher concentration of our restaurants. And we think that's part of the reason the gap was not as strong. Now, the other part of this gap narrowing this quarter related to the last quarter was the fact that we're wrapping on huge gap from a year ago. We had a very strong performance a year ago. So that's really how we would kind of frame that.

Look, we've been clear that it's very hard to maintain multiple hundreds of basis points of gap forever. We're going to have that narrow over time. But things we've done with our pricing and our value equation have helped us continue to take share, and we're happy with that and as Rick said earlier, in an environment when there was intensity, in promotional intensity more so than ever, we still outperformed and we were able to gain share. So that's the piece on the industry.

Now, as you look at the income mix, this has been an ongoing shift. So we've talked about in Q2 that we're starting to see shift a little bit more towards the pre COVID mix. As we looked at Q4, now Q3 that just ended, we were right essentially where we were before COVID so, yeah, the next three quarters, there is a little bit of moderation of getting that, but it's not as big as it was this quarter. If you think about, we don't think we'll have to see, but based on the data we have, what we are seeing, it should moderate. But we would expect the next two to three quarters to kind of get back to those levels.

From a mix perspective, though, [technical issue] we actually think mix is going to get better. We expect mix to continue to moderate. I think I mentioned already that Q2 to Q3, we saw an improvement. As we get into Q4, we should see that get better. And as we get into next year, we expect this to be not a huge headwind. We'll see how that plays out, but that's our best thinking at this point.

[Sara Senatore, Analyst at Bank of America]

Great. Thank you very much.

[Operator]

Thank you. Next question today is coming from Gregory Francfort from Guggenheim Securities. Your line is now live.

[Gregory Francfort, Analyst at Guggenheim Security]

Hey, guys, thanks for the question. A lot of what I wanted to ask was asked, but I wanted to ask you about the commodity outlook and thoughts into the fourth quarter. Maybe what's implied and risks to the upside or downside on that going forward. Thanks.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Hi, Greg. Sorry. As far as on the commodity side, if you look at what we expect, we expect third quarter to be around, the implied guidance would be around 3% for commodities inflation and part of the reason it's going up relative to where we've been is that everything except for seafood is inflationary as we move into the fourth quarter. Now, not huge, but as you look at beef and produce are more in the mid single to high single digit inflation, and then most other categories are in low single digits. So a little bit of that is just comparison to last year, a function of the levels last year.

But from a coverage point, we're 75% covered for Q4, which is consistent with historical average levels. And I think on beef we're actually 80% covered for Q4. As far as we look into '25 as I said earlier, we're in the middle of planning process for next year, so we'll be able to share more in the June call. But I think at this point we are working through some contracts for next year, so I would hesitate to share a lot at this point.

[Gregory Francfort, Analyst at Guggenheim Security]

Thank you for the perspective.

[Operator]

Thank you. Next question is coming from Patrick Johnson from Stifel. Your line is now live.

[Patrick Johnson, Analyst at Stifel Nicolaus]

Great, thanks. Good morning, guys. Rick, I wanted to touch on menu innovation, particularly at Olive Garden and Longhorn, and I'm just curious if there are any opportunities you see to either introduce permanent menu items that still align with the brand strategy or even if there's potential to create limited time platforms like never ending pasta bowl that aren't necessarily discounted but could drive incremental interest in visits over time.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah, Patrick. There's always room for menu innovation. We've got to balance innovation and new items with improving our existing items and making sure our menus stay compact and simpler than they were before COVID and there's also always room for kind of limited time, not necessarily promotional offers. So currently, Longhorn has lamb on their menu, and it does really well. It's doing a lot better than it did last year.

And with brands like Cheddar's, we use opportunity buys to put some items on the menu, but at really great values and Olive Gardens continue to look at ways to improve some of their items and maybe introduce an item, but take off an item. So, yeah, we still have a lot of work that we do with innovation, but most of our guests come to us for what we have on our menu today, and we're not going to alienate the core guest by completely changing those menus around.

And we don't plan on getting back to a six or seven week promotion where an item is great, it does great for six weeks, and then a guest comes back in week ten and it's not there anymore. And so we'll continue to innovate, but we'll continue to innovate a lot more on improvements, but we'll introduce new items here and there.

[Patrick Johnson, Analyst at Stifel Nicolaus]

Great. Thank you, guys.

[Operator]

Thank you. Next question is coming from Lauren Silberman from Deutsche Bank. Your line is now live.

[Lauren Silberman, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you very much. A few follow ups. Can you just talk about the same store sales differences that you're seeing across regions, and then from a marketing perspective, you're now running less than 1.5% of sales this year, well below pre COVID at 3% or even north[phonetic]. So understand you want to be prudent and protect long term, but why is this the right level of marketing spend today? How do you assess it, even if it's not deep discounting?

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Lauren. So from a regional perspective, we continue to see softness in Texas and California. I think Texas pretty much throughout the year we had seen weakness, and that continues to be the case. Florida was a little weaker, but nothing crazy. But you also had the weather impact that probably disproportionately impacted both Texas and California during Q3 different types of events, but weather there. So that's the regional. From a marketing perspective, we've been very clear that, look, we're going to be prudent, we're going to be very deliberate in how we bring back marketing. We've learned a lot in terms of the effectiveness of marketing different channels, how we deploy it.

And we've talked about bringing it back at a level that's more methodical in terms of 10 to 20 basis points increase over time in a way that's margin neutral, all else being equal. So that's kind of really how we're thinking about it. And we have done a lot of work. We continue to do a lot of work on marketing mix analysis and that we got our teams of data scientists internally and work with some external partners to ensure that we're getting that appropriate return. And it's actually being effective the way we want it to be, which is to elevate brand equity and build long term guest loyalty.

[Lauren Silberman, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you. And then if I can just on the guide, lowered sales maintained or increased the lower end of the guide, inflation more favorable. Any other puts and takes in the guide for the year. And then can you just clarify what you're expecting for the full year on G&A? Thank you.

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah. Let me start with the G&A. We expect G&A to be pretty similar to what we said last time, $440 million I think, is what we said in the last quarter. So call it roughly $100 million for Q4. Look, I think the big things are, we've obviously brought down some sales expectation, but inflation is better and then our teams are doing a better job managing our business. So there is some improvement in productivity, improvement in other waste and other types of inefficiencies. But outside of that, nothing that's not outside of those few items that I've just mentioned. But if you just step back and look at where we started the year, right, if we look at the beginning of the year, we said earnings guidance was $8.55 to $8.85 and we said, to the extent sales slow down or we see weakness in sales, we should see inflation come down and our cost management continue to help us get us closer to that and today we're talking about earnings guidance of $8.80 to $8.90 now with a lot lower sales, but we got there through other wins. So again, I don't want to say we told you, but it's just, that is reality. That's what happened.

[Lauren Silberman, Analyst at Deutsche Bank Aktiengesellschaft]

Thank you. Appreciate it.

[Operator]

Thank you. Next question is coming from Peter Saleh from BTIG. Your line is now live.

[Peter Saleh, Analyst at BTIG Research]

Hey, great. Thanks for taking the question. I apologize if I missed this, but I know you guys commented on the traffic softness for the lower income consumer and maybe by cohort, but can you maybe discuss the behavior of those consumers in terms of their check management? Are you seeing a lot of trade down for the consumers that are coming in within the menu or within brands, are they cutting alcohol or appetizers or desserts or just anything that suggests that those consumers that are coming in are also managing that check down? Thanks.

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

Yeah. Interestingly, from a check management perspective, it's not as much driven by income. The gap is more driven by older consumers, especially 65 plus is managing the check a little bit more irrespective of their income is what we're seeing. And they're also, I think Rick mentioned earlier, they're shifting more to lunch. So we're seeing a couple of things. They're getting a little bit less add ons, but also managing the check. But also, like I said earlier, from Q2 to Q3, it's actually less management of check now with a little bit less traffic. But what's happening is check management is actually getting better in terms of negative mix is not as big as it was in Q2.

[Peter Saleh, Analyst at BTIG Research]

Thank you very much.

[Operator]

Thank you. Next question is coming from Brian Vaccaro from Raymond James. Your line is now live.

[Brian Vaccaro, Analyst at Raymond James]

Hi, thanks and good morning. Before my question and sorry if I missed it, but could you share what traffic in the quarter was for Olive Garden and Longhorn? I know that's usually in the queue, but did you or can you share that?

[Raj Vennam, Chief Financial Officer at Darden Restaurants]

Yeah, sure. Olive Garden check was 2% in the quarter. So basically traffic would be negative 38. And then Longhorn traffic was in the mid, negative 2s.

[Brian Vaccaro, Analyst at Raymond James]

Okay, thank you for that. And I guess you've had this question a couple of times, but I'll ask it this way. In an environment where you're seeing softness on the lower end consumer, and maybe there's just a broader backdrop where value seems increasingly important. I guess it's interesting to see Olive Garden's relative comp out performance narrow given the brand's strong everyday value positioning. So I guess, how do you reconcile that? And is there any evidence that you're starting to seed some profitable guests to certain brands not asking for names, but certain brands that are gaining share or have shifted their tactics in the last year?

[Rick Cardenas, President and Chief Executive Officer at Darden Restaurants]

Yeah, Brian, if you think about Olive Garden. So, as Raj said, Olive Garden exceeded the industry benchmark for same restaurant traffic by 270 basis points. They spent less in media at a time when many of their competitors ramped up discounts on television. So they exceeded by 270 with less media. And when others were ramping up, their two year gap is 830 basis points. And so that's a big share gain over two years. So I'm really proud of the work that Dan and his team have done to improve the guest experience, you know they continue to focus on their key equity of never ending, craveable, abundant Italian food, specifically focusing on ensuring every guest is offered a refill on their never ending first course. And that's a huge value.

I can't tell you if an Olive Garden guest has shifted over to one of those competitors, but I can tell you that we trade guests all the time. Some of our biggest -- Olive Garden's biggest competitors are the ones that are doing some of the discounting today. And so we're really proud of the 270 basis point gap on top of the gap they had before. And if we're seeding a profitable guest, I don't think it's a seed forever. It's just because people shift and they move around. And so we're going to keep focusing on what we can do to keep our guests coming back for one more visit.

[Operator]

Thank you. We reached the end of our question and answer session. I'd like to turn the floor back over to management for any further or closing comments.

[Kevin Kalicak, Investor Relations at Darden Restaurants]

Thank you. That concludes our call. I'd like to remind you that we plan to release fourth quarter results on Thursday, June 20, before the market opens with a conference call to follow. Thanks again for participating in today's call and have a great day.

[Operator]

[Operator Closing Remarks]