Kevin Kalicak - Investor Relations Gene Lee - Chief Executive Officer Rick Cardenas - Chief Financial Officer.

David Tarantino - Baird Brian Bittner - Oppenheimer Will Slabaugh - Stephens David Palmer - RBC Capital Markets Jeffrey Bernstein - Barclays Matt DiFrisco - Guggenheim Sara Senatore - Bernstein Peter Saleh - BTIG John Glass - Morgan Stanley Greg Francfort - Bank of America Chris O'Cull - Stifel Andrew Strelzik - BMO Brandon Sonnemaker - JPMorgan Nicole Miller - Piper Jaffray Stephen Anderson - Maxim Group.

Welcome to the Darden Fiscal Year 2019 Second 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, you may disconnect at this time. I will now turn the call over to Mr. Kevin Kalicak. Thank you. You may begin..

Thank you, Sue. Good morning, everyone, and thank you for participating on today's call. Joining me on the call today are Gene Lee, Darden's CEO; and Rick Cardenas, CFO. As a reminder, comments made during this call 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 in our 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.

We plan to release fiscal 2019 third-quarter earnings on March 21st before the market opens, followed by a conference call.

This morning, Gene will share some brief remarks about our quarterly performance and business highlights, and Rick will provide more detail on our financial results from the second quarter and update our outlook for fiscal 2019 before we take your questions.

As a reminder, all references to the industry benchmark during today's call refer to estimated Knapp Track excluding Darden. During our fiscal second quarter, industry total sales growth was 2.1%, industry same-restaurant sales grew 1.2%, and same-restaurant guest counts decreased 0.2%. Now, I'll turn the call over to Gene..

Staff to win, master the tools, and standardize and simplify. To support team members staffing, they have introduced consistent and more effective methods to attract, hire, train, and retain the right talent, and their teams have made meaningful progress increasing their staffing levels.

Today, the restaurant management teams are using our proprietary tools to forecast their business with much more accuracy, enabling them to staff their restaurants properly to better serve their guests. And, we have introduced standards to create consistency across the brand.

For example, during the highest-volume periods, restaurant managers are now positioned properly with one manager at the host stand, one managing the dining room, and one managing the kitchen, resulting in much better throughput.

With this laser focus on the strategic priorities, they are seeing higher guest satisfaction scores, and those scores continue to improve each month, and in time, they should see better team member and management retention levels. The Cheddar's team is also working on culinary process improvements that we phased in over time.

These efforts will lead to increased quality, consistency, and speed of service. There's still work to be done at Cheddar's to simplify the operation and consistently improve restaurant-level execution.

They have a strong management team in place, and as they continue to implement our Back-to-Basics operating philosophy, they will make significant progress throughout this year and years to come. Before I turn it over to Rick, I want to close by saying thank you to our 180,000 team members.

The holidays are the busiest time of the year for our restaurant teams as they create exceptional experiences and lasting memories for our guests, so on behalf of the management team and the Board of Directors, thank you for all you do to help our guests celebrate this time of the year and for making our company successful, and I wish all of you a wonderful holiday season.

Rick?.

Thank you, Gene, and good morning, everyone. Overall, we were pleased with our results in the second quarter, as total sales grew 4.9% from the addition of 40 net new restaurants and same-restaurant sales growth of 2.1%.

More importantly, with this sales growth came strong flow-through, resulting in expanded margins for the quarter, with restaurant-level EBITDA growing 40 basis points. Diluted net earnings per share from continuing operations of $0.92 grew 26% from last year's adjusted diluted net earnings per share.

We also returned a total of $154 million to our shareholders this quarter, paying out $93 million in dividends and repurchasing $61 million in shares.

Turning to the margin analysis for the quarter, food and beverage costs were favorable by 40 basis points as pricing of approximately 2% and cost savings net of investments more than offset both commodities inflation of under 1% and the unfavorable impact of the new revenue recognition standard, which we detailed in our last earnings call.

Total labor inflation of over 3.5% and incremental workforce investments drove restaurant labor 50 basis points higher than last year despite continued sales leverage and productivity gains. As a reminder, Q2 was the final quarter of the incremental workforce investments we introduced last January.

Restaurant expense was favorable 40 basis points, as sales leverage more than offset minimal inflation. In fact, our total restaurant expense in dollars per operating week were equal to last year.

Marketing expense was favorable to last year by 20 basis points, driven by sales leverage, all resulting in restaurant-level EBITDA margin of 16.7% this quarter, 40 basis points better than last year.

Below the restaurant level, general and administrative expense improved 20 basis points, as we lapped an unfavorable legal settlement from last year, which was partially offset by incremental workforce investments. We recorded $2.7 million of impairments during the quarter, which is included in our $0.92 diluted EPS.

This impairment is related to a planned Olive Garden restaurant relocation and one future closing, also in Olive Garden. Taxes were favorable to last year as a result of tax reform. Our effective tax rate for the quarter was 14.3%, which is higher than our annual expectation of between 10% and 11%.

Turning to our segment performance, Olive Garden, LongHorn, and the Fine Dining segment all grew sales, driven by positive same-restaurant sales and net new restaurants. Segment profit margin increased in each of these segments with strong flow-through and cost management, even after the incremental workforce investments.

Sales for our Other Business segment grew 3.6%, driven by net new restaurants and incremental franchise revenue related to the adoption of the new accounting standard.

Segment profit declined 110 basis points in this segment due to margin deleverage from negative same-restaurant sales, incremental workforce investments, and the adoption of revenue recognition.

In this morning's press release, we increased our fiscal 2019 same-restaurant sales growth outlook to approximately 2.5% from the previous range of 2% to 2.5%. We also increased our EPS outlook to be between $5.60 and $5.70 from the previous range of $5.52 to $5.65. All other metrics in our financial outlook remain unchanged.

Finally, and most importantly I want to wish all of our 180,000 team members and each of you a happy and safe holiday season. Now, we’ll open it up for questions..

Thank you. We will now begin the question and answer session. [Operator Instructions] Our first question comes from David Tarantino with Baird. You may go ahead..

Hi, good morning. Gene, just a question on the Olive Garden traffic and mix.

I know you mentioned that Olive Garden made a choice to reduce the incentives this quarter, so could you elaborate on what exactly that means? And I think this quarter was one of the first in recent memory where Olive Garden did not outperform the industry on traffic, and I know that incentive adjustment might have been part of it, but just how do you think about that gap versus the industry and the importance of maintaining a positive or stable gap on the traffic side? And then, I have a follow-up related to the mix..

Okay. We headed into the quarter feeling like the industry was in fairly good shape, and we made the strategic choice to reduce our incentives, which primarily was coming through email. We ran 16 fewer weeks during the quarter. That included some weeks we had multiple offers out there last year. We really didn’t have any offers out there this year.

We felt it was with the demand environment being strong, it was a good opportunity to remove some of that incentives so that in the future, if needed be, we could add it back in.

We also thought it was an opportunity to really, as we think about growing our sales profitably, we just felt like the environment was right, and we can basically get to the guest count for the reduced incentives, which was more than what we were down for the quarter.

So we would have, if we had the same incentive level as we had the prior year, which has been consistently what we’ve been running, we would have beat the industry. So we’re not that really concerned about that.

What we’re really focused on is building a really healthy guest base and trying to ensure that we create some opportunity in the future if need be to put back some of these incentives into the business. I will add that I think the overall industry continues to perform well. The dynamics are changing.

Large, nationally advertised brands are taking share with the advertising budgets being increased, and the industry is growing more promotional as check averages growth is less than 2% for the first time in a while.

It will be interesting to see whether these large brands will continue to give up margin to advertise and promote in the intensity they’ve been promoting at..

Yeah. And, that’s maybe the nature of my follow-up, Gene. On the Olive Garden, check growth has been fairly substantial for the last two quarters. And I think I understand the dynamics there.

But are you seeing anything in your data that would suggest the change in the perceived value equation at Olive Garden in a negative way related to that check growth?.

No, we’re seeing the exact opposite, David. We’re seeing value go up. So, just a little more color on the mix change, we did make a couple menu moves halfway through the quarter to mitigate the mix growth.

However, our investment in the chicken alfredo dish, we saw some significant increase in the mix there, and because the promotional calendar had the value promotions there, we saw a lot of trade up out of the promotional items into that item.

We also saw -- with the increase in Never Ending Pasta Bowl from $1.00, we saw some trade out of that into regular higher-priced menu items, and then when you throw the dollar on, that had a little bit of contribution to the mix, and with less incentives that also contributed a little bit to the overall mix.

So, we're seeing our value scores increase. I think the consumer is healthy; they're making those choices. We're giving them plenty of optionality. We’re also focused on highlighting a couple other value options on our menu, made those more prominent, so I think right now, I feel really good where we're at.

I think the dynamics will change a little bit in the back half of the year as our promotional calendar changes, and we'll have some more full-price promotions, and the trade will be a little bit different. So, I feel really good right now about it..

Thank you. Our next question comes from Brian Bittner with Oppenheimer. You may go ahead..

Thanks. Good morning, Gene and Rick. Question on the same-store sales guidance for the rest of the year.

It implies that over the next two quarters, your business will trend as good or maybe even better than it just did in the second quarter, and this is really happening at a time when many expect the environment to soften in the next year, so what's driving your confidence in this forecast from the angle that you have?.

Yeah, Brian. Our forecast for the year of approximately 2.5% is driven by a few things. One is our confidence in what we've been doing for the last four years in improving our execution in the restaurants.

If you look at our year-to-date, same-restaurant sales, it would basically assume it's a slightly lower number than what we are today, and if you look at a few other minor things, we've got weather.

Last year's weather was a typical-year weather, and we expect it to not be dramatically worse than last year, so that should help versus what we've seen in the past. And, we've got just slight -- just slight improvements because of holiday shifts, not major, but those are the slight differences with where we were before.

We feel really good about our same-restaurant sales estimates for the rest of the year, and we're looking forward to hitting them..

Thanks, Rick. Last question is on Cheddar's. Gene, can you just talk about any progress you expect to see there moving forward? I know during the quarter for the first time, you got all the store-level management positions filled across the portfolio, which I would assume is a pretty big deal.

Is this starting to drive any type of tangible improvement in the operations that you can speak to?.

You know we're seeing -- as I mentioned in our prepared remarks, we're seeing for the first time a leading indicator that we're heading in the right direction, which is guest satisfaction. These scores are improving significantly each month, and we can point to things that we've done.

We're seeing significant improvement on Friday and Saturday night now that we have managers positioned in the right place. Our throughput is up significantly. We're closing the gap on same-restaurant sales on those nights. So, we can see operationally some results.

Now, they're just not manifesting themselves into the overall same-restaurant sales number. I will say that we've had a couple discrete issues in a couple restaurants that have really hurt the trend in the last couple weeks of the quarter. Those things will work themselves out. But, I am extremely optimistic right now with what I'm seeing.

I think operationally, we had to make this reorg. We held off, but we had to unify these operating cultures, and our teams are really focused on the right things, and for the first time, we've got 98% of the restaurants have a managing partner or general manager in there. We're getting close to fully staffed. We're stopping the churn.

We still have the 10 restaurants that we acquired in Georgia that are still down double digits. We expect that to lessen as we moved through the years. We've stabilized those restaurants with leadership. So, overall, I think that we're moving in the right direction, and I'm excited that J.W. and his team -- J.W.

has only been in there just over three months, so he's still just getting out there, and listening to people, and trying to really hone in on the operational plan, but I think we're moving directionally in the right direction. I'm seeing something for the first time that gives me confidence with these guest satisfaction scores.

The next big thing is can we see some improvement in the human resource metrics?.

Thank you. The next question comes from Will Slabaugh with Stephens, Inc. You may go ahead..

Yeah, thanks, guys. You mentioned this is the last quarter for the incremental workforce investment.

Could you talk about what that headwind has been, if that's been different quarter to quarter, and maybe what we should expect a headwind would look like going forward?.

Yeah, Will. The overall incremental investments are about $9 million a quarter in the first quarter and in the second quarter. And if you recall, we started that last year in Q3, so we shouldn't have incremental investments in the back half of the year.

So, the run rate investments are about $35 million, and if you recall, we did about $20 million last year, so we should be wrapping on that with no problem..

Okay, I appreciate that. And, just following back up on the Cheddar's comment, it sounds like you're pretty pleased with what's happening behind the scenes, and obviously, you want that to come through on the top line eventually, but I'm curious if you think at some point that may require additional investment of some sort.

It sounds like much of that has been made, but just curious as we think about these investments going away if there might be needing to replace that or not..

No, I don't think there's anything additional from a big investment standpoint. We do think that some of the very large brands that are promoting real heavily right now and advertising is having a little impact on Cheddar's top line.

So, we're trying to figure out maybe how we might market the business maybe a little bit differently to increase our share of voice where everybody else is out there pretty loud right now, but we don't see anything major. One of the things that's also exciting I didn't mention is cost managements improving dramatically with our tools in place.

We're seeing food waste come down, we're just getting a labor management system up and running, so we think that we're going to see some cost benefits as we move forward in the next 12 months. The teams are really doing a good job in getting accustomed to our tools, so...another thing that we're excited about..

Thank you. The next question comes from David Palmer with RBC Capital Markets. You may go ahead..

Hi. Quick follow-up on the price promotions over at Olive Garden. You mentioned that heading into the back half, you have some full-price promotions coming up and you feel good about those.

Are you generally implying that you’re going to have a little bit more comparable promoted price points and perhaps a little bit different and more even balance between traffic and check in the coming months?.

I don't know if I, my point that I was trying to make there was the big change we made with our chicken alfredo dish and the positive mix change that had in Q2 was primarily because we had lower-priced promotions.

As the promotional calendar goes up and the price point goes up in the third and fourth quarter, you’ll have less trade, the trade will be less beneficial. And so, that was the point that I was trying to make. I feel good about our promotional calendar in the back half of the year.

We’re usually not, we’re usually starting at price point to headline our promotions versus the deep value promotions.

I think lastly on that question, David, as we try to develop our incentive strategy in the back half of the year, these levers are pretty easy for us to pull and we can do it pretty quickly, but if demand stays strong in the industry and we can achieve our same-restaurant sales targets.

We will still not be using this lever a whole lot in the back half of the year..

Got it. And just a quick question on delivery you can see everybody’s grabbing a digital delivery partner these days. You still have double-digit off-premise growth at Olive Garden, but how is your thinking shifting with regard to delivery for those not catering delivery, but ultimately, individual delivery for Olive Garden? Thanks..

David, I have really no update on third-party. We continue to test a small group of restaurants and monitor the results. All I’ll say is the economics of this have to change along with the execution. The execution of a third party has to improve dramatically.

The satisfaction of the guest is not great using these services and we’re focused on creating a great off-premise experience for our consumer. We’ll encourage them to come pick it up. We’re still growing at a good rate. I really like what’s happened in that business. The satisfaction of our consumer using that experience is really high.

And so at this point, we have no additional update really on third-party..

Thank you. The next question comes from Jeffrey Bernstein with Barclays. You may go ahead..

Great. Thank you very much. Two questions. Gene, one the industry, the competitive landscape, I’m surprised to hear you say that despite the broader industry being better that you think you’re seeing maybe a ramp up in discounting of the competition.

Just wondering if your expectation over the next couple of quarters maybe is that you would start to expect the industry to pull back on the incentive similar to what you did, and perhaps where you see the industry comp over the next six months relative to what seems to your forecast to be in the 2.5% range. And then, I had one follow-up..

Yeah. I mean, as we look at what the industry’s doing, we see increased advertising spending significant increase in advertising spending. The products that they’re promoting are pretty aggressive in price and therefore, you’re seeing check average for the industry get below 2%. We haven't seen that in a long time for any extended period of time.

And so, we'll continue to monitor -- this is putting tremendous pressure on their margins, and we'll see how long they're willing to eat into their margin growth to have this kind of intensity out there. We think we're nimble enough that we can adjust to what's happening, and it'll be interesting for us to see what they do.

We feel we have levers that we can pull, and we can compete effectively against them. Right now, we think the consumer is in a really good place. We're operating at our lowest unemployment in 50 years; confidence remains high. As we watch the guests, they're continuing to buy across our menus.

They're adding on to their entrees, they're buying up -- it feels like it's a really good environment, so we think it's prudent to have the strategy that we have right now..

Understood. And then, in terms of future potential tailwinds, there's a lot of talk about expectations in terms of tax refunds over the next few months, which I guess could be a significant tailwind for some, maybe not for others.

I'm just wondering -- with your diverse brands across the consumer income spectrum, what are your thoughts in terms of how tax refunds will have an impact? Separately, I think fiscal '20 for you has a 53rd week. I was wondering if you would offer any directional color on the potential EPS impact. Thank you..

I'll let Rick answer the 53rd week. That's too complex for a CEO.

So, what was the first...?.

The tax refund potential impact across your brands..

So, tailwinds -- Jeff, we do know that there's going to be -- we've heard any number -- $60 billion out there in the first quarter of tax refunds. We'll see how that plays out. Obviously, that's a positive. I think that...we don't have the same tailwinds that we had going into our fiscal '19 -- the first half.

In the second half -- we got some on the first half -- I just think overall, the biggest tailwind of all is sub-4% unemployment, which is a real positive. As long as the consumer feels confident that they're going to keep their job and that wages are going to grow, I think that the restaurant environment should be pretty positive..

Yeah, and as it relates to the 53rd week, that is our last fiscal week of next year, and it's roughly about a 2% increase in EPS. It's one week out of 52, and that's really how it flows..

Thank you. The next question comes from Matt DiFrisco with Guggenheim. You may go ahead..

Thank you. I just have a follow-up question on some of the margin questions here. I know you had on the slide here on your presentation the labor, and you broke that down -- that's very helpful.

Just curious, Rick -- on the 1.2% inflation for Q2, what's embedded in your outlook for the remainder of the year?.

For the remainder of the year, we still expect total labor to be about 4.5%-5.5% for the year, so if you just get the midpoint of that about 4% -- which is what we've been running, so, as we said, a little over 3.5% for the last quarter, so we don't expect it to dramatically change, and we haven't changed our outlook for overall inflation.

Our overall total inflation outlook is still 2%, which includes labor and commodities..

Okay. So, when you look at the labor line when you have the 1.2%, you're netting that number, then.

So, the 4% -- you're just netting that versus the comp, basically?.

No, the 1.2% is the labor percent impact of inflation..

Got it..

So, that was the impact, and again, with a little over 3.5% labor inflation, that shows up to 1.2% labor percent..

Understood.

And then, just looking at the productivity in Other, assuming that those are related more so to ongoing things and momentum behind the business, or were those somewhat related to specific to this current period with less incentives and less discounting, or are those new processes in place that you think continue throughout the year?.

No, those are things that we've been working on for the last few years. All of the productivity enhancements -- as you remember, we've done a lot of work at Olive Garden, we've been simplifying the menu at LongHorn, we're starting to do some work at Cheddar's. We would expect that our productivity would continue to improve.

Whether it's 40 basis points going forward, or 20, or 60, I can't answer that question, but we do expect to continue productivity improvements going forward..

Thank you. The next question comes from Sara Senatore with Bernstein. You may go ahead..

Thanks. I have a question on Olive Garden comps, and then a quick follow-up on the other segments.

On Olive Garden, obviously, you seem very confident in the comp drivers through the year, but I wonder if you could put it into context in the last few years in the sense that you noted 17 quarters of positive comp, which roughly corresponds to when you took the helm and refocused on value.

So, is there any risk that there was a lot of low-hanging fruit on that front, and then, perhaps it just gets more difficult from here, or just about basic blocking and tackling in the sense of improvement in customer scores or satisfaction is somewhat asymptotic and you've kind of leveled out? Just trying to get a sense of how you think about this run of very strong comps in historical context.

And then, again, I have a follow-up question..

Good morning, Sara. You brought up a lot of good points there. We have done a lot over the last four years with Olive Garden to reestablish the brand as the value leader. However, this still -- I still believe today there's a lot of opportunity for us to improve across our fleet of restaurants.

We think that scale gives us a competitive advantage in Olive Garden. We're able to continue to find productivity enhancements. We think there are future investments that we can continue to make to increase value.

I think the big difference between where we are today in this cycle versus where we were seven or eight years ago when Olive Garden was into a good growth cycle is that we're making investments back into the business.

When I studied the history last time, Olive Garden started to drift maybe a little upscale and really didn't focus on what gave them the great advantage.

I think the decision the management team made to increase the chicken alfredo portion by 50% in protein is an example of what we'll continue to do to be able to increase value and drive guest counts and sales into the future. We think we have some other opportunities. We're being innovative from a marketing standpoint.

I think our marketing is as relevant today as it has been in a long time. And, more importantly, I think the younger consumer -- the millennials -- they really enjoy Olive Garden. They enjoy the value in it.

They enjoy the communal piece of it, of coming together and enjoying a meal, so I think it's really well positioned, and we're going to continue to double down on simplification and value. And so, we think that we’re well positioned to continue to compete effectively into the future..

That’s very helpful, thank you. And then, just on the other business segment, I notice that Yard House is obviously small. It had a negative comp in the quarter, which we hadn’t seen in a while.

I was just trying to understand if there’s something about varied menu that’s particularly competitive, or is there any risk that maybe Cheddar’s is taking managerial attention or resources away from the other brands. Just trying to understand if there’s anything to read into that..

Yeah. Let me be very clear about this. Cheddar’s is not taking any managerial focus away from any of the other brands. I mean these other brands have full presence, full management teams that have nothing to do with Cheddar’s. I would just say on Yard House, we had a positive two year comp. We had a couple high-volume restaurants that had some pressure.

For those who are familiar, the Link in L.A. had scaffolding all around our building as they were building a zipline in from some place to drop people off in front of our restaurants, which had an impact. California was a little soft. We had some restaurants in Florida that were a little soft toward the end of the quarter.

I’m focused on total growth on Yard House, and we’re opening a lot of restaurants, which also creates some churn inside the system. Overall, Yard House is an extremely strong brand and I do think that from time to time, we’ll fluctuate, especially with some of these high-volume restaurants. They can swing the comp a little bit.

But, I feel really good about where Yard House is positioned. We’re opening some great restaurants and I’m really excited about their future..

Thank you. Our next question comes from Peter Saleh with BTIG. You may go ahead..

Great, thanks. Gene, I just wanted to come back to the Cheddar’s commentary.

Is this the first quarter that you’re seeing the guest satisfaction scores improve at Cheddar’s and is this the highest they’ve been since you guys acquired the brand?.

They’ve been improving for the last six months, but right now they are at the highest they’ve been since we acquired them. Our value ratings are still extremely strong in this business. And so, we feel really good about where we are.

We know hour-to-hour today, we’re running these restaurants better than we were six to nine months ago, and we can see it in the results..

And then historically, when you look at your other brands, what has been the lag between seeing the improving guest satisfaction scores and then starting to see the top line starting to trend better as well?.

Well, I’m not so sure that there’s a perfect correlation in any of that because there’s marketing; there’s other things in the environment. All I know is that in all my years of experience, once we get the leading indicators going in the right direction, sales will follow..

Thank you. The next question comes from John Glass with Morgan Stanley. You may go ahead..

Hi. Thanks very much. First, just on the off-premise business, it’s been growing strongly for a number of quarters. It didn’t grow quite at the same rate quarter.

Is that just a function of the base effect, it’s just a bigger business, so compounding is harder? Did some of the changing in promotional activities maybe impact that business as well as the dine-in business? Can you just talk about your current views on the incrementality of that business? Is that still a very strong different customer, different occasion, or how do you measure incrementality of the off-premise business?.

Yeah. Hi, John. I think the answer to your questions are yes and yes. I think as this gets bigger, it’s going to be harder to continue to grow it at a compounded growth rate. I’m thrilled with 10%. This is a big business now. Yes, we did pull back on some incentives that had some impact on off-premise.

This time of year, off-premise gets to be pretty strong, so we definitely want to make sure that we're taking advantage and that we're getting full price. The incrementality of this business is always hard to really measure.

We do know by looking at the demographics of the people that are using us that a lot of these off-premise customers are only off-premise customers, and they don't really dine inside an Olive Garden all that much. They're probably using a chef-driven restaurant or a higher-end restaurant. So, we believe all that’s incremental.

But, the bottom line the way I think about it is you're in the top of mind for that occasion, and you need to win the occasion -- as many occasions that you possibly can, and whether that impacts you into the future -- I don't know, I just think those are two totally different occasions, and what we work hard at is being top of mind in each of them, and we'll never know for sure what's incremental and what's not.

We just know we want to play, we want to be very good, the best at off-premise, and try to create a frictionless experience. We want to be the very best of in-restaurant that we can possibly be, and that's what we're working hard at..

Thank you. And then, just to follow up, what is the current state of the estate for the two major brands? We've seen a lot of capital go into the limited-service restaurant industry. I think some of our competitors are continuing to upgrade their assets.

How do you feel relative to the competitive set and relative to your own expectations about the estate, both at Olive Garden and LongHorn, and remodel possibilities if there is one over time?.

We feel pretty good. We've been working hard at the Olive Garden. We've done approximately 230 remodels to date in the last four years; we did 28 in the quarter. We've got a few more to do -- we've got another 70 to do to get that fleet up to speed.

Then, we're going to start just freshening the Farm Houses, which will not take nowhere near the capital that the RevItalia restaurants needed, so we feel like that fleet's in really good shape. We think LongHorn has got a little bit more of a timeless décor.

The capital that we're putting into LongHorn right now is really to upgrade the off-premise experience, so we're putting a little bit of capital in there to create a space for the consumer to be able to make the experience a little less frictionless than it has been in the past. So, we feel good. We think our buildings have stood the test of time.

The other thing I would add -- and, this is pre-this management team, and we've been able to continue it on -- is Darden has always done a great job with its maintenance capital and keeping its restaurants looking fabulous.

There's times I walk into an Olive Garden that's 25 years old that really hasn't been remodeled recently, and I'll look around and say, "Boy, this place looks great. We've got good furniture, we're well painted, it looks clean." And so, our team has done a great job keeping these buildings in outstanding condition..

Thank you. The next question comes from Greg Francfort with Bank of America. You may go ahead..

Hey. I had two margin questions. The first one is for Rick. I think in the first quarter, you had said wage inflation was 5%, and this quarter, it was just over 3.5%.

Are those comparable numbers, and what are you seeing in terms of that step-down in terms of your wage pressure?.

What we said in the first quarter, I believe, is that hourly wage inflation was about 5%, but total inflation was closer to 3.5%, so these are comparable -- a little over 3.5% is very comparable to what we've been seeing before..

Understood, thanks. And then, Gene, one thing we've seen that I think has been a multi-year story for Olive Garden and Darden has been marketing dropping as a percent of sales.

I guess, what's the strategy there, and what level are you looking to see or trying to get to in terms of marketing, and where are you cutting back, and where are you reinvesting?.

You broke up a little bit.

I hate to ask -- can you repeat the question?.

No worries. Marketing as a percent of sales has been dropping for a few years.

What's the overall strategy, what's the long-term goal, where are you trimming back, where are you reinvesting on that front, and where do you see that going over the long term?.

Yeah. First of all, it's been dropping at the Darden level because of brand mix. As the smaller brands start to grow with a little less marketing spend, it's levering that down a little bit. We've worked hard over the last four years to decrease our non-working media.

That was an area I thought that was a big opportunity inside Darden, so we've been able to eliminate some of those costs, and some of those non-working costs we transferred to working, and some of them we've been able to just put back into the P&L.

We're going to continue with our big brands really honing in our advertising, improving our messaging, getting our messaging in the right place at the right time. And so, we think that our current spending levels are appropriate to support these businesses.

I think that's why new unit growth in Olive Garden is so important, because we get to leverage the advertising spend. In some situations, it's the same for Olive Garden, and we'll continue to find ways to appropriately spend for our smaller brands..

Thank you. Our next question comes from Chris O'Cull with Stifel. You may go ahead..

Thanks, good morning. Rick, the earnings guidance seems to imply the growth in restaurant-level costs per operating week would be at a greater rate in the back half of the year than what you saw in the last quarter.

I understand commodity costs may be higher, but why would labor costs and restaurant expenses per operating week start to grow at a faster rate?.

Well, this quarter, the restaurant expenses actually were flat, so they didn't grow at all. So we would expect normal inflation to happen in the restaurant expense line. As we've said, we've had very minimal inflation on the food and beverage line, and we expect our inflation to tick up in the back half of the year. We're also making investments.

Gene mentioned the investment that Olive Garden made in the chicken alfredo. And finally, we've got a little bit of timing in the marketing line. We would expect our marketing as a percent to lever year-over-year, but it might be a little bit higher than it was in the last quarter..

Okay, that's helpful.

Gene, were the leadership Cheddar's recruited from within Darden or outside the company? And maybe can you discuss if you've made any changes to the operators' bonus metrics or how they're incentivized?.

Everybody that's on the Cheddar's management team in senior levels are long-term Darden employees who understand our systems, understand our thought process, understand our branding.

And, as far as bonus, Cheddar's this year is on the bonus program that all our other restaurant brands are on for the first time, which heavily incentivizes sales growth and profit growth..

Thank you. The next question comes from Andrew Strelzik with BMO. You may go ahead..

Hey, good morning. Two questions for me. Last quarter, you mentioned an improvement in the retention rates at Cheddar’s and it sounds like maybe they took a step back this quarter. And I’m just wondering what are some of the challenges that you’re finding with respect to the HR metrics and retention specifically at Cheddar’s.

And number two, we all know about the cost environment in the restaurant space and you mentioned about the importance of advertising budgets with respect to driving sales. So, I’m just wondering if you could comment a little bit more about maybe what you’re seeing in the independent restaurants.

Are you seeing accelerated closures given the cost side or any change in behaviors there? That would be a helpful color..

Okay. On Cheddar’s retention, it hasn’t gone backwards; it hasn’t made the improvement I was hoping for. I think what we’re struggling with both at the team member and management level here is expectations, right. We’ve come in, we’re starting to put in some structure and some processes, the expectations are a little higher.

And so, when you go through this kind of turnaround, you do end up losing some management along the way. A lot of some, of the management that was in the system was tethered to the old management. They had worked with them before and when you make those changes those folks leave.

So, I’m confident that we will start seeing the Cheddar’s human resource metrics start to come toward the Darden norms. And when we see that, I think our operations will improve. It took us a couple years to make those improvements happen in Yard House. And I expect that we’ll make progress here over the next 12 months.

Its basic things and I know I keep coming back to this but we didn’t have an effective way to train new employees. We don’t have a great certified trainer program that we have in all of our other businesses. Now, we’re developing that and we’re implementing that. We have to ensure that everybody that we hire goes through a great training program.

On the independent restaurant scene we know. Again, the CREST data has been saying for years that large brands are taking share from smaller brands and independent restaurants.

We’ve seen some closures out there for independent restaurants but as I said before most of the time once a restaurant is a restaurant, it stays a restaurant, it just flips its name and goes down for two or three months, and then someone else comes in and tries to make it work.

So, again we’re in an up cycle which is when a lot of people think they want to be in the restaurant business. So, independents are there. I think it’s tough for them to compete in this environment..

Thank you. The next question comes from Brandon Sonnemaker with J.P. Morgan. You may go ahead..

Great. Thanks for taking the question. Just to clarify, labor costs in the quarter, it came in better than expected relative to our model. Obviously, you experienced 50 bps of labor deleverage this quarter. Once the 30 bps of workforce investment rolls off, you mentioned the productivity savings will continue to improve.

Just to be clear, is it your expectation that the amount of labor deleverage moderates in the back half?.

Yes, just a little bit..

Okay, great. And then, you mentioned two promotions during the quarter, Buy One, Take One and Never Ending Pasta. I believe these were also run during the same period last year. Would you mind sharing if these were run for less weeks relative to last year.

And could you also clarify your expectation for the back half of the year? Will you have more or less promotions relative to last year?.

Yeah. You broke up again for some reason.

Could you repeat that question?.

Yeah. Just Buy One, Take One and Never Ending Pasta Bowl during the quarter -- I believe those were run during the same period last year. Would you mind sharing if those were run for less weeks relative to last year? And then, your expectation for the back half, whether promotions will be up or down relative to last year..

Buy One, Take One and Never Ending Pasta Bowl were the exact same as last year, and we expect our promotional calendar to mirror pretty much what we did last year in the back half of the year..

Thank you. The next question comes from Nicole Miller with Piper Jaffray. You may go ahead..

Good morning.

I wanted to understand a little bit more about the relatively higher-end concept, so could you talk about Cap Grille, Eddie V's, and the performance there? Is that driven mostly by check or traffic? And then, the second part of the question -- is it coming from the main dining room, or is there something in private dining that would account for those trends? And then, anything you'd be willing to share on the holiday progression so far? Thank you..

Yeah. We had another strong quarter in our upscale businesses. Capital Grille had a great quarter, continues to focus on driving guest counts. I would say there's guest counts and check in those numbers. Capital Grille is adding a little bit of capacity in a few restaurants, which has been helpful.

We've got a lot of restaurants at full capacity, so we're managing full capacity and price, but the business is performing well. We're making meaningful progress in Eddie V's. We're real excited about the progress we've made there, especially on the income statement.

That P&L is starting to look more like a Capital Grille P&L over time as the cost structure comes into line, so we think there's tremendous upside there. We've got a pretty good pipeline for Eddie V's, and we've got some good pipeline for Capital Grille in the future, which we'll discuss in an upcoming call, so we're excited about that.

I'm not going to talk about private dining in December. Just know those businesses are healthy; they're running good. Let me sneak in a comment here about Seasons also because we're making great progress in Seasons. Although same-restaurant sales were down for the quarter, guest counts were positive.

We've been making the strategic choice to bring check average down a little bit. And, I'm also thrilled with -- John Martin's overseeing that business right now, and he's taken a lot of costs out of the business that needed to be taken out, and year-over-year profitability is up. So, I'm excited about the direction of Seasons 52.

We've got a good pipeline there, and I think that business is well positioned to really start to make a meaningful growth push into the future..

And, just a quick follow-up -- when you talk about capacity, do you make additions at the bar, the main dining room, or private dining?.

We've closed a few patios, which have given us an extra 25 seats in restaurants, so that gives us full utilization of that space year-round..

Thank you. Our last question comes from Stephen Anderson with Maxim Group. You may go ahead..

Yes. This is a follow-up to Nicole's question on Capital Grille. Have you seen any kind of -- with the recent volatility in the financial markets, have you seen any declines in the business in some of the walk-in business for Cap Grille, and maybe to a lesser extent, at Eddie V's? Just wanted to see your thoughts about that..

No, Stephen. We haven't seen any of that. Again, 3.7% Cap Grille for the quarter -- it's been strong, and we've got some restaurants in New York City, and it's been strong, so we haven't seen anything correlated to what's going on in the markets..

Thank you. And, there are no further questions. I'll now turn it back to Kevin Kalicak for any closing remarks..

Thanks again, Sue. That concludes our call, and I'd like to remind everyone that we plan to release third-quarter results on Thursday, March 21st before the market opens, with a conference call to follow. Thank you for participating in today's call..

Thank you. That does conclude today's conference. All participants may disconnect..