Darden Restaurants Inc. (DRI) Q2 2021 Earnings Call Transcript

Darden Restaurants Inc. (NYSE: DRI) Q2 2021 earnings call dated Dec. 18, 2020

Corporate Participants:

Kevin Kalicak — Senior Director – Investor Relations

Gene Lee — President & Chief Executive Officer

Rick Cardenas — Senior Vice President, Chief Financial Officer

Analysts:

David Tarantino — Baird — Analyst

Chris O’Cull — Stifel — Analyst

Andrew Charles — Cowen — Analyst

Brian Bittner — Oppenheimer & Co. — Analyst

Eric Gonzalez — KeyBanc — Analyst

Christopher Carril — RBC — Analyst

Jeff Bernstein — Barclays Capital — Analyst

Peter Saleh — BTIG — Analyst

John Glass — Morgan Stanley — Analyst

Dennis Geiger — UBS — Analyst

Jeff Farmer — Gordon Haskett — Analyst

Lauren Silberman — Credit Suisse — Analyst

Jon Tower — Wells Fargo — Analyst

Nicole Miller — Piper Sandler — Analyst

David Palmer — Evercore ISI — Analyst

Nick Setyan — Wedbush Securities — Analyst

Andrew Strelzik — BMO Capital Markets — Analyst

Andy Barish — Jefferies — Analyst

Brett Levy — MKM Partners — Analyst

John Ivankoe — JP Morgan — Analyst

Gregory Francfort — Bank of America Merrill Lynch — Analyst

Jared Gardner — Goldman Sachs — Analyst

James Rutherford — Stephens Inc — Analyst

Brian Vaquero — Raymond James — Analyst

Jake Bartlett — Truist Securities — Analyst

Priya Ohri-Gupta — Barclays — Analyst

Presentation:

Operator

Ladies and gentlemen, thank you for standing by, and welcome to the Fiscal ’21 Second Quarter Earnings Conference Call. [Operator Instructions]

I would now like to turn the call over to your speaker today, Kevin Kalicak. Thank you. Please go ahead, sir.

Kevin Kalicak — Senior Director – Investor Relations

Thank you, James. 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 will include forward-looking statements as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the company’s press release, which was distributed this morning and in its filings with the Securities and Exchange Commission.

We are simultaneously broadcasting a presentation during this call, which is posted in the Investor Relations section of our website at darden.com. Today’s discussion and presentation includes certain non-GAAP measurements, and reconciliations of those measurements are included in the presentation. We plan to release fiscal 2021 third quarter earnings on March 25 before the market opens followed by a conference call.

This morning, Gene will share some brief remarks about our quarterly performance and business highlights. Rick will then provide more detail on our financial results and share our outlook for the third quarter. And then Gene will share some closing comments.

Now, I’ll turn the call over to Gene.

Gene Lee — President & Chief Executive Officer

Thank you, Kevin, and good morning, everyone. As — we continue to operate in a very fluid environment, and I was pleased with our ability to once again deliver strong profitability in an unpredictable sales environment. Total sales from continuing operations were $1.7 billion, a decrease of 19.4%, same-restaurant sales decreased 20.6% and diluted net earnings per share from continuing operations were $0.74.

The last two weeks of the quarter negatively impacted our same-restaurant sales by approximately 200 basis points as we quickly went from 97% of our dining rooms being opened in the middle of the quarter to only 80% being open at the end of the quarter. As a reminder, Thanksgiving shifted back into our second quarter this year, and we believe just modified their behavior in advance of the holiday.

During the quarter, we remain focused on four key priorities. The health and safety of our team members and guests, in restaurant execution in the complex operating environment, deploying technology to improve the guest experience and transforming our business model. The health and safety of our team members and guest has always been our top priority. We continue to follow latest guidance from the CDC as well as our own enhanced safety protocols to create a safe environment for everyone. This includes daily team member health monitoring, requiring mask for every team member, enhanced cleaning procedures and social distancing protocols. I’m proud of the commitment our teams make every day to keep our guests and each other safe.

Second, our restaurant teams remain focused on our Back-to-Basics operating philosophy to drive restaurant level execution that results in great guest experiences whether our guests are dining with us or ordering curbside to-go. Our teams have been operating in this environment for 10 months, and they have become very adept at adjusting to the ever-changing COVID restrictions, but it’s still not easy. That’s why we remain committed to our simplified operations, including streamline menus, processes and procedures which continue to strengthen our execution and our guest satisfaction metrics confirm that our restaurant teams are doing a great job delivering exceptional guest experience in this challenging environment.

Third, we continue to deploy technology to improve the guest experience. Our brands benefit from the technology platform Darden provides, allowing each of them to compete more effectively by harnessing the power of our digital tools, including the 25 million email addresses in our marketing database. During the quarter, Olive Garden LongHorn Steakhouse launched refresh websites and all our brands continue to use their digital storefronts effectively. More than 55% of our off-premise sales during the quarter were fully digital transactions where guest ordered and paid online. And at Olive Garden, 20% of our total sales for the quarter were digital.

During the quarter, we also rolled out Curbside I’m Here, which allows our guests to easily notify the restaurant that they’ve arrived to pick up their curbside to-go order by simply tapping on a link embedded in a text message. As a result, our operators are spending less time on the phone and more time focused on ensuring orders are accurate and on-time, which is leading to improved guest satisfaction scores. We also introduced Wait List Visibility, allowing guest to see their place on the waiting list using their phone regardless of whether they’ve checked in online or in person. And we’re working on several other initiatives, including streamlining our online checkout process and adding additional mobile payment options to provide even more convenience for our guest. We continue to accelerate our digital journey, and I’m encouraged by the progress we are making.

Finally, we continue to view this environment as a rare opportunity to transform our business model for long-term growth. We continue to make investments in our team members, product quality and portion sizes to ensure we emerge even stronger and better positioned to grow share.

Olive Garden same-restaurant sales declined 19.9% as capacity restrictions continue to limit their top-line sales. Olive Garden began November with 56 dining rooms closed, and that number accelerated to 208 by the end of the month. However, they were able to deliver strong average weekly sales during the quarter of more than 73,000 per restaurant, retaining 80% of last year’s sales.

Olive Garden also continue to realize operational efficiencies and strengthened margin as a result of their simplified menu and the elimination of promotional activity, including discounts. In the current limited capacity environment, their reduced marketing spend was focused on showcasing the convenience of their off-premise experience, while featuring compelling core menu items rather than limited time promotions. This led to increased segment profit margin, while making additional investments in abundance and value.

Additionally, off-premise sales grew 83% in the quarter, representing 39% of total sales. Enabled by the technology investments I mentioned earlier, Olive Garden improved their to-go experience and achieved another all-time high in guest satisfaction for having orders ready to pick up at the time promised. Finally, Olive Garden successfully opened three new restaurants in the quarter.

LongHorn Steakhouse had another solid quarter. Same-restaurant sales declined 11.1%. Almost 20% of their restaurants grew same-restaurant sales in the quarter. They also successfully opened three new restaurants during the quarter. The LongHorn team remains laser focused on their strategy of increasing the quality of their guest experience, simplifying operations to drive execution and leveraging their unique culture to increase team member engagement. During the quarter, the team did a great job of managing controllable costs while their simplified menu drove improved labor productivity. Finally, LongHorn grew off-premise sales by more than 175%, representing 22% of total sales.

Now I’ll turn it over to Rick.

Rick Cardenas — Senior Vice President, Chief Financial Officer

Thank you, Gene, and good morning, everyone. For the second quarter, total sales were $1.7 billion, a decrease of 19.4%. Same-restaurant sales declined 20.6%, EBITDA was $206 million and diluted net earnings per share from continuing operations were $0.74.

Our second quarter start was encouraging with weekly sales building on results from the first quarter. However, as COVID-19 cases began increasing in November and many state and local governments re-imposed dining room restrictions, the last two weeks of the quarter trended down significantly. We estimate that this downward shift in sales over the last two weeks negatively impacted operating income by approximately $15 million.

Turning to the P&L. Food and beverage expense was 30 basis points higher than last year, primarily driven by investments in food quality and increased to-go packaging. Restaurant labor was 140 basis points lower than last year with hourly labor improving by over 310 basis points, driven by operational simplification. This was partially offset by deleverage and management labor due to sales declines and $3 million of emergency pay net of retention credits as we reinstated our emergency pay program for our team members impacted by dining room closures.

Restaurant expense per operating week was 13% lower than last year, driven by lower repairs, maintenance and utilities expenses. However, sales deleverage resulted in restaurant expense as a percent of sales coming in 170 basis points higher than last year. We reduced marketing spend by almost $50 million this quarter with total marketing 210 basis points favorable to last year.

Restaurant level EBITDA margin was 17.9%, 140 basis points above last year despite the sales decline of 19%. General and administrative expenses were negatively impacted by $8 million of mark-to-market expense on our deferred compensation. This is related to significant appreciation in both the Darden share price and equity markets this quarter. As a reminder, due to the way we hedge this expense, it is mostly offset in the tax line.

Page 12 of this quarter’s presentation illustrates the $8.1 million reduction of operating income and corresponding operating income margin reduction of 50 basis points from mark-to-market expense. Our hedge reduced income tax expense by $6.4 million, resulting in a net mark-to-market reduction to earnings after-tax this quarter of $1.7 million. The effective tax rate of 8.3% this quarter was lower by 5.1 percentage points due to the tax benefits from the deferred compensation hedge I just mentioned. After adjusting for this, the normalized effective tax rate for the second quarter would have been 13.4%.

Looking at our segment performance this quarter. Olive Garden, LongHorn Steakhouse and our Other segment, all saw a segment profit margin increase despite sales declines. This was driven by our continued focus on simplified operations, which significantly reduced direct labor and lower marketing expenses. Our Fine Dining segment profit margin of 18.8% was impressive, although below last year, driven by a 30% sales decline.

We ended the second quarter with $770 million in cash and another $750 million available in our untapped credit facility, giving us over $1.5 billion of available liquidity. We generated over $150 million of free cash flow in the quarter and improved our adjusted debt to adjusted capital to 58% at the end of the quarter, well within our debt covenant of 75%. The board declared a quarterly cash dividend of $0.37 per share, 50% of our Q2 diluted EPS within our long-term framework for value creation. We will continue to have regular discussions with the board on our future dividends.

As I mentioned earlier, the quarter started with sales building upon first quarter results. As dining room closures increased, these improving sales trends reversed. As of today, we have approximately 77% of our restaurants operating with at least partial dining room capacity versus a peak of 97% in the middle of the second quarter. Moving forward, we may experience further dining room closures and increasing capacity restrictions in the third quarter.

As you may recall, in our last earnings call, we mentioned that the third quarter is historically our peak seasonal sales quarter, driven by the Christmas, New Year’s and Valentine’s Day holidays as well as travel time during this time of year. At that time, we also stated that it will be more difficult to increase on-premise average unit volumes if capacity restrictions do not ease. Current dining room closures, capacity restrictions and reductions in travel will exacerbate our same-restaurant sales comparison to last year due to the higher sales — seasonal sales from last year. Additionally, there are still uncertainties surrounding further capacity limitations and dining room closures and the duration of these impacts.

Given all these factors, we are providing a broad range of expectations for the third quarter. We expect total sales to be between 65% and 70% of prior year levels, resulting in total sales of between $1.53 billion and $1.65 billion, EBITDA between $170 million and $210 million and diluted net earnings per share from continuing operations between $0.50 and $0.75 on a diluted share base of 132 million shares.

With dining rooms closures increasing, we are focusing on our playbook of expense management and off-premise sales. While there is encouraging news on the broad distribution of COVID-19 vaccine in the spring, we currently don’t anticipate meaningful sales trend improvements until some time in the fourth quarter of fiscal 2021. Despite the short-term headwinds we faced with sales trends, operational complexity and impacts to our team members, I’m confident we are making the right decisions for the long-term to create a better guest experience and strengthen our business. And consistent with our messaging last quarter, we continue to believe we can achieve 100% of our pre-COVID EBITDA dollars at approximately 90% of pre-COVID EBITDA — pre-COVID sales, while continuing to make appropriate investments in our business.

Now with that, I’ll turn it back to Gene.

Gene Lee — President & Chief Executive Officer

Thanks, Rick. This morning, we also announced that Rick will become our President and Chief Operating Officer. Rick’s career represents what our industry is all about. He joined Darden as a Buster at Red Lobster 1984 and has worked extremely hard mastering many functions. On January 4, he will become the President of the world’s largest full service restaurant company. He’s been a great partner to me over the last five years, and I look forward to working side-by-side with him in his new role.

Additionally, we announced that Raj Vennam will become our Chief Financial Officer. Raj began his career at Darden in 2003, and has done an exceptional job in every role he has held. His promotion recognizes the significant contributions he has made to our individual brands as well as the greater organization. With a brilliant mind and a keen understanding of our industry, Raj is the perfect person to take over for Rick. I’m excited to see him expand his role in the company as CFO. Rick and Raj are here with me in the room today, and I want to take this opportunity to congratulate both of them.

I want to close by recognizing our team members in the restaurants and at the support center. I can’t say enough about the dedication they’ve demonstrated throughout the year. Their focus, commitment and determination is exceptional. With multiple jurisdictions implementing dining room closures, we know many team members will not get the hours they needed during this holiday season. That is why we have reintroduced our emergency pay program that will provide three weeks of emergency pay to team members who are furloughed from their restaurant when dining rooms are closed.

Our [Technical Issue] our greatest competitive advantage, and we are committed to taking care of them. On behalf of the management team and the board of directors, I want to thank all our team members for your tireless effort to serve our community by providing the comfort of a warm meal. Thank you for going to the extraordinary lines to take care of our guests and each other. I wish you all a safe and a happy holiday season.

And with that, we’ll take your questions.

Questions and Answers:

Operator

Thank you. [Operator Instructions] Our first question comes from the line of David Tarantino with Baird. Go ahead please. Your line is open.

David Tarantino — Baird — Analyst

Hi. Good morning. First, Gene, congratulations on being elected to chair of the board. And Rick and Raj, also congratulations on your promotions. Very well deserved. Gene, my question is about those changes. I wanted maybe to hear your thoughts on how your day-to-day involvement will change as a result of Rick taking on the President and COO role? And just your thoughts on whether investors should interpret this as a signal that you’ll be less involved in the business going forward?

Gene Lee — President & Chief Executive Officer

No, absolutely not. I plan on being as involved operationally there, that’s my strength. I mean, I see this as a opportunity to create growth for both Rick and Raj. I think it’s going to give Rick an opportunity to understand operations more deeply. Obviously, he has a great relationship with our presidents today, but I think it’s important for him and his development to get a little deeper into the operations and get to know and oversee a lot of the other people that make things happen, just not the president.

I also think it’s important for him to partner with me on making sure that we are leveraging all the non-consumer-facing parts of our business and to see if there is an opportunity to continue to find additional synergies to enable us to further invest in our business. So I see this as an opportunity to work with people that deserve the opportunity to grow. And more importantly, have an extra set of hands to be able to do some things and look at things maybe a little bit differently.

Giving Rick the freedom and the time to look across the organization and see where we can pick up some additional synergy I think is a good thing. I think that I tried to do that even in a position that was in, but I know there is a limit to the amount of time you have. I think giving Rick that time will be very beneficial to the organization as we move forward.

So I’m excited about these changes. It has — I don’t think anybody should read anything into it. I am going to still be heavily involved in food servicing atmosphere, just the way I am today, and I look at it as a great opportunity. I also look forward to working with Raj and giving him a chance to develop into a world-class Chief Financial Officer, and I think that’s going to be really exciting. So don’t read anything into it other than we’re creating growth for our people, creating new opportunities and we have a few things that we want to get done with this change.

David Tarantino — Baird — Analyst

Sounds great. Congrats again to all of you.

Operator

Our next question comes from the line of Chris O’Cull with Stifel. Go ahead please. Your line is open.

Chris O’Cull — Stifel — Analyst

Thanks. Good morning, guys. Gene, how is the company thinking about returning to a normalized marketing spend? Meaning, does the company plan to wait until government restrictions on dining usage are lifted or does the company plan to see what kind of pent-up demand there is going to be as consumer mobility increases to determine how much advertising utilized? I’m just trying to get a sense for how you guys are thinking about that.

Gene Lee — President & Chief Executive Officer

Yeah. We have no definitive plans to put back marketing at this point in time. Obviously, we have developed multiple options of how to come back and use those resources that we have. But I think — and part of your question, I think the answer is there is that we’re going to look and see what the competitive environment is like, we want to see what the pent-up demand is like and we’re going to put back the marketing — put marketing resources back in the business judiciously.

And I would love to get to a point where we can grow our business and rely a little less on advertising spend. We really like the P&Ls with the marketing line at the level it’s at right now. And so there is no predetermined outcome on this. We just — we need to get into the competitive environment and then make our decisions then. We have developed multiple options if needed.

Chris O’Cull — Stifel — Analyst

Great. Congratulations on everyone’s promotions.

Operator

Our next question comes from the line of Andrew Charles with Cowen & Company. Go ahead please. Your line is open.

Andrew Charles — Cowen — Analyst

Great. Thanks so much. Gene, Rick and Raj, happy holidays, and congrats on the well deserved promotions. Gene, do the most recent few weeks of sales trends change your view from last quarter that 5% to 15% of the category is likely to see store closures? And what I’m trying to get at is, are you starting to see more favorable terms from landlords and developers that will benefit the development pipeline as you look out to the 2022 and 2023 class of openings?

Gene Lee — President & Chief Executive Officer

No, I don’t think — I mean, I think that my position on closure is still in that 5% to 15% range. And it’s unfortunate that a lot of these small businesses are being impacted this way, because I do think it has a — it will have a negative impact on our — on the productivity of our industry, so on so forth. So as far as real estate goes, I think that my position on that is still pretty much the same is that there is some more availability out there right now. However, we’re not seeing any weakness in the rent deals. I think what we’re — I think there is some speculation going on out there right now with some of the REITs.

So I think as we move forward, we will continue to try to grow our businesses responsibly. We want to eventually get back into our long-term framework. We’ll give you some more guidance in March exactly how we’re thinking about FY ’22 for development. But we reconfirmed our guidance for this year and hoping that we can get the number of restaurants that we talked about in the press release open. And we have a bunch of restaurants today sitting there ready to go and that are ready to open. We just need to — our guideline here is, once we get to approximately 50% occupancy in a jurisdiction, we will go ahead and open that restaurant, and we’ve been very successful doing that.

Andrew Charles — Cowen — Analyst

Thank you so much.

Operator

Our next question comes from the line of Brian Bittner with Oppenheimer & Company. Go ahead please. Your line is open.

Brian Bittner — Oppenheimer & Co. — Analyst

Thanks, and good morning. And I echo the congratulations to all three of you on the upcoming move into your new roles. Gene, in the press release and on this call, you talked a lot about the fact that you were taking this opportunity to transform the business for a long-term growth. And on the call, when you spoke about that in your prepared remarks, you specifically said, employee investments and some menu and portion changes, but can you just talk a little bit more beyond that. What else are you doing to truly transform this company for long-term growth? And how do you strategically think about growth, both for the AUV recapture opportunity and the unit and portfolio growth of the company in the long-term?

Gene Lee — President & Chief Executive Officer

Good question, Brian. I think we think about it in three ways, right? What are we doing to ensure that we can grow the base from a same-restaurant sales perspective. And I think a lot of the simplification and efficiency — and the efficiencies that we’re creating. But more importantly, and I think I talked about this in the last call was, as we brought our menus down, we learned a lot about guest behavior and what the guest wanted to buy without our nudge. And I think that’s really been eye opening for us. And I think that that’s going to strengthen the operation and day-to-day operation on that side. So I really think that we’re well positioned there. We’ve done a lot of good work to ensure that our brand is set up for success.

Secondly, we talked about transformation. And when we go to second bucket of growth, which is new restaurants, the key here is that we believe that the business model from a cost side is much stronger than it was pre-pandemic, which should enable us to be able to grow, especially in Olive Garden, deeper than we may have thought we would be able to grow pre-pandemic. So that’s one of the things I’m really excited about is, we think that we can actually over time tick up Olive Garden growth and handle — because of the improvements we’ve made, we think we can handle the cannibalization a little bit better and still get a good return on our investment.

The third bucket that you highlighted was really around how do we continue to add brands to the platform. And as I’ve said forever, we continue to look at what our options are. The filter that we use really comes down to does the — does it benefit us to put that brand on the platform? Does the platform benefit that brand? Do we think it can grow faster than Olive Garden to improve our growth rate? And we’ve historically done something every three or four years. This has obviously been a different period of time. But we believe that to be an avenue of our growth and to support our long-term framework. And so I think we’re really well positioned in all of those — in those three buckets to drive the business.

The last thing that I would say is I think that — in this transformation, it’s moved a lot of the technology forward faster than what we originally were planning to do. And the big change for us is moving from — moving how we handle the off-premise business, which has been a big part of our growth historically the last five years as we capture the convenience trend. But really getting clarity that this is going to be a curbside business, it’s going to be technologically-enabled versus someone coming to the restaurant and getting out of the car and coming to pick it up. And I think that we’ve really worked hard and our team has done a great job. And I think that experience today, when you come into an Olive Garden, especially Olive Garden and LongHorn, in all our brands, but really this is an Olive Garden play because of the food travel so well. I think that that’s going to really be a competitive advantage going forward.

Brian Bittner — Oppenheimer & Co. — Analyst

Thanks for that, Gene. And nobody seems to be taking their follow-up, but I am going to ask one, if you don’t mind. The step back that’s happening in the business in the third quarter, it’s pretty telegraphed by what’s been happening in the world. But when you look back at the quarter that you just reported, when you got to that 97% of units offering in-store dining in the middle of the quarter, can you give us a peek into how the business was performing with that type of percentage of stores operating in that manner?

Gene Lee — President & Chief Executive Officer

Well, I think there were still geographic problems, and I would say that we were really adhering to the social distancing. But the business — in some ways I gave you that because I said we — the last two weeks cost us 200 basis points for the quarter. And so I think there were parts of the country that were performing really well, and I think you can look at the mobility index out there and see what parts of the country were performing well.

And so if you look at Georgia and Texas, Florida hasn’t been performing as well just because of tourism is down and we have a lot of restaurants based in tourism. But in our non-tourist markets in Florida we’re performing well. So we had some good momentum, but we all — we knew as a management team that we weren’t — this wasn’t done, that we’re going to face this second wave and we are prepared for it. And we had good processes and we’ve been able to wind down the businesses effectively to off-premise-only and then we’ll quickly be able to wind them back up and take advantage of the opportunity.

Brian Bittner — Oppenheimer & Co. — Analyst

Thank you, and congratulations, guys.

Operator

Our next question comes from the line of Eric Gonzalez with KeyBanc Capital Markets. Go ahead please. Your line is open.

Eric Gonzalez — KeyBanc — Analyst

Hey, thanks. And I’d also like to add my congrats on the promotions. My question is, as we look ahead to the vaccine rollout, can you talk about what you think you need to do differently in order to maximize the opportunity to capitalize on that pent-up demand that likely exists? And as a follow-up to that, what is the — what do you think the flow-through rate is on incremental sales today? And what do you think it will be post-vaccine, assuming you don’t need any — assuming you don’t need to discount or advertise? Thanks.

Gene Lee — President & Chief Executive Officer

I’ll let our new president answer that.

Rick Cardenas — Senior Vice President, Chief Financial Officer

Well, first of all, thanks everybody for all the kind words. And I want to congratulate Raj as well on his promotion. He has been a real partner to me over these — over the four and a half, five years that I’ve been the CFO. And so I appreciate that. What do we needed to capitalize. Gene has been talking a lot about what we’re doing to make sure that we invest in our team members, invest in our food. And as the restaurants start to ramp up, we really believe that we’re seeing and we’ve seen growth when those restaurants start to open. We’re not going to talk strategically about what we’re going to do to capitalize on that. But just know that our business model is so much better that even if we — as we get our sales to grow, our margins will continue to improve, which gets to the second part of that question that you asked, and the question is flow-through in incremental sales.

As we look at what we’re doing today, right, today, our variable margins are closer to 50% and before they were closer to 40%. And so we’ve taken a lot of costs out, but some of those costs will come back in. And as we mentioned, and that would imply about 150 basis points of margin improvement over the long run. But right now, incremental profitability is pretty strong. When we started to see some closures, we started to see that drop. And so as we move forward, we still believe that we’re going to get to a 100% of our pre-COVID EBITDA, 90% of pre-COVID sales. We just don’t know when we’re going to get to the 90% of pre-COVID sales.

Eric Gonzalez — KeyBanc — Analyst

Very helpful. Thanks.

Operator

Our next question comes from the line of Chris Carril with RBC Capital Markets. Go ahead please. Your line is open.

Christopher Carril — RBC — Analyst

Hi. Good morning. Gene, Rick and Raj, congratulations on your new roles and promotions announced this morning. Rick or Raj, could you please provide your thoughts on how to think about G&A now moving forward, both in the near-term and longer term? At this point, how much of the savings that you’ve seen thus far do you think could be held on to in a more normalized environment? And how does the increased focus on technology impact this?

Rick Cardenas — Senior Vice President, Chief Financial Officer

Yeah, Chris. Thanks. The G&A, I’ll talk about this quarter that we just ended. And as you saw, we reported about $90 million in G&A. But that would have been closer to $82 million without that mark-to-market expense. And as you recall, at the end of the first quarter call, we talked about the early retirement program that we had, saving us about $25 million to $30 million a year. We’re still seeing that and we still believe that we’ll keep that as we move forward. But we’ve also had some savings in G&A because of reduced travel and other things, no general manager conference and those kind of things. Those things will come back. How fast they come back is a question. But we’re running about 5% G&A or 5.5% G&A right now, which is remarkable considering our sales where they were — where they are. As we get back to our pre-COVID sales, we will start seeing G&A come up a little bit, but nowhere near where it was before because of that $25 million to $30 million — I’m sorry, $25 million to $30 million of savings that we got on early retirement.

Christopher Carril — RBC — Analyst

Got it. Thank you. And just again the increased focus on technology, is there any potential impact there?

Rick Cardenas — Senior Vice President, Chief Financial Officer

Yeah. No, we’ve been investing in technology for years. As we continue to work on our technology investments, that will impact the depreciation line amortization line going forward. But we also have some projects that we worked on [Technical Issue] would fall off. We’re going to continue to invest in technology. Will that help make us more efficient here in the support center? Yes. But a lot of our G&A is out in the field and our directors of operations and our senior vice president of operations and technology will help them be more effective and more efficient, but it won’t get us a whole lot of G&A save. But absolutely, the technology investments we’re making are more about in restaurant. So that’s not a G&A, that’s kind of restaurant margin.

Christopher Carril — RBC — Analyst

Got it. Thank you.

Operator

Our next question comes from the line of Jeffrey Bernstein with Barclays. Go ahead please. Your line is open.

Jeff Bernstein — Barclays Capital — Analyst

Thank you. Good morning, and congratulations, Gene, Rick and Raj. One question and then a follow-up. The question is in terms of the labor outlook, obviously lots of moving pieces. And I think we’d agree Darden’s an employer of choice. And with unemployment up, inflation in theory should ease and you experienced significant leverage in the second quarter. I’m just wondering how you think about that in the context of potential for national minimum wage increase. I’m just wondering your bigger picture industry thoughts maybe using Florida as a guide or how you think about how you can offset that whether with cost savings or menu pricing or just broad outlook on the labor line going forward? And then I had one follow-up.

Gene Lee — President & Chief Executive Officer

Yeah. Good morning, Jeff. Labor is definitely is a little bit of a question mark for us and for the industry. But as we think about labor, we’ve dealt with the structural increases over time very effectively. We are better positioned than anybody else in the industry to be able to deal with that because where our margins are today. Do I — at the bottom if you’re asking me, do I think there’ll be a federal minimum wage increase that’s similar to Florida, I think over time we will see federal minimum wage increase, but not at the same rate as Florida.

I think the key for us and the way we’re thinking about it is, how do we get to the right tip wage and to keep that relationship between the constituents — two constituents, the guest and the server that don’t want that relationship to change, albeit people in public office and some advocacy groups believe that that relationship should change where our team members in service really don’t want that to change. So how do we protect that, get that to the right level. If we’re all — if the industry at all faced with it then, we’re going to have to figure out how from a pricing standpoint we are able to pass that through.

I think long-term, when I look at the P&L and think about it, I think it’s — California is an example of it today. You’re going to end up with a little bit lower cost of goods sold and a little bit higher labor cost, but you’re going to end up at the same place. And so as long as you’re thinking about that way, I’m confident in our ability to manage that over the long-term. Could it have some short-term impacts and volatility of the cost structure? Yes. But long-term, I like where we’re positioned and our ability to be able to deal with it.

Jeff Bernstein — Barclays Capital — Analyst

Understood. And then just the follow-up. You mentioned earlier, Gene, that maybe there is an opportunity to increase penetration of your brands, obviously Olive Garden is the furthest along, so maybe that’s the best example. I’m just wondering whether there is any quantification on that or how you would think as an alternative about maybe using goes kitchens? I mean, with your portfolio being as large as it is, I would think you can create your own goes [Phonetic] kitchen just of your own portfolio since the brand is already pretty well known and not necessarily need to open up as many new boxes. So just trying to get a sense for that? Thank you.

Gene Lee — President & Chief Executive Officer

No, we believe we’re an on-premise restaurant company. And we believe — we strongly believe that demand for in-restaurant dining is going to come back really strong. There’ll be some fall-off on the off-premise occasion. I think people have a lot of fatigue with that right now. Long-term, convenience is going to — when you think about long-term, convenience is still going to be important. But I think that — and off-premise will come back and be strong and be stronger at some point than it was pre-COVID. But I believe that these are — these brands need to be developed to be on-premise locations that as your primary business that drives an auxiliary business, which is your off-premise location, off-premise business, but you developed the brand in a box and we create in-restaurant — great in-restaurant experience. And the logistics of moving that the last mile are just so, so expensive and something that we know really cuts into the profitability and some that we don’t want to be involved in.

Jeff Bernstein — Barclays Capital — Analyst

Thank you.

Operator

Our next question comes from the line of Peter Saleh with BTIG. Go ahead please. Your line is open.

Peter Saleh — BTIG — Analyst

Great. Thank you, and congratulations to the team on the promotions. Gene, I wanted to ask if you can give us an update on the Cheddar’s brand? And what, if any changes you guys have made throughout the pandemic? And how should we think about the unit growth of that concept when we come out of this pandemic?

Gene Lee — President & Chief Executive Officer

Yeah. I think we’ve talked about in the last call, the biggest transformation we’ve made in the cost structure has been at Cheddar’s. As we simplified the menu, we really were able to get in there and look at all the processes and procedures from the backdoor to the dining room table. And the team has made great progress there, which has resulted in a significant reduction in labor cost. And we’ve got a significant reduction in the waste in that business around cost of goods sold, which has really changed the business model. Prior to the pandemic, we had just rolled out [Indecipherable] at every single guest, which has been received very well, and we were able to absorb the pricing that we implemented. When we did that, our value ratings have actually increased.

I think the other thing that going through this crisis has accelerated is their off-premise capabilities. Prior to the pandemic, we did not have a ton of capabilities there. We didn’t — we really had a couple of phone lines, but it was just a mess. So we’ve increased the number of phone lines. We’ve got online ordering in place. We’ve now got the Curbside I’m Here in there. And it take our businesses growing fairly rapidly through the pandemic, and we’re very pleased with that. We’ve got to get better at it because it’s not a core competency in Cheddar’s, but I think the team has been working really hard on it and I know they’ve got a big initiative, and I’m really proud of what they’re doing.

As far as unit growth goes, we’ve really — I always talk about human resources than we talk about unit growth. We’ve stabilized the human resources in Cheddar’s. The human resource metrics are getting closer to Darden metrics. I think actually management turnover is actually in the middle now after being such an outlier for so long. So I’m excited about that. But we still need to build management strength to handle growth.

Now we’ve been opening restaurants all the way through the transition, through the pandemic and through — really through the integration. And I would expect unit growth to be somewhere in that 5% to 8% range, which I think we can handle from a human resource standpoint. So it’s additive to our growth rate. We’re excited about the business. We’re excited to see what the P&L will really look like in a post-pandemic environment. And we’ve always loved the business and we love the business today, and we’re excited about it. We’ve got — team has done a great job, I’m really proud of them.

Peter Saleh — BTIG — Analyst

Do you anticipate having to spend more as a percentage of sales for Cheddar’s to — on the marketing side to accelerate that growth in the coming quarters or year?

Gene Lee — President & Chief Executive Officer

No, I just don’t have — we don’t have the density in that business to be cost effective from a marketing standpoint. I think we’ll continue to use the digital — our digital capabilities there. But really, it was always a high volume concept that didn’t have the cost structure set up right. Now we have the cost structure set up — we think set up right and doing 5,000 guests a week. I think that the growth in that business really comes from new units not really comp growth. There is not many restaurant companies out there doing 5,000 guests a week.

Peter Saleh — BTIG — Analyst

Thank you. Very helpful.

Operator

Our next question comes from the line of John Glass with Morgan Stanley. Go ahead please. Your line is open.

John Glass — Morgan Stanley — Analyst

Thanks very much. Happy holidays to everyone, and congratulations from me as well. Rick or Raj, maybe two, maybe more boring finance questions. One is just on the third — on your current quarter guidance. Even at the high end, it would assume revenues might be a little lower than they are, total revenues this quarter, but the operating margins might be actually higher, I should say, EBITDA margins. Is that just a function of like the G&A, which was a little bit off this quarter because of mark-to-market? Is there something else going on that would actually allow you even have higher profitability versus second quarter on lower sales?

Rick Cardenas — Senior Vice President, Chief Financial Officer

Hi, John. No, I think you got it a little bit on the G&A front. But as we continue to reopen restaurants, we’re getting more efficient at that, right? So if restaurants come back and reopen, we’re just getting better at doing that. And as restaurants close, we’re getting more — we’re more efficient doing that as well. So we just believe that we’ve got a business model that’s wired pretty well right now and that should show up in our margins in Q3.

John Glass — Morgan Stanley — Analyst

And in the next — this is probably the last quarter we’ll be talking about negative same-store sales and then you’ll start to lap the May period etc. How should investors sort of think about how to model the business or think about the recovery? Should we just focus on average unit volumes and then just sort of back into this implied same-store sales because that’s what really drives things to be really — year-over-year doesn’t matter, it’s really just the volume capacities are limited to a point until those capacity restrictions end. Is that the best way to think much of business over the next couple of quarters after you start lapping the pandemic?

Gene Lee — President & Chief Executive Officer

Yeah. John, I think what investors have to do is make assumptions for when the pandemic starts to ease and when dining room restrictions kind of — when dining rooms reopen and then look at our average unit volumes what we’re doing today and kind of put some kind of a factor on that. And you can kind of see some of the things that we’ve shown in our releases and pretty transparent on our weekly sales and restaurants that have dining rooms opened versus the total company and just kind of make your best guesses on when do you think the pandemic is going to wane and when dining rooms are going to reopen. We can’t tell you when that is, but we feel really confident that when that does happen, we’re going to be there to capitalize on it.

John Glass — Morgan Stanley — Analyst

Great. Thank you.

Operator

Our next question comes from the line of Dennis Geiger with UBS. Go ahead please. Your line is open.

Dennis Geiger — UBS — Analyst

Thank you, and congrats to all on well deserved promotions. Gene, wondering if you could talk a bit more about technology and the digital platforms. You talked a bunch about the initiatives that recently rolled out and those that are coming. But can you size up the opportunity a bit more on the role that tech plays and digital plays and can play for the brand? Perhaps a bit more maybe on some of the top-line benefits and thinking about guest satisfaction, speed ultimately and sales?

And then, Rick, I think you talked some about the benefits from the cost and margin perspective a little bit, but if there is anything more to kind of frame up that opportunity as well? Thank you.

Gene Lee — President & Chief Executive Officer

I think — first of all, I think technology really helps you on the off-premise side. As we talk to our guest, they continue to talk — tell us they don’t want a technologically-advanced or enabled in-restaurant experience. They don’t want to look at digital menus. I mean, as we put the QR codes out there and have people try to look at the menus on their phone, they really pushed back, they don’t like that. And so that trend I don’t think is going to take place in restaurant.

We’re playing with some handheld devices to see if we can get orders quicker. I think that kiosk [Phonetic] has played a major role in a lot of our brands. It’s enabled our servers to in a non-pandemic time be able to use that device to get orders in. It really does a great job on payment. The option rate on payment is extremely high with that device as the consumer becomes used to using it. So in restaurant, I don’t see a ton of technological advances there over time.

I think the things that we’re working on, you know Wait List is important. Again, the big one that we’re working on right now is how do you accelerate the checkout process on an online order and how can that be as friendly as the big retailers. And so those types of things on the margin I think technology is there. We are fairly technologically advanced with our dining room system, our KDS system. I’m not sure how much more is there that we see right now. We are working on a technology roadmap over the next five years to figure out where do we want to invest and how do we get the highest return on that. And so there’s still work to be done. I think the majority of it still is in off-premise to accelerate that.

And then on the other side, we don’t talk much about, but when you think about the size of our email database today and how we interact with our guests digitally. We will continue to evolve that and get better at that and more efficient with that. Trying to figure how to communicate more effectively with our consumers and let them know about the things that might drive a visit. And so I’m excited about that.

There’s a lot of engagement digitally with our brand, both from an email database, but from social. Just think about what happened last week when Taylor Swift dropped the song with Olive Garden in it, and how we were able to capture that socially and create buzz around that. And all of a sudden, when Taylor Swift drops our name in a song, our brand becomes very, very relevant. It’s a 40-plus year old brand that’s all of a sudden relevant with her audience. And our team was working around the clock to capitalize on that activity. And to those that are listening that were on that team, they did a fantastic job to be able to make that relevant. So thank you to them and thank you to Taylor Swift for dropping Olive Garden in her song.

Dennis Geiger — UBS — Analyst

Thank you.

Operator

Our next question comes from the line of Jeff Farmer with Gordon Haskett. Go ahead please. Your line is open.

Jeff Farmer — Gordon Haskett — Analyst

Great. Thank you, and congratulations to all three of you. Well deserved across the board. Another labor question for you. So if memory serves, you saw 350 basis points of hourly labor favorability in the fiscal first quarter. It sounds like you guys just talked about 310 basis points in the second quarter. How should we be thinking about favorability moving forward, especially with the emergency pay coming back?

Rick Cardenas — Senior Vice President, Chief Financial Officer

Hey, Jeff. This is Rick. On the labor front, the hourly labor of 310 basis points favorability this quarter, it was really driven by the fact — compared to 350 basis point in Q1, it was really driven by the fact that in Q1 we had a much, much more simplified menu in some of these restaurants because some of them were still to go only, some of those restaurants were running with very few hourly employees. And so, as we started ramping up dining rooms, yes, we added some labor, but 40 basis point difference isn’t very big when you consider the sales that we added from Q1 to Q2. And the emergency pay isn’t — we don’t necessarily put that into our direct labor cost, it’s more in the kind of fixed labor, we talk about it. So when we talk about the 310 basis point to the 350 basis points, it does not include emergency pay.

Jeff Farmer — Gordon Haskett — Analyst

Okay. And just as a follow-up again on labor, this is a popular investor question. But you touched on it, but with indoor dining suspensions affecting roughly 25% of the system as you — most recently. Can you provide some color on the impact that that has on variable restaurant level costs, specifically in the labor and restaurant expense lines? And I know you’ve shared some color on hourly versus management labor as a percent of total labor, but anything there to sort of help analysts and investors understand the movement between fixed and variable costs for restaurants that are essentially close to indoor dining?

Gene Lee — President & Chief Executive Officer

Yeah. When you think about, when you have no indoor dining, a big part of our restaurant is the servers and — so that’s a little bit less, actually, a little less efficient in number of hours than in our premise business. On dollars it’s not so bad, but on an hour’s basis you have a lot more servers per guests then you do wanted to go — to go experience. So actually it does help us a little bit when we go to off premise only, just for a little bit of time. We actually don’t like to be off premise only, we would much rather have the total sales and the total margin of being open on premise.

And I relation to the fixed versus variable, that — as the definition says, the variable cost definitely go way down as we — our sales go down. Most of our costs on the fixed side will be there. We have a few things that we can turn off, when we go to off-premise only. The TV’s, the music and those kind of things, but that’s not significant. The other thing that is significant as we have a little less repair and maintenance. When you’re restaurant isn’t getting beat up in the dining room, you don’t have to do as much repairs there. But I would say, we would much rather have a full restaurant full dining rooms and deal with the cost of that, then have empty dining rooms and just do off-premise.

Jeff Farmer — Gordon Haskett — Analyst

All right. Thank you.

Operator

Our next question comes from the line of Lauren Silberman with Credit Suisse. Go ahead, please. Your line is open.

Lauren Silberman — Credit Suisse — Analyst

Thanks for the questions. Congrats to all. Hopefully at this time next year, all restaurant will be open at full capacity. When you reopen restaurant, how long does it take for restaurants to ramp up sales to their full allowable capacity? Is that immediate or it takes several weeks to build. What I’m trying to get at is, how quickly do you expect to reach full pre-COVID sales level, assuming capacity restrictions are lifted 100%?

Gene Lee — President & Chief Executive Officer

Well, I think that — I mean that’s hard for us to really define for you. I think that from our standpoint, we can — other than maybe having a ramp up in staffing, we can get right — we can get to a point where we can move back to 100% fairly quickly of where we were from a volume standpoint. And I think even staffing would be more of a fatigue thing, because we probably have to work our people more hours than what they were used to in the near term, but I think we can get there right away. The question is going to be more on the consumer demand is that, is this going — is this going to come back in all at once or is it going to come back over a period of time as more and more people get comfortable. You think about the different demographics out there today, and is it going — our people is going to, as soon as they are vaccinated say, okay, I can get out and move or are they still going to be cautious. And that to us is the unknown.

But what I would tell everybody on the call and our investors is that, we’re going to be prepared to be able to handle the situation as it unfolds. And we’re going to be in a situation where I think that our brands are trusted and beloved by our guest and that people once they feel good about being able to have a little bit more mobility, they’re going to come back to as quickly and we’re going to be ready to serve them a great meal and deliver on our expectation.

Lauren Silberman — Credit Suisse — Analyst

Great. And then can you touch on those kitchen that are sending us the virtual brands operating out of existing restaurants, more restaurants are developing new virtual concept businesses. And at near-term sales, I think, uncertainty regarding the same tower over the long term. Last quarter you said this wasn’t the right approach for Darden, is that still your view? And can you just expand on your view on the concept of virtual brands and whether that’s appropriate for any of those concepts in the Darden portfolio?

Gene Lee — President & Chief Executive Officer

It’s still our position, we believe that we need to stay focused on running the brands that we spent many, many years investing and marketing and building. And I believe that that’s the right place to be. I believe, as I said last quarter, others have got to do what they think they need to do to run their business. I think the question I would ask is, who owns a virtual brand? Is the kitchen or just door dash on the virtual brand?

Lauren Silberman — Credit Suisse — Analyst

Great. Thanks.

Operator

Our next question comes from the line of Jon Tower with Wells Fargo. Go ahead please. Your line is open.

Jon Tower — Wells Fargo — Analyst

Awesome. Thank you. I appreciate you taking the questions. Congrats to the team, happy Friday and happy holidays to everybody. Just two follow-ups, really. First one, when thinking about the targeted 100 basis point to 150 basis point margin improvement over time, does that take into account potentially a higher or a lower level of marketing spend over time? Or essentially we’re turning back to, say, the 3% spend?

And then digging a bit deeper into the unit potential we were discussing a little bit earlier. When thinking about it, are you contemplating the idea of potentially putting more units in an existing trade area? Or do you think that there is greater opportunity for your brands to move into a smaller markets over time? And is this more about the portfolio or all of Olive Garden specific? And then just one more on top of it. How much is cannibalization weight on same-store sales and margins historically?

Rick Cardenas — Senior Vice President, Chief Financial Officer

Hey, John, this is Rick. I’ll go through those questions. So lower marketing is part of the 100 million to 150 million — 100 basis points to 150 basis points. I’m sorry. But most of that is going to be from our labor efficiencies that we’ve come to play. As sales go back up depending on what the competitive environment looks like we will market. I mean, Olive Garden is a national brand. And one of the benefits of Olive Garden is their scale and their national footprint. So Olive Garden will be on TV nationally, because we think that’s a big competitive advantage for us. And so marketing will come back not to the level it was before, but most of our 100 basis points to 150 basis points is going to be on the labor front.

As it relates to unit potential, while we’re not going to give a number on units, Gene did mention Olive Garden, seeing that we could potentially go into smaller markets because of the — because of the business model enhancements that we’ve made, but other brands are going to fill in markets. I mean, one of the things that Gene mentioned earlier about Cheddar’s is, they don’t have scale, they really don’t have a whole lot of scale in most of the markets there are in either. So we really believe in relative market share and we think Cheddar’s has the opportunity, LongHorn has the opportunity, all of our brands have the opportunity to build scale in some markets they are in, while still growing into new markets.

And in regards to cannibalization, we haven’t given that number in a long time. And most of the cannibalization would be at Olive Garden. And Olive Garden isn’t growing that many restaurant, so the cannibalization isn’t that impactful for us. And as it relates to the other brands, as we do go into some markets that we already have restaurants in, because we’re so, especially for Cheddar’s, because we’re so disbursed on where we — where our restaurants are. When we add a new restaurant, yes, we will have some cannibalization, but the business model is so much better now that we believe that is the right thing to do, plus it actually leverages some of the G&A and other things in that market, even our supply chain. So while our restaurant level margins may tick down if we cannibalize, the cost outside the restaurant will get better.

Jon Tower — Wells Fargo — Analyst

Great. Thank you.

Operator

Our next question comes from the line of Nicole Miller with Piper Sandler. Go ahead please. Your line is open.

Nicole Miller — Piper Sandler — Analyst

Thank you. Good morning. Congrats to everybody. Two quick questions for me. The first is on numbers, with the guidance. Can you talk just a little bit more about what is underlying that? I would wonder about two things. I think you said like 75% of the dining rooms are open. So I can imagine you’re contemplating all of those reopening, yet you’re not contemplating everything closing. So what is kind of the spectrum there? And then on the comp, is it holding steady for dining rooms opened and the momentum they’ve achieved and — or are they also seeing some softness? Thank you.

Rick Cardenas — Senior Vice President, Chief Financial Officer

Hey, Nicole, this is Rick. As it relates to our guidance and then I’ll get into the comp. We aren’t assuming that we’re contemplating any significant changes in net capacity restriction. So where we are today is where we’re going to expect to be through the quarter. Other than those that are already — that are already contemplated by officials if there is some new ones coming then — that we already know about, but we don’t know about any new ones coming. Now hopefully those things will ease as the quarter — as the quarter goes on. And so, we do have some — a little bit of that.

I will give you — I want to give you a couple of data points. So as of Sunday our quarter-to-date on a fiscal basis, which is what you all look at, our comp sales were down about 26%. But if you look at it on a comparable calendar basis, because, remember, we had a 53rd week last year and Thanksgiving shifted, we’re down 35%, as Gene mentioned, over the first two weeks. So our guidance takes all that into account, it takes into account that we think that our sales are going to maybe grow a little bit on a per op week basis or on average unit volume basis, but because we’re going up against that high seasonal sales last year our comps will be a little bit more challenged.

And so that lead to the second part of your question of what are we seeing in comps for restaurants that still have dining rooms open. We’re now getting into our seasonal period, so we’re getting into that point that we talked about after Q1 and recently mentioned on today’s prepared remarks is that, our comps are going to be harder. What I would focus everybody on is our average weekly sales. And if you look at our press release that we shared, we still have average weekly sales growing. Unfortunately not growing as fast as average weekly sales grew last year, which we knew would happen and we highlighted that.

So we’re focusing more on Q4 next year. We believe we have the business to get us through that and we’re really comfortable with the guidance that we gave for Q3, but we’re really focusing on getting our business really ready to capitalize on when sales come back.

Nicole Miller — Piper Sandler — Analyst

That’s super helpful. Thank you. And to your point on — yeah, looking to this quarter and looking to the next, absolutely, that just leads me to my second last question is exactly that. There is not even just the thought process anymore about this bigger chains like yourselves being able to take share. But it’s absolutely model by seeing the consensus estimate, that’s where we’re at. And I want to understand what do you think about that? What’s the opportunity for sales transfer? Does the NRE saying 110,000 locations are closed, what’s all the type and location and health? What’s the probability in the interim that you pick up those sales? I mean, we are hope for an independent revival, but that’s going to take time. Has consensus been too optimistic on that front or is that what is happening is going to happen? Thank you.

Gene Lee — President & Chief Executive Officer

Yeah, Nicole. I don’t want to comment on where consensus is for Q4 or beyond. But what I do want to get everybody understanding is, before the pandemic the full service restaurant business was about $100 billion category. We believe after the pandemic, it’s going to be $100 billion or more category. I mean, we also know that unfortunately there have been a lot of restaurants that have closed and there might be more that are coming. We really are unhappy with that, we really like to see these independents stay opened, as Gene mentioned, because they do provide some novelty and flare that we can learn from as well.

But as we think about our business in the long run, full service restaurants was a big category, we had about an 8% share, 9% share, we believe it’s going to be at least as big, potentially bigger because of the pent-up demand and people really understanding and realizing what they missed out of casual dining and full service restaurants. And so, if restaurant stays close for a while, we are bound to pick up some of that share. How much that is? I can’t comment on it, but we believe we’re really, really well prepared to capture that share. And with the business model that we have, we believe that we’re going to benefit from that.

Nicole Miller — Piper Sandler — Analyst

Thanks again.

Operator

Our next question comes from the line of David Palmer with Evercore ISI. Go ahead, please. Your line is open.

David Palmer — Evercore ISI — Analyst

Thanks, good morning and congratulations to all of your promotions. A follow-up on your comment so far about how Darden is transforming the business model for the long-term. You mentioned how simplification and productivity will result in a longer-term margin step up and that can lead to greater unit growth opportunities down the road. That’s great. And I think to get that, one thing I’m curious about is about this whole crisis and your internal actions, has the business been transformed in a way than your major brands that is going to bolster sales per restaurant long term perhaps some year like fiscal ’23 might be higher than it would have been without the crisis and your internal actions. I’d be curious to hear about that?

Gene Lee — President & Chief Executive Officer

Yeah, David. I think — as this crisis has done a few things. I think it’s not just for the restaurant business, but for our business. I’ve listened to all the CEOs talk. I mean we’ve identified a lot of non-value-added activity inside our organizations that you’re funding, but also was creating distractions at the operational level. And I think that’s a big upside for us and it’s something that we’re really focused on to ensure that there is not — there is not this gravitational pull to bring us back to do that type of work.

What gives me the most confidence in our ability to get above pre-pandemic sales is the investments we’ve made. And from the minute after — day after April 20, when we raised $500 million in the equity offering and we knew liquidity wasn’t going to be an issue. This management team focus 100% on what do we need to do to ensure our businesses are stronger than they were before the crisis? What actions, what investments do you want to make? What things that you do in history that turned out to be wrong that you want to make right? And our businesses have worked hard to do that. Now each one of our brand is in a different place on that journey. I think our bigger brands are much further along at this point and they’ve made the — they’ve made the moves.

And what I’m really impressed with is, the stuff that they’re working on today, at the level of detail are trying to improve guest satisfaction to me is absolutely amazing. Words down to — we’re spending a lot of time working on how do we improve our — the off-premise experience and how do we ensure the food at 15 minutes if it’s not going to go back into a microwave is in it’s optimal eating point or what it look like at 30 minutes when it goes back into the microwave. So there’s just a tremendous amount of work and investment being made. And what I would call the second level that I think is going to pay big dividends. We’ve invested a lot back into quality and value and our brands. And I’m really excited about that and the guests are telling us that they are noticing these changes.

David Palmer — Evercore ISI — Analyst

Is kitchen capacity an issue at Olive Garden. I mean can you kind of — the step changes happen without you running into bottlenecks and thresholds where the experiences compromised on either off-premise or on-premise.

Gene Lee — President & Chief Executive Officer

No. Actually the opposite, David, because we’ve removed a lot of the extraneous products that we are trying to serve. We were getting 0.5% of sales out off. And then we really — we’ve really through our menu — in our menu engineering, we are moving the high value, high satisfaction more of those items through to our guests. And we — the more we make the better we get. So actually, everything we’re working on today, speed is taken into account and that holds the simplification of that process. You guys have heard me talk about this — you probably tired of me talking about it.

A great kitchen starts with how the product comes in the backdoor and we got to streamline all those processes until it get to the table. And during this crisis we’ve been able to reevaluate all that — all that activity and all those processes and we’re so far along that journey today and that’s what gives me confidence about the future.

David Palmer — Evercore ISI — Analyst

Thank you.

Operator

Our next question comes from the line of Nick Setyan with Wedbush Securities. Go ahead please. Your line is open.

Nick Setyan — Wedbush Securities — Analyst

Thank you, and congratulations on all the promotions. As the recent months progressed, the strength of the consumer in the context of the dining room capacities was a positive surprise. Is there a way to tease out that? How strong the consumer now is as the reversals happen and the dining room closures accelerate. Is there a way to tease out whether part of it is also the customer just spending less?

Gene Lee — President & Chief Executive Officer

Yeah. Nick. We haven’t really seen a whole lot of difference in our check average, so that’s one way to think about the consumer and how strong they are. And as you look at our week to week sales in dining rooms that are open, they are still growing. Now, it’s really hard to tease out consumer strength versus people going out for holidays or people actually curbing their spending because maybe they were self quarantining before Thanksgiving and those kind of things. So it’s really tough to see that other than the fact that our check really hasn’t had a big dip.

Nick Setyan — Wedbush Securities — Analyst

Thank you very much.

Operator

Our next question comes from the line of Andrew Strelzik with BMO. Go ahead, please. Your line is open.

Andrew Strelzik — BMO Capital Markets — Analyst

Great, thank you. Good morning. Two things for me. The first, just in thinking through what off premise sales could look like in a normal operating environment whenever that may be. Can you share where sales were from — on the off-premise side in markets where the dining recovery maybe was farthest along, or anything you’ve gleaned from your customer data that’s informing your thinking around post pandemic off-premise sales?

And then the second question, as you mentioned adding brands to the portfolio, has the COVID environment either created more or fewer attractive opportunities for acquisitions or multiples less or more of an inhibitor now than they were before. Just any comments around the M&A environment would be great.

Gene Lee — President & Chief Executive Officer

Yeah. First on the off-premise capacity — on the off-premise capacity, what I would say is, it’s hard to get your arms around it, because you still have capacity restrictions in your restaurant if you living with the six feet. So there is still a lot of people that pull up to our doors that realize that we’ve got to hour wait and then they transition to an off-premise experience. So we really don’t have a feel for where that’s going to level out. And I think I — I think I said last quarter, we actually see a scenario where that could actually fall down to below pre-pandemic levels once you open up the dine rooms, because there’ll be less demand for it.

And then we believe it will come back at a higher level than it was pre-pandemic. But we don’t have a feel for where that’s going to settle in right now. Because I think everybody’s behavior is so modified in this environment. I’m really not going to comment on the M&A environment any further than what I’ve already said.

Andrew Strelzik — BMO Capital Markets — Analyst

Okay, great. Thank you very much.

Operator

Our next question comes from the line of Andy Barish with Jefferies. Go ahead, please. Your line is open.

Andy Barish — Jefferies — Analyst

Hey, guys. A lot of kind of medium and long-term questions. I just wanted to kind of think about the fourth quarter, given obviously there is impossible number of variables to try to project at this time, but if the environment kind of stays the same as it is, I mean, historically your 4Q has looked a lot like your 3Q, is that how we should kind of be thinking about things on a high level?

Gene Lee — President & Chief Executive Officer

Hey, Andy. Our fourth quarter isn’t that different than third quarter. We’ve got Mother’s Day in Q4, so that’s a really big day for us. While it’s not as seasonally high as Q3, it’s not that different.

Andy Barish — Jefferies — Analyst

Okay, thanks.

Operator

Our next question comes from the line of Brett Levy with MKM Partners. Go ahead, please. Your line is open.

Brett Levy — MKM Partners — Analyst

Great. Thanks for taking the time sharing all this information. Congratulations to all of the team members who were elevated and all the people who actually helped them get there. I guess just one data question if you’d be willing to share. And then just second question on that. The first is on market share. Would you care to share what Olive Garden and LongHorn were X. And if you had any thoughts on positive units just across those two systems?

And then just a second question. We’ve talked a lot about technology and the people, how are you thinking about the physical boxes, the existing ones, the new ones with all of these transformative issues that you’re dealing with, whether it’s tack or people or just how the consumers are looking and some of the structural issues you dealt with at Olive Garden. How are you thinking about what you need to do to your current and your future boxes. Thank you and good yeah.

Gene Lee — President & Chief Executive Officer

Yeah, Brett. As we get the share information pretty lagging, so we’re usually a quarter behind to see what kind of share we’ve gained in Olive Garden and Longhorn. So I really can’t really comment on that. I would assume that we’ve gained share based on based on the industry data. I mean, because we’re looking at total industry, so a lot of restaurants were shut down.

As far as our boxes, and I think the biggest thing that we’re looking at right now and I mentioned this earlier, is that we, believe the off-premise experience will be driven by Curbside enabled by technology. We were on a pathway in our big brands to really developed space that’s consumer facing to deal off-premise experience where the consumer came into the building to get it. So now we’re looking at that and we’re trying to develop ways to adapt the current facilities to make that space non-consumer facing and closer to the kitchen so it should actually cost less longer term as we make these adjustments. We have just built the new prototype in Orlando for all of Garden with a dedicated consumer facing off-premise experienced more like a, what I would call, a fast casual type restaurant/and now we’ve determined that’s not necessary, so that’s good news on that [Indecipherable].

And so, our team is working real hard to figure out what these adjustments will look like, they will target those investments in the high volume off-premise locations and they’ll react and get that done over the next couple of years.

Operator

Our next question comes from the line of John Ivankoe with JP Morgan. Go ahead, please. Your line is open.

John Ivankoe — JP Morgan — Analyst

Hi, thank you. I don’t think this was — this was touched on in any of the questions. But you did mentioned technology you’re making. And I think it was field level management more effective and more efficient. So I wanted to explore whether that has been fully implemented in the field and the regional manager ranks. And exactly, I guess how big that could be?

And then secondly, as you do think about repopulating the restaurants. Is there a possibility of changing the mix between manager and hourly employees. Do you think you actually may have an opportunity to run a more efficient restaurants from a managerial perspective as as we return back to normal.

Gene Lee — President & Chief Executive Officer

Hey, John, good questions. I think from a technology standpoint, there’s nothing we’re adding to help our supervision. We’ve got some — we got management information systems that we’ve been well developed over the years, we continue to evolve those, streamline those, try to get them the most important information that they need to run their businesses. I think the biggest challenge there is how to not giving too much information and parallelism and so I think that — I think that will be one thing that I think Rick will look at in his new role, especially with his technology background as how to fine tune that platform to ensure that they’re getting the information they need, but not too much information.

As far as the team member management mix. I don’t see any gain, we’ve always been efficient maybe more efficient than I think a lot of our competitors are at that level. We use key employees to supplement as a supplement to management but also as a development program is a gateway into our management program. So I think we’re pretty lean there and I don’t see our technology is going to change that at all. I mean I’m always going to want a Management person in the business, in the facility leading, these large groups of people. I think the difference in casual dining and I think it’s one of the reasons why it doesn’t franchise all that well, these are complex businesses with lots of team members. And if you’re not doing this business over the counter. And the one thing that off-premise has added is, added more complexity as you’re dealing with 10 or 12 at a time in your parking lot as you bring in the food out.

So the businesses in some ways getting more complex as you try to deliver food through different channels. So I don’t see a whole lot of cost savings there.

John Ivankoe — JP Morgan — Analyst

Thanks.

Operator

Our next question comes from the line of Gregory Frankfurt with Bank of America. Go ahead please. Your line is open.

Gregory Francfort — Bank of America Merrill Lynch — Analyst

Hey, thanks. I’ll keep it brief. I just had a follow-up to Palmer’s question about the menu. And can you maybe talk about from two quarters ago to today. How your thoughts might have changed on re-expanding the menu. You shrunk it quite a bit and I think customers are okay with that. Are they still okay with it and just have you stock on re-expanding it change at all. Thanks.

Gene Lee — President & Chief Executive Officer

Yes, good question, Greg. I think that — obviously, we shrunk it for many reasons, primarily supply chain and then just from a labor productivity standpoint. We’ve been very judicious as we brought the products back. We think we’ve through our Turf [Phonetic] studies we think that we’ve satisfied everybody on the — any consumer and offer them places that they would want to go and eat specific menu. What we’re really focused on is, eliminating duplicity in the menu where you have a menu item, it does the same thing. [Indecipherable] someone else did. I think that [Indecipherable] has a very broadly appealing menu but yet limited number of items you have to figure out what Hill Stoner or Houston’s environment where they touch — they touch everything in each category that you might want as a consumer, but they do it with 15 menu items. And so I think that’s what we’re trying to do is to ensure that we don’t have duplicative. And I think the example I would use is, in Longhorn as an appetizer you don’t need both wild west shrimp and Kalamare [Phonetic], it’s the same consumer that’s going to buy the product. And so what we’re working on is, how do we — how we end up with the unique product and a product that you can only get in our restaurant, that’s very craveable and that differentiates you. And having two products that do the same thing and one is not — one is ubiquitous and one is differentiated, it makes no sense to me.

And so that’s how we’re thinking about it. So over time, yeah, [Indecipherable] product there, yes. But what you have to have, you have to have discipline. And the discipline is, you have to take stuff off. And we have been demonstrating that as an industry over the last 15 years and we need to demonstrate that moving forward.

Gregory Francfort — Bank of America Merrill Lynch — Analyst

Thank you.

Operator

Our next question comes from the line of Jared Gardner with Goldman Sachs. Go ahead, please. Your line is open.

Jared Gardner — Goldman Sachs — Analyst

Good morning, thanks and congratulations to the team on respected promotions as well. Just a quick one for me. Wanted to get an understanding of the potential opportunity in sort of the family ordering or catering business. Is that something that over the long term, when things normalize and consumers tend to come back to the restaurants, is that another business that can be maybe bigger than it was in the past, as we think about consumers may be adopting more of an at-home occasion and in-restaurant dining occasion?

Gene Lee — President & Chief Executive Officer

Yeah. We are very strong in that. In Olive Garden already — Obviously, we sell [Indecipherable] So that’s a big part of our business. Where we’re seeing some growth right now is in Cheddar’s with that business with family packs. We’ve also had some success in our upscale brands being able to sell family packs, stakes and size that you can — that are — stakes aren’t prepared but the size are prepared and we will give you instructions to reheat. And so we’re calling family meals or family packs that are working very well.

So I think it’s something that we had some penetration. In Olive Garden, I think it will be bigger as we move forward. And it provide us an opportunity in some of our other businesses to get in that business.

Operator

Our next question comes from the line of James Rutherford with Stephens Inc Go ahead, please. Your line is open.

James Rutherford — Stephens Inc — Analyst

Hey, thanks for taking the question. Just one quick one for me. Gene with the technology investments that you all have made around online ordering in Curbside, has your view changed at all in terms of the long-term mix of off-premise, where perhaps it doesn’t that being a material higher mix longer term compared to where it was pre-pandemic. Of course, still this is maybe a slight bump but not huge kind of pre and post-pandemic? Thank you.

Gene Lee — President & Chief Executive Officer

Yeah, I think it’s a slight bump from pre-pandemic levels. I think that — I mean, listen, this was a growing piece of everyone’s business has convenient to became more and more important. Maybe there is an opportunity for us to take more share in Olive Garden than I think, because the experience is going to be so frictionless. But we’re going to see what the consumer demand is. What I am confident in, especially on the Olive Garden side and somewhat to Cheddar’s is that, we will have — we will get our share in this business, we will get our share of the off-premise pie. And I think we’ll do a really good job with it, and it will continue to grow over time.

Operator

Our next question comes from the line of Brian Vaquero with Raymond James. Go ahead please. Your line is open.

Brian Vaquero — Raymond James — Analyst

Thanks. And I echo the congrats on your promotions. Just two quick ones from me. I wanted to circle back on the labor discussion and you spoke to some tech investments. And I’m curious what role you think server handhelds could play in the coming years with Florida and others potentially moving towards the path to 15? Or perhaps there are other adjustments in the service model that you could see, maybe implementing while protecting the guest experience? Just curious to get your thoughts there.

Gene Lee — President & Chief Executive Officer

Yeah, I’m not a big believer in trying to gain too much efficiency on the service side. I mean I think every time you say you’re going to gain efficiency there, you’ve really saying you’re going to cut service. And we are full service restaurant. So when I think about the handhelds and technology for the service, I’m thinking more about speed of service for our guest than saving money. I just — I’ve been doing this for a long time and I just — every time I’ve tried to increase the efficiency in that part of the restaurant it doesn’t end well for me. And so I am committed to keeping the service levels up. I think service is a big part of the value equation, that’s a differentiator when you come into our restaurant versus go into a fast casual or fast food is, we got to provide a service. And there is a level that you’re going to, you want to get to that minimum level, you want to do a better than your competitors and you want to earn your business that way. So I see the technology solution more as a benefit to the consumer not a benefit to us from a cost standpoint.

Brian Vaquero — Raymond James — Analyst

Understood. All right, that’s helpful. And then shifting gears, quickly on the store margins. Rick, could you provide a little more perspective on the other opex line. Some more specifics on costs that are starting to normalize versus the lower spend levels in your fiscal Q2? And it looks like your guidance for Q3 and bed store margins that are in the ballpark of Q2. I know you mentioned emergency pay but, are there other changing cost dynamics that we should be mindful of, specifically in Q3 versus Q2. Thank you.

Rick Cardenas — Senior Vice President, Chief Financial Officer

Yeah, Brian. The one cost that will continue to go up is repairs and maintenance. As I mentioned, we have dine in’s closed, we don’t have as much beating of our dining room. So we have — we’ll have R&M start to tick up and it already started to tick up in Q2 as dining rooms reopen it also gives us the time to actually do some of that repair and maintenance while the dining are close. So we will have some of that coming up. Utilities go up as your dining rooms open and you’ve got more utilities going that way. But again that’s all contemplated in everything that we have in our guidance.

Brian Vaquero — Raymond James — Analyst

All right. Thank you.

Operator

Our next question comes from the line of Jake Bartlett with Truist Securities. Go ahead, please. Your line is open.

Jake Bartlett — Truist Securities — Analyst

Great. Thanks for taking the questions. And also congratulations to all. My first one is a quick one on LTOs in marketing. You mentioned that your marketing dollars would largely recover post-COVID. Do you expect to go back to the same sort of cadence you had on LTOs, are you rethinking kind of your promotional strategy longer term?

Gene Lee — President & Chief Executive Officer

We’re totally rethinking our promotional strategy and how to effectively use that. There was a lot of good in what we did and we’ve realized there was a lot of bad in what we did. And there’s a lot of activity that goes into those. And as we evaluate that after the fact we believe there is a better way to do that. That doesn’t mean that we’re not going to do LTOs, but we’ve been out of them — we were out of LTOs and LongHorn for almost two years, pre-pandemic. And we have been able to make that adjustment. As we look at Olive Garden, we will continue to try to figure out what’s the best way to use our scale advantage and market that business effectively, but also considering do we need to do six LTOs a year or are there other ways to do that more effectively.

Jake Bartlett — Truist Securities — Analyst

Got it. And then my last — my second and last question is, you talked about improvements to the business and kind of coming out of COVID I think it was a better business model. How do you think about or I don’t know if you’re ready yet to talk about it, but how do you think about the long-term growth algorithm that you’ve talked about in the past as it pertains to unit growth, or maybe margin expansion opportunities. Are we still kind of thinking the 7% to 10% EBIT growth or you think we should think about that differently longer term.

Rick Cardenas — Senior Vice President, Chief Financial Officer

Yeah, Jack, this is Rick. I think if you — as you think about our long-term framework, we haven’t adjusted our long-term framework. So as of now, we still believe we can get to those numbers over the long run. But as we’ve always said, any one year could be above or below that. And so I would hope that FY’22 would be above that, because of where we were in FY’21, but in FY’21 and we’re going to be below it. So in the long run, which is what we talk about to all of our investors and to all of you. We believe we can hit our long-term framework. And I will remind everybody that we’ve been a public company since 1995. We’ve never had a 10-year period where our average annual TSR has been below 10%.

And even when — fiscal period. So even last year when we had the worst fourth quarter I think of any industry and of any one at least for us, we still had a 10-year TSR of over 10% on average.

Jake Bartlett — Truist Securities — Analyst

Great. Thanks a lot.

Operator

Our next question comes from the line of Priya Ohri-Gupta with Barclays. Go ahead please. Your line is open.

Priya Ohri-Gupta — Barclays — Analyst

Great, thank you so much for squeezing me in. And let me just add my congrats to the three of you as well. I was just curious if you could give us some thoughts around how you are broadly thinking about the dividend? I know you mentioned sort of 50% payout relative to this quarter’s EPS. So just in light of the upcoming guidance and some of the continued volatility that we’re seeing in the external environment, how should we anticipate the dividend sort of progressing going forward? Thank you.

Gene Lee — President & Chief Executive Officer

Yeah, Priya. As we know the dividends are important to our shareholders. We also know that the dividend policy is important to our bondholders. And as you think about our dividend and what we do, we typically set it within our long-term framework of 50% to 60% of our earnings. And the quarter that we just ended was at the low end of that, at 50%. We’re going to continue to work with the Board on what our dividend is going forward, but going farther than this quarter, it’s kind of hard for me to say, because the board is the one that decides a dividend, but we did contemplate what we think our guidance was in Q3 when we set our dividend in Q2. So we always look forward to see what we think our cash flows are going to be to ensure that the dividend is safe. And so that’s why we set the dividend of $0.37 this quarter.

Priya Ohri-Gupta — Barclays — Analyst

That’s helpful. Thank you.

Gene Lee — President & Chief Executive Officer

Thanks, Priya.

Operator

And ladies and gentlemen that concludes today’s Q&A session for the call. I would like to turn it back over to Mr. Kalicak.

Kevin Kalicak — Senior Director – Investor Relations

Thank you everyone for participating. That concludes our call for today. I’d like to remind you that we plan to release third quarter results on Thursday, March 23, before the market opens with the conference call to follow. Thank you and happy holidays.

Operator

[Operator Closing Remarks]