2026 Q2 Earnings Call: Contradictions Emerge on Beef Prices, Labor Margins, and Pricing Strategy

Date of Call: December 18, 2025

Financials Results

• Revenue: $3.1B total sales, up 7% YOY
• EPS: $2.08 adjusted diluted net EPS from continuing operations, up 2.5% YOY
• Operating Margin: Restaurant-level EBITDA 18.7%

Guidance:

• Total sales growth for fiscal 2026 expected to be 8.5%–9.3%.
• Same-restaurant sales growth expected to be 3.5%–4.3%.
• 65–70 new restaurant openings planned.
• Total capital spending $750M–$775M.
• Total inflation ~3.5%; commodities inflation 4%–5%.
• Adjusted diluted net EPS $10.50–$10.70 (≈$0.20 related to 53rd week).
• Diluted average shares ~116.5 million.
• Expect EPS to sequentially improve (Q3 mid-single-digits), with pricing gap to inflation narrowing by Q3 and catching up by Q4.

Business Commentary:

* Strong Sales Performance Across Segments: - Darden Restaurants reported total sales growth of 8.5% to 9.3% for fiscal 2026, driven by positive same-restaurant sales and the addition of 30 net new restaurants. - The growth was supported by positive same-restaurant sales across all segments, exceeding the industry benchmark by 300 basis points.

• Impact of Commodity Costs:
• The high beef costs were a significant headwind, with beef prices peaking above historical norms and impacting restaurant-level margins.

• Despite these challenges, Darden strategically priced below inflation and leveraged their scale to mitigate costs while maintaining value for guests.

• Olive Garden Success:

• Olive Garden's positive same-restaurant sales were 4.7%, driven by initiatives like the Never Ending Pasta Bowl promotion and first-party delivery.

• The implementation of lighter portion offerings has led to increased affordability perceptions and guest frequency, contributing to sales growth.

• Casual Dining Industry Outperformance:

• Darden's casual dining brands saw growth from middle to higher-income households, with strong traffic growth from guests aged 55 and over.

• The company's strategic focus on value and guest experience has enabled it to outperform the industry and capture market share.

• Operational Efficiency:

• Darden noted that their labor margin improvements were driven by productivity improvements that offset the impact of underpricing inflation.
• The focus on operational excellence and leveraging technology have helped maintain labor costs amid a competitive labor market.
  

  Sentiment Analysis:

  Overall Tone: Positive

  • Management: "We had a strong quarter that exceeded our sales expectations"; company generated $3.1B sales (up 7% YOY) and adjusted EPS $2.08 (up 2.5% YOY). Guidance was updated upward with clear cadence to narrow pricing vs. inflation and expectations of sequential EPS improvement (Q3 mid-single-digits). Despite commodity headwinds, commentary emphasizes top-line momentum, industry outperformance and confidence in the plan.

Q&A:

• Question from Brian Bittner (Oppenheimer & Co. Inc.): How impactful will Olive Garden's lighter portions menu be to sales and will it be observable externally?
  Response: Management: Primarily improves internal metrics (value perception, frequency); short-term check/mix drag ~20–30 bps in Q2 but contributes to long-term traffic and was accelerated for system rollout.

• Question from Brian Bittner (Oppenheimer & Co. Inc.): Why has labor margin shown deleverage despite >4% comps?
  Response: Management: Comparable restaurants drove labor leverage via productivity; total company labor appears worse due to brand mix and Chuy's acquisition—idiosyncratic, expected to improve in back half.

• Question from David Palmer (Evercore ISI): Does guidance factor in Olive Garden comps into tough fourth-quarter laps and potential fiscal stimulus?
  Response: Management: Full-year same-restaurant guidance (3.5–4.3%) embeds back-half ~2.5–4%; outlook contemplates macro uncertainty and potential early-2026 fiscal stimulus alongside brand initiatives.

• Question from David Palmer (Evercore ISI): Will you add pricing at LongHorn given beef inflation and current underpricing levels?
  Response: Management: Darden priced ~130 bps below inflation in Q2; expect gap to halve by Q3 and catch up by Q4; LongHorn will take modest price increases and won’t stay 320 bps below inflation.

• Question from Brian Harbour (Morgan Stanley): What gives confidence beef costs come down by Q4?
  Response: Management: Beef peaked in Q2 due to supply constraints; retail demand softened (~Nov -14% volume), production and packer dynamics improved recently, and ~45% coverage for the back half supports easing prices.

• Question from Brian Harbour (Morgan Stanley): Is Olive Garden first-party delivery at 4% of sales on track and can it grow?
  Response: Management: 4% is encouraging without Q2 marketing; can grow with targeted marketing and tracks closely to overall to-go penetration.

• Question from Jacob Aiken-Phillips (Melius Research LLC): As delivery grows, will incrementality hold or does cannibalization rise, and what operational steps preserve incrementality?
  Response: Management: Expect incrementality to hold or improve as delivery attracts younger, higher-frequency, higher-check guests; monitor until saturation and apply learnings to operations.

• Question from Jacob Aiken-Phillips (Melius Research LLC): Any shift in where full-service/casual dining fits within broader food spend?
  Response: Management: Casual dining is growing faster than other segments and Darden is outpacing the industry, taking some share from limited service.

• Question from Jake Bartlett (Truist Securities): Marketing as a % of sales—what's the expectation for the year?
  Response: Management: Prior savings (~$20M) freed marketing; expect roughly a 10 basis point increase year-over-year in marketing as currently modeled.

• Question from Jake Bartlett (Truist Securities): What baseline macro consumer view underpins back-half guidance?
  Response: Management: Consumers remain resilient but cautious; strongest growth from middle-to-higher income and 55+; some pullback under $50k — guidance assumes this environment.

• Question from Andrew Charles (TD Cowen): Does updated same-store guidance embed incremental pricing?
  Response: Management: Yes—pricing is modeled to rise modestly (mid-3s in back half), up from ~2.6% in Q2, contributing to guidance.

• Question from Andrew Charles (TD Cowen): Have third-party delivery concerns been addressed enough to list Olive Garden on third-party platforms?
  Response: Management: Third-party providers understand Darden's concerns (data, tips, control); Darden would consider solutions that address those issues.

• Question from Jeffrey Bernstein (Barclays): Do you expect the gap vs. industry to continue widening in the back half?
  Response: Management: Historical pattern is widening when industry slows, but they base outlook on macro and brand initiatives and decline to quantify the future gap.

• Question from Jeffrey Bernstein (Barclays): Where does Yard House/LongHorn sit in Uber Direct rollout plans?
  Response: Management: Yard House expected to be smaller contributor given its smaller off-premise base; LongHorn could pursue testing but food travel mix (more chicken/seafood off-premise vs. steak) is a consideration.

• Question from Sara Senatore (BofA Securities): Are value promotions bringing different customers or just increasing frequency among existing customers?
  Response: Management: Promotions mainly support core customers and also bring some lapsed/new guests; Ruth's Chris $55 menu drives volume and is profitable.

• Question from Sara Senatore (BofA Securities): How should we think about retail demand decline (~14% Nov) translating to beef prices?
  Response: Management: Dynamics are atypical; price response depends on production and packer behavior—company sees early green shoots and improved coverage but no precise crystal ball.

• Question from James Salera (Stephens): Can you break out Olive Garden comp components (mix vs traffic) and guest demographics?
  Response: Management: Olive Garden same-restaurant sales +4.7%: traffic +1.7% plus catering +1.1% = ~2.8% traffic; pricing +2.6%. Guest growth above $50k and 55+; slight pullback under $50k.

• Question from James Salera (Stephens): Is LongHorn's outperformance related to pulling from Fine Dining or grocery-driven substitution?
  Response: Management: LongHorn’s focus on quality, modest underpricing vs inflation and grill expertise drives loyalty; high grocery beef prices may be pushing consumers to dine out, possibly taking some share from Fine Dining.

• Question from Lauren Silberman (Deutsche Bank): Can you unpack cadence of comps through the quarter and region-to-region differences?
  Response: Management: Won't detail cadence; pricing gap expected to halve by Q3 and tighten into Q4. Regionally Q2 strongest in Midwest; softness in New England and Pacific Northwest; other regions near median.

• Question from Lauren Silberman (Deutsche Bank): Which brands benefit most from fiscal stimulus and via traffic vs check?
  Response: Management: All brands benefit; stimulus that helps median/lower incomes likely aids Olive Garden, Cheddar's and Chuy's; benefit may show in traffic and some check.

• Question from Peter Saleh (BTIG): Why no Q2 marketing for Uber Direct and will you market it later?
  Response: Management: Prioritized marketing behind Never Ending Pasta Bowl (highest ROI); delivery marketing could be used later if warranted.

• Question from Peter Saleh (BTIG): Any update on tariffs impacting commodities or development costs?
  Response: Management: Tariff impact is already in commodity inflation at tens of basis points of sales; construction cost impact remains mid-single-digit—no change.

• Question from Jon Tower (Citigroup): Will Olive Garden market the smaller-portion section and how are you thinking about the mix trade-off?
  Response: Management: No current plans to market it; it's performing via in-restaurant adoption and word of mouth; they may change approach if Olive Garden finds a compelling communication strategy.

• Question from Jon Tower (Citigroup): Will the small-portion items be available on delivery (1P)?
  Response: Management: If it's on the menu, it will generally be available for delivery.

• Question from Jon Tower (Citigroup): Unit growth update—where are the incremental ~5 restaurants coming from and is this a pull-forward from fiscal '27?
  Response: Management: The extra ~5 restaurants come from a couple brands and faster site execution; not expected to materially pull forward next year's growth—guidance remains 65–70 openings.

• Question from Jeffrey Farmer (Gordon Haskett): Thoughts on fiscal '26 restaurant-level margin vs fiscal '25?
  Response: Management: Stay focused on long-term framework—earnings after-tax margin flat to +20 bps; current guidance implies being within that range ±~10 bps.

• Question from Jeffrey Farmer (Gordon Haskett): Are you increasing reinvestment given better top-line results?
  Response: Management: Yes—accelerating Olive Garden lighter-portion rollout and other investments while maintaining pricing below inflation.

• Question from Dennis Geiger (UBS): Update on operational speed-of-service initiatives and expected impact on traffic/table turns?
  Response: Management: Brands implementing tailored programs with progress; faster service should improve peak table turns and drive long-term traffic as guest experience improves.

• Question from Andrew Barish (Jefferies): Cheddar's status and key to unit growth there?
  Response: Management: Cheddar's delivered same-restaurant sales growth, improved turnover and operational metrics; pipeline building for gradual growth (company capping brand growth below ~10%).

• Question from Andrew Barish (Jefferies): Can you re-run Olive Garden comp components?
  Response: Management: Traffic +1.7% + catering +1.1% = ~2.8% traffic; pricing +2.6%; implied mix/check dynamics yield ~1.9% implied check.

• Question from Christopher O'Cull (Stifel): Will other brands adopt smaller portions?
  Response: Management: Some brands are testing smaller portions or different-size offerings (LongHorn, Cheddar's) but not a uniform menu section like Olive Garden.

• Question from Christopher O'Cull (Stifel): Any menu changes planned due to GLP-1 usage?
  Response: Management: Monitoring usage; main observed impact is on alcohol mix rather than core food; lighter portions help but changes are incremental—many brands already offer protein-focused options.

• Question from Andrew Strelzik (BMO Capital Markets): Does Olive Garden delivery tracking like off-premise surprise you?
  Response: Management: Not surprising—delivery guests resemble off-premise guests and tend to be higher-frequency; observed ratios match expectations.

• Question from Andrew Strelzik (BMO Capital Markets): CapEx change—does it reflect new-unit timing and what's timeline to push to higher end of range?
  Response: Management: CapEx rose due to restaurants opening earlier than planned; pipeline supports 3–4% sales contribution from new units; timing driven by development execution.

• Question from Danilo Gargiulo (Bernstein): Which consumer cohorts drive your long-term outperformance and how will that sustain?
  Response: Management: Outperformance varies; recently stronger among higher-income guests though COVID saw strength in lower-income groups—portfolio breadth lets Darden serve multiple cohorts sustaining competitive advantage.

• Question from Danilo Gargiulo (Bernstein): Beyond alcohol, any mix shifts from GLP-1 users (proteins, desserts, sides)?
  Response: Management: Largest change is reduced alcohol; modest declines in appetizers/desserts among some guests; brands offer protein-forward choices (e.g., Seasons 52) to serve these needs.

• Question from Gregory Francfort (Guggenheim): Current turnover levels and wage environment?
  Response: Management: Turnover at record lows year-over-year (meaning improvement); hourly wage inflation ~3%, lower than pre-COVID mid-3% levels—labor environment stable.

• Question from Brian Vaccaro (Raymond James): Never Ending Pasta Bowl mix and lighter portion sales rate?
  Response: Management: NEP saw stronger preference and record refill rates with some fewer buy-ups to higher-protein items; lighter portions remain ~1.5% of sales (fluctuating modestly).

• Question from Brian Vaccaro (Raymond James): G&A outlook after Q2 beat?
  Response: Management: Full-year G&A ~ $500M; Q4 expected ~$15–20M higher than Q3 largely due to 53rd week and seasonality—no change to total guidance.

• Question from James Sanderson (Northcoast): Demographics of lighter-portion buyers and holiday booking trends?
  Response: Management: Sample size small (~1.5% of sales) so demographic analysis ongoing; Thanksgiving and holiday bookings are strong with record Thanksgiving at Fine Dining reservation brands.

• Question from John Ivankoe (JPMorgan): Any immigration-driven labor issues at restaurants or in packer supply chain affecting beef?
  Response: Management: No material immigration impact on Darden staffing—retention strong; packer supply constraints noted but unclear whether labor-driven; regionally Q2 strongest in Midwest, softness in New England and PNW.

• Question from Hyun Jin Cho (Goldman Sachs): How will you communicate value across brands and what would prompt marketing the lighter portions?
  Response: Management: Will adhere to marketing filters (brand equity, simplicity, not deep discounts); lighter portions will be marketed only if Olive Garden finds a clear, effective consumer communication approach.

Contradiction Point 1

Beef Price Trends and Expectations

It involves differing expectations about beef price trends, which are crucial for financial planning and budgeting.

Can you explain the dynamics and pricing expectations in the beef market? - Brian Harbour (Morgan Stanley, Research Division)

2026Q2: Beef prices peaked in the second quarter due to supply constraints, but recent declines in retail demand offer hope for easing prices. Production is increasing, and coverage reflects this in the back half. - Rajesh Vennam(CFO)

Can you discuss your contracting plans for the remainder of the year and what gives you visibility that you've accounted for the range of food cost outcomes? - Brian Harbour (Morgan Stanley)

2026Q1: We're starting to see demand disruption in retail. Beef costs and seafood tariffs are driving inflation. We're taking a disciplined approach to mitigate risks and manage cash flow. - Rajesh Vennam(CFO)

Contradiction Point 2

Labor Margin Deleveraging and Comps Growth

It involves the differing explanations for the labor margin deleveraging despite comps growth, which impacts financial performance expectations.

What challenges exist in leveraging labor margins despite growing comps? - Brian Bittner (Oppenheimer & Co. Inc., Research Division)

2026Q2: Despite the growth in comps, labor margins are deleveraging due to acquisitions and brand mix. - Rajesh Vennam(CFO)

Can you explain the flat operating margins in Q4 despite revenue growth above 3%? - Brian Bittner (Oppenheimer)

2025Q3: The key driver is expected inflation of 3% compared to our pricing below 3%. This means our operating profit will not grow materially year-over-year. - Rajesh Vennam(CFO)

Contradiction Point 3

Pricing Strategy and Inflation Management

It involves changes in the company's strategic approach to pricing in response to inflation, which directly impacts revenue and profitability.

Does the updated guidance include additional pricing to offset inflation? - Andrew Charles (TD Cowen)

2026Q2: We expect full-year pricing to approach 3% and we'll get closer to this in the back half. - Rajesh Vennam(CFO)

What are pricing expectations for fiscal 2026, and is there a long-term goal to keep pricing below total inflation? - Brian James Harbour (Morgan Stanley)

2025Q4: We expect to be in the mid-2s for fiscal 2026 pricing, with a long-term strategy to keep pricing below total inflation. - Rajesh Vennam(CFO)

Contradiction Point 4

Marketing Strategy and Effectiveness

It involves differing perspectives on the marketing strategy and its effectiveness, which impacts gross marketing spend and sales growth expectations.

Are you planning to more aggressively market the smaller portion menu? - Jon Tower (Citigroup Inc., Research Division)

2026Q2: Marketing is not planned for the smaller portion menu as it is doing well without additional promotion. Future decisions may change based on performance. - Ricardo Cardenas(CEO)

What is the fair margin level for personalized digital marketing at Olive Garden? - John Ivankoe (JPMorgan)

2025Q3: We can use digital to personalize marketing without necessarily offering discounts. - Ricardo Cardenas(CEO)

Contradiction Point 5

Impact of Smaller Portions on Olive Garden's Sales and Traffic

It highlights differing opinions on the impact of the lighter portions menu on Olive Garden's sales and traffic, which affects strategic decisions and market positioning.

How has the lighter portions menu affected Olive Garden's sales and value perception? - Brian Bittner (Oppenheimer & Co. Inc., Research Division)

2026Q2: The lighter portions menu impacts value perception and affordability, driving higher frequency among guests. There is some impact on sales, initially through mix adjustment but not significantly offsetting delivery sales. - Ricardo Cardenas(CEO)

Rick, regarding the new portion sizes at Olive Garden: Are you seeing different customer segments requesting them, and do you think this is a traffic driver for Olive Garden? - Jon Tower (Citigroup Inc., Research Division)

2026Q1: Yes, it's pretty early. We believe this will be a traffic driver, but it's not significant, and we haven't marketed it. We're seeing some preference moving, but not significant yet. - Ricardo Cardenas(CEO)