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Darden Restaurants, Inc. (NYSE:DRI)
Q3 2018 Earnings Conference Call
March 22nd, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to Darden's Fiscal Year 2018 third quarter earnings call. Your lines have been placed on listen only until the question and answer session. To ask a question, you may press * followed by the number 1 on your touchstone phone. This conference is being recorded. If you have any objections, please disconnect at this time. I will now turn the call over to Mr. Kevin Kalicak. You may begin.

Kevin Kalicak -- Senior Director, Investor Relations

Thank you. 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 can cause actual results to differ materially from our expectations and projections. Those risks are described in the company's press release, which was distributed this morning in 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 www.darden.com. Today's discussion and presentation includes certain non-GAAP measurements and reconciliations of these measurements are included in the presentation. We plan to release Fiscal 2018 fourth quarter earnings on June 21st before the market opens followed by a conference call.

This morning, Gene will share some brief remarks about our quarterly performance and business highlights and Rick will provide an update on our financial results and outlook for the year. During today's call and for the remainder of the Fiscal Year, all references to Darden's same restaurant sales will only include Darden's legacy brands since Cheddar's Scratch Kitchen restaurants are new to Darden.

Now, I'll turn the call over to Gene.

Gene Lee -- Chief Executive Officer

Thanks, Kevin. Good morning, everyone. As you've seen from our press release this morning, we had another good quarter. Total sales from continued operations were $2.13 billion, an increase of 13.3%. Same restaurant sales grew 2% in spite of the negative weather impact, which Rick will address in his remarks. Adjusted diluted net earnings per share were $1.71, an increase of 29.5% from last year.

I'm proud of the way our teams have executed against our strategy we rolled out three years ago. Our operating teams remain focused on food, service, and atmosphere. At the Darden level, we continue to concentrate on our four competitive advantages -- leveraging our significant scale to create cost advantages, using an extensive data and insights to improve operating fundamentals and to better understand our guests and communicate with them more effectively, ensuring our brands systematically go through our rigorous strategic planning process, and cultivating our results-oriented people culture to enable growth.

Olive Garden had another solid quarter. In fact, December was the highest total sales month in the history of the brand. Overall, same restaurant sales grew 2.2%, the 14th consecutive quarter of growth, out-performing the industry benchmarks excluding Darden by 310 basis points, same restaurant discounts outperformed the industry benchmarks, excluding Darden by 440 basis points.

During the quarter, Dan Kiernan was appointed President of Olive Garden. I'm excited to have an outstanding operator like Dan leading the team. His passion for our team members and guests coupled with his deep understanding of the brand makes him the perfect leader for Olive Garden. Olive Garden continues to consistently deliver strong results, which I attribute to the brand's strategic focus on driving frequency among our most loyal guests. This begins with flawless execution of the guest experience and we will continue to focus on simplification to improve execution of our standards.

We were also able to drive more frequency by introducing craveable menu items that created excitement among our core guests. We introduced a new appetizer, Loaded Pasta Chips, and a new lunch entrée, the Meatball Pizza Bowl, during the quarter, and both were supported with successful integrated marketing campaigns that drove overwhelming PR buzz.

Additionally, our focus on off-premise sales is doing more than just meeting our guests' need for convenience. It's also enabling us to capture dining experiences that guests would not have previously considered for us. During the quarter, off-premise sales grew 13% and were approximately 15% of total sales for the quarter.

Building loyalty also means we need to continue to deliver meaningful value to our guests every day. During the quarter, we launched a new advertising campaign to build awareness for every day value, highlighting our lunch duo starting at $6.99, early dinner duo starting at $8.99, and create your own pasta starting at $9.99.

The work we're doing is resonating, as industry data shows that Olive Garden has seen the largest improvement in our value ratings versus key competitors over the least year. Our focus on every day value and simplification has also allowed us to reduce the number of promotional offers we'll run this year.

As a result, during the fourth quarter, we will not offer one of our most popular promotions, Buy One, Take One, that ran during the fourth quarter last year. Buy One, Take One, is a strong promotional platform for us. To ensure its long-term effectiveness, we do not want to risk over-exposure. However, not running this promotion may have a short-term impact on our traffic in Q4. I'm encouraged by Olive Garden's momentum and we'll remain focused on making decisions that ensure our guests win.

LongHorn Steakhouse's same restaurant sales grew 2%, the 20th consecutive quarter of growth, outperforming the industry benchmarks excluding Darden by 290 basis points. Same restaurant guest counts outperformed the industry benchmarks excluding Darden by 420 basis points. The team at LongHorn continues to make solid project against their long-term strategy of investing in the quality of the question experience, simplifying operations to drive execution and leveraging LongHorn's unique culture to increase team member engagement.

We think about investing in the guest experience across all three guest touch points -- food, service and atmosphere. While we've been making investments across all three areas, our primary focus has been on increasing the quality of our food. In fact, we've increased the size or improved the cut of nearly every one of our steaks over the last two years.

Our focus on simplification, like reducing the number of new items needed to support or promotional offers, is driving more consistency, leading to higher levels of execution inside our restaurants. That's evidenced by the fact that LongHorn ranks at the top of its competitive set on food quality scores.

While LongHorn's team member and management retention levels lead the industry, we remain focused on team member engagement. During the quarter, we kicked off our third annual Steak Masters competition. This program provides intense training for our culinary team members while creating excitement and increasing engagement for our entire team in each restaurant. And finally, our new LongHorn openings continue to exceed our expectations and we're building a strong pipeline for future growth.

Now, I'll update you on Cheddar's Scratch Kitchen and our progress with the integration. Same restaurant sales declined 2.2% and that decline was driven by the 52 restaurants and the two franchise systems that have been acquired over the last 14 months. Same restaurant sales at the 91 legacy Cheddar's restaurants were essentially flat. Operations leadership is focused on strengthening the restaurant management teams and working to improve operational excellence with a concentration on these previously franchised locations.

Cheddar's is a strong brand that serves more than 6,000 guests per week. These high guest counts create some unique operational challenges that we will address primarily through simplification. This will take time as we manage through the amount of change taking place across the system.

Turning to the integration -- it's been less than a year since we acquired Cheddar's and I'm pleased with everything the integration team has accomplished in that amount of time. We are now in the final stages of our systems integration. All restaurants are utilizing our full distribution network. And we successfully transitioned Cheddar's onto the Darden payroll platform in December.

The last major milestone is the rollout of our proprietary POS system which we expect to complete by the end of the fiscal year. Our restaurant managers and teams are still familiarizing themselves with our systems and processes and it will take time before they're fully comfortable using them, but we're pleased with the insights and feedback we're receiving from the restaurants that are fully integrated into the Darden infrastructure.

As I said previously, this is a complicated process. We know we're throwing a lot at the restaurant teams and we know it's distracted. We're confident the long-term benefit will be worth the short-term impact this is having on the business.

Now, let me provide a quick update on a restaurant we just opened in Washington DC called the Capital Burger. This restaurant is a brand extension of the Capital Grille in DC, which is a very busy restaurant with limited capacity. The Capital Burger is a way for more of our guests to enjoy a bar-centric Capital Grille with a limited menu featuring our signature burgers. The Capital Burger will leverage Capital Grille's steak and wine expertise as well as their exceptional service to create an extraordinary burger experience. I'm excited to see how our guests in that market will respond.

Finally, I want to congratulate all of the restaurant management teams at Olive Garden and the Capital Grille for winning the People Report's 2018 Best Practices Award. Being recognized as having the workplace culture in casual dining and fine dining is a tremendous honor. We know what truly sets us apart is our people. I'm proud of the work each one of our eight brands does to ensure our results-oriented culture remains a competitive advantage for Darden.

Now, I'll turn it over to Rick.

Rick Cardenas -- Chief Financial Officer

Thank you, Gene. Good morning, everyone. We had another strong quarter with total sales growth of 13.3% driven by 11.3% growth from the addition of 140 Cheddar's and 34 other net new restaurants and same restaurant sales growth of 2%. Adverse winter weather negatively impacted same restaurant sales this quarter by 70 basis points. The negative impact was experienced in January and February. Weather for the quarter was in line with the average over the last five years. However, we were wrapping on unseasonably mild winter weather in the third quarter last year.

Second quarter adjusted diluted net earnings per share from continuing operations or $1.71, an increase of 29.5% from last year's earnings per share. We've paid $78 million in dividends and repurchased $19 million in shares, returning approximately $97 million of capital to our shareholders this quarter and over $440 million fiscal year to date.

Additionally, during the quarter, we've further strengthening our financial position by issuing $300 million of new 30-year debt at 4.55%, replacing $311 million of our outstanding notes tendered that had a higher interest coupon rate of 6.8% and 6%. We funded the approximately $100 million of premium and fees associated with the tender with cash on hand and commercial paper.

Looking at the margin analysis, I'm going to focus on food and beverage, restaurant labor, G&A and tax, as variances for all other lines on the P&L were relatively small on a year over year basis.

Food and beverage expense was 50 basis points favorable to last year as pricing leverage, cost savings, and synergies more than offset commodities inflation of below 1%. Restaurant labor was 130 basis points unfavorable last year due to several factors. First, we continue to see elevated wage inflation of approximately 4% that was only partially offset by the favorability we picked up from pricing leverage and productivity improvements.

Second, we are still experiencing negative brand mix from Cheddar's. Next, there were headwinds related to mark to market expenses for general manager and managing partner of equity awards, which I'll explain in further detail in a moment. Last, in January, we announced a $20 million investment in our workforce this fiscal year. We incurred approximately $9 million of that amount this quarter, most of which impacted the restaurant labor line.

General and administrative expense was elevated this quarter, driven by mark to market expenses related to significant appreciate in the equity markets this quarter. The mark to market of our deferred compensation liability and other equity-based programs increased expenses, primarily in G&A, consequently reducing our EBIT. However, due to the way we hedged this expense to reduce the volatility of earnings after tax. It is almost entirely offset in the tax line.

In the quarterly presentation that is posted on our website, we showed the third-quarter details of this hedge. Market-based compensation increased general and administrative expense by $5.5 million. Including the impact in restaurant labor I previously mentioned, total mark to market expenses reduced EBIT by $7 million and EBIT margin by 30 basis points this quarter. Our hedge reduced income tax expense by approximately $6 million, resulting in a net earnings after tax impact of $900,000.

In quarters in which the overall equity market and/or our stock price declines, the inverse relationship would be true. EBIT would have a positive benefit while the tax line would be unfavorable, but overall earnings after tax should be relatively flat.

Turning to income tax expense, we had an abnormally low performance adjusted effective tax rate of 4.4% this quarter due to several factors. First, the application of the new lower tax rate in Q1 and Q2 earnings reduced our rate by 7% points in the quarter. Next, the resolution of other tax matters reduced our quarterly rate by 4 percentage points. Both of these favorable impacts were contemplated in the updated guidance we provided in January.

Finally, the impact from the deferred compensation hedge I just explained lowered the tax rate by approximately 4 percentage points. This was not contemplated in our January guidance. After adjusting for these three factors, our normalized tax rate for the quarter would have been approximately 19%.

Now to our segment performance -- Olive Garden, LongHorn, and the fine dining segment all grew sales in the quarter, driven by positive same restaurant sales and net new restaurants. Segment profit margin increased in each of these segments even at the incremental workforce investments by leveraging the same restaurant sales growth and managing costs effectively.

Sales grew 71.4% at the other business segment, primarily due to the addition of Cheddar's and new restaurant growth at the other brands, as well as same restaurant sales growth at Yard House and Bahama Breeze. Similar to last year, segment profit margin was 250 basis points lower than last quarter, similar to last quarter. Segment profit margin was 250 basis points lower than last year due to the brand mix of impacting -- of adding Cheddar's and for moving consumer packaged goods out of this segment, primarily to Olive Garden.

Additionally, with this mornings announcement, we increased our Fiscal 2018 adjusted earnings per share outlook to between $4.75 and $4.80 from the previous $4.70 to $478. This assumes approximately 126 million average shares outstanding for the year and it's driven by same restaurant sales growth of approximately 2%, new restaurant growth of approximately 40, not including the 11 Cheddar's franchise restaurants we acquired in Q2 and total sales growth of approximately 13%. We also updated our effective tax rate to be between 16% and 16.5% down from approximately 18%. Finally, we brought our annual capex guide to the bottom end of the previous range at approximately $400 million.

Looking ahead, we wanted to provide some preliminary guidance for Fiscal 2019. We currently anticipate total capital spending between $425 million and $475 million, of which $225 million to $260 million is related to growth new restaurant openings between 45 and 50 and $200 million to $215 million is related to ongoing restaurant maintenance, additional Olive Garden remodels, technology, and other spending.

In addition to the capex, a new unit guidance we typically give during our third quarter announcement, we are providing a few additional items for Fiscal 2019 given tax reform and other unique modeling challenges. First, we anticipate our annual effective tax rate to range between 12% and 13%.

We also expect to make an additional $15 million of investments related to the savings from the tax act. This is in addition to the $200 million of workforce investments we are making -- $20 million, to the $20 million of additional workforce investments we are making in Fiscal 2018 for a total annual run rate of $35 in P&L investments. Finally, we expected diluted average common shares outstanding for Fiscal 2019 to be approximately $125 million.

With that, we'll take your questions.

Questions and Answers:

Operator

Thank you, speakers, we will now begin the question and answer session. If you would like to ask a question, please press * followed by the number 1 in your phone and mute your phone and record your name clearing when prompted. Your name is required to introduce your question. If you cancel your request, please press * followed by the number 2. One moment, please.

Our first question comes from David Tarantino from Baird. Your line is now open.

David Tarantino -- Baird -- Analyst

Hi, good morning. Gene, I just wanted to ask about your views on the current environment within casual dining and how you're viewing the underlying momentum in the business in light of factoring out some of the weather you noted. Then more specifically on Q4, you do have what looks like a tougher comparison, especially for Olive Garden. You mentioned that you're not going to repeat the buy one, take one promotions.

So, just wondering about your thoughts on how we should expect the fourth quarter to play out and your ability to sustain positive momentum despite the self-comparison and eliminating that promotion.

Gene Lee -- Chief Executive Officer

Yeah, good morning, David. Let's start with the industry. We are seeing a little bit of momentum there, a little bit of uptick in traffic. The real change that we're seeing as we analyze the benchmarks is that the check average appears to be growing and it's picked up some steam. As we look at that, we're trying to analyze whether that is the industry taking more pricing, is it a pull back on some discounting, is it a change in promotional strategy -- at this point, we really don't have a good feel, but we do see that check average is up over 3% and it's been that way for almost the last 90 days.

So, that's a significant move up. We've seen a tick up in traffic, but not at the same rate as overall sales. As far saw the fourth quarter, you gave our guidance. We think we're comfortable in that range. We do have some tough laps, but we're making good long-term decisions. We think there's value in the menu. We're operating and executing at a high level. Obviously, we're very comfortable with the guidance we just put forth. You did make the comment, introduced the fourth quarter weather issue. We've been in this quarter and every week we've had a major snow impact for at least one day.

I will add -- I think I added this during the hurricanes -- weather impacts today are greater than they were five or ten years ago because of the media hype around the situation. So, it's kind of tough for us. This will be the only comment I'll make about fourth quarter. It's been tough for us to get any type of read around fourth quarter because of the weather impacts in March.

David Tarantino -- Baird -- Analyst

Just to follow up, Gene -- on the elimination of the Buy One, Take One promotion, are you planning to run something else in place of that or is it a situation where you're not going to have a major promotion like that in the fourth quarter. Any way to gauge what the level of impact from that factor alone would be...

Gene Lee -- Chief Executive Officer

We believe that we -- we're going to run promotions. We have taken the promotional calendar. We've gone from nine to six promotions this year. We think that's a huge operational benefit. So, our promotional timing is not lining up exactly where last year. We do have a great promotion that's about to start in two weeks. So, we think that will be really strong.

As we change the promotional cadence, we also change our media cadence, which makes our ability to analyze our business week to week a little bit more difficult, but we're confident that we've got a good promotion for the back half of the fourth quarter and we think we've got the right media plan. That's all been incorporated in the guidance we gave you.

Operator

Thank you. Our next question comes from Brett Levy from Deutsche Bank. Your line is now open.

Brett Levy -- Deutsche Bank -- Analyst

Good morning. Thank you. Is there a number where you look at your same stores sales GAAP and outperformance where you start to get concerned? If we look at what we've seen for Olive Garden, it seems to be back to the beginning of your run about ten quarters ago. When you think about labor, what can you do aside from just trying to drive greater retention? What can you do to offset to create either incremental training, incremental technology to try to help us get a better sense of what the leveragability is on that line. Thank you.

Gene Lee -- Chief Executive Officer

As far as the GAAP would go, I would point you back to our long-term framework and say that we're focused on trying to deliver between 1% and 3% same restaurant sales on a consistent basis. I know there's a lot of attention and a lot of concern about our GAAP. I'd go back and look at a two-year stack. We didn't lose that much momentum on a two-year stack. Also, we lost a lot less momentum on the guest count. We appear to have a lot less price in our menu compared to our competitors, which we think is a really great thing and will play out over the long-term.

As far as labor goes, I think the key to labor is simplification. We'll continue to try to simplify our menus, simplify our processes. We've done a good job. I thought the graph that Rick showed in his prepared remarks shows that we are getting some productivity improvement to offset some of the wage rate increase. It's a line that I don't think we're going to leverage here in the near-term. We're trying to keep it as flat as we possibly can.

I look at our businesses, I'm not so sure there's a piece of equipment that's going to help us improve or any technology that's going to help us improve our efficiencies back there. My belief will always be it starts with your menu, with all your processes and procedures as your products come in your backdoor. That's what we're going to focus on.

Brett Levy -- Deutsche Bank -- Analyst

Thank you.

Operator

Our next question comes from Sara Senatore from Bernstein. Your line is now open.

Anna Papp -- AB Bernstein -- Analyst

Good morning. This is actually Anna Papp representing Sara. I'm surprised at how modest food inflation has been across the industry despite what appears to be more significant increases in commodity prices. Can you remind us about how contracting plays into this and how we should think about the type of lag there between the commodity markets and your input? It seems like the industry is [inaudible] [00:30:18] aggressively, as you say, and typically, we'd expect that to happen if [inaudible]. Thank you.

Gene Lee -- Chief Executive Officer

Yeah, Anna, thanks for the question. On the commodity front, we contracted different times a year. We've got a great supply chain team that decided when is the right time to buy, looking at forward rates, etc. We haven't seen a lot of commodity inflation, as we've said. We were slightly below 1% in the quarter. What I would say is more of the pricing you're seeing from some competitors is probably to cover the labor, not necessarily the commodities.

What we also know is that as demand has picked up, supply has picked up. So, it's helped keep the commodities from inflating dramatically. We also, in our presentation, show that we've got inflation expected in the last quarter in the low single digits. We've got an appendix back there. The one place we are seeing a little bit of inflation in the food is on the distribution side. It's getting a little bit tougher and tougher to find people to drive trucks. So, we're seeing a little bit of distribution expense, but that's driven by labor and not necessarily the food costs.

Anna Papp -- AB Bernstein -- Analyst

Thank you.

Operator

Our next question comes from Brian Bittner from Oppenheimer. Your line is now open.

Brian Bittner -- Oppenheimer & Co. -- Analyst

Thanks. Good morning, guys. Rick, I appreciate the initial look at 2019 on several line items. You highlighted the incremental investment to $15 million from the tax savings redeployment, but as you put all the pieces together for '19, you didn't say anything regarding the Cheddar's synergies. What's the year over year benefit now expected related to that for '19? I have a follow-up.

Rick Cardenas -- Chief Financial Officer

Yeah, Brian. Thanks for the question. In relation to Cheddar's synergies next year, what we last quarter was we expect to be close to the run rate by the fourth quarter of this year and we expect to have $27 million to $22 million of total synergies. So, doing the math, you're going to be a little below $15 million next year incremental synergies. But we also now expect to be closer to the high-end of our synergy range of the $22 million to $27 million. Hopefully that answers your question.

Brian Bittner -- Oppenheimer & Co. -- Analyst

Yeah. Just on the labor line, when you back out the investment in the mark to market stuff, the deleverage was close to like 90 basis points, more deleveraged that we've seen recently on that line. Is there something changing there? Is inflation pick up relative to past quarters or anything else you can point to that's kind of changing the trend in that labor line?

Rick Cardenas -- Chief Financial Officer

No, Brian. Nothing is changing in the inflation. We're still seeing the 4% to 5% wage inflation. We did have a little bit of Cheddar's mix in there, more than we would have seen in the past as we bring in more franchisees or we had brought in the franchisees in Q2. Other than that, there's nothing dramatically different. We did have a little bit lower check growth in pricing in the quarter than we've had in the past.

Operator

Thank you. Our next question comes from

Will Slabaugh -- Stephens Inc. -- Analyst

Thanks, guys. Question on the Olive Garden -- did your more recent advertising campaigns around $8.99 dinners impact the mix of Cucina Mia at all or even the rate of what you would call overall value mix? Overall, I'm just curious on your thoughts, if you're oaky with that, if that's kind of the direction you want to go here.

Gene Lee -- Chief Executive Officer

Yeah. I don't think it's had a whole lot of impact on Cucina Mia. We're only offering it from 3:00 to 5:00. We see that -- early dinner duos is just an opportunity to attract the clientele that is looking for value during really the only time when Olive Garden has some capacity. So, we see it as -- obviously, there are some people trading in that were coming at 5:30 that now come in 4:45. But we think this is over the next couple years, we think this is a real growth opportunity for us is to build this value visit for people who aren't really time-sensitive around when they're eating. We hope that over time, we'll just backfill anybody that we shift down into an earlier time zone. So, we think this is a great way to offer value to our consumers in a period of time when our restaurants aren't very full.

Will Slabaugh -- Stephens Inc. -- Analyst

Got it. Just a quick clarification on the guidance, if I could -- on the tax rate, I wanted to clarify what you're implying for the fourth quarter. It looks like it would be closer to 20%. I'm curious what the reason would be if it did climb that high.

Rick Cardenas -- Chief Financial Officer

Well, if you hear the prepared remarks, we talked about what our normalized rate would have been in the third quarter. It was about 19. So, if you're doing the math to get to the 16 to 16.5 and you're getting to around 20, it's not really that different from what our rate would have been in Q3.

Operator

The next question comes from John Glass from Morgan Stanley.

John Glass -- Morgan Stanley -- Analyst

Thanks. I wanted to just go back to the change in the promotional cadence at Olive Garden, I guess one, specifically, if you can talk about what you think that promotion or change in the promotion might specifically do to impact sales when you called that out. Maybe more broadly as you've moved from nine to six promotions, is that the right number now as you think about 2019 and does that affect, for example, the first half of 2019 as you think about lapping or uneven laps around promotional activity?

Gene Lee -- Chief Executive Officer

Let me answer the last part of the question first. It will not change the first part of next year. We'll have completely lapped this. We've been working this all year. We haven't talked too much about it, primarily for competitive reasons. We did want to call it out this time because Buy One, Take One is one of our most successful promotions and we're not sure how well we're going to be able to offset that.

As far as giving you some guidance into the fourth quarter, I put you back to our guidance. We've taken into account what we think the headwinds will be from removing that promotion. It's in our full guidance. I'm not going to give anymore color on that.

John Glass -- Morgan Stanley -- Analyst

No, that helps. Rick, just two modeling questions, if you will. One is this mark to market, program -- is this new? I hadn't heard about it coming to bear before and there has been market volatility before. Is it a new program and we should anticipate this from time to time or is it the first time it's surfaced as a callout? And then I just want to make sure I understand -- the workforce reinvestment this year, you said $9 million this quarter, so an anticipated $11 million next quarter, the fourth quarter, then the $15 million in 2019. I just want to make sure that is correct.

Rick Cardenas -- Chief Financial Officer

Yeah. I'll start with the second one. Yes, the workforce investment was $9 million this quarter and it would be about $11 million in Q4. As far as the mark to market, it's not new. It was just with the run up in the equity markets for our quarter, it was pretty significant on a one-quarter basis and our stock price at the same time caused a lot more impact on mark to market than we've seen before. We've had this program going on for years, but this was a significant impact for us in this quarter.

John Glass -- Morgan Stanley -- Analyst

Okay. Thank you.

Operator

Our next question comes from Jeff Farmer from Wells Fargo. Your line is now open.

Jeff Farmer -- Wells Fargo -- Analyst

Thank you. Did you guys comment on the potential refi impact on interest expense as you head into F1 '19 with that lower interest rate? Just trying to figure out, I think you gave us some interest rates, but what that might mean to actual interest expense as you move into '19 versus '18.

Rick Cardenas -- Chief Financial Officer

Yeah. We didn't call it out, but if you do the math, it's about a $5 million net reduction interest expense for next year when you include the fact that we had to take on a little bit of commercial paper.

Jeff Farmer -- Wells Fargo -- Analyst

Just an unrelated question -- current appetite or philosophy toward pursuing acquisition of additional concepts in coming years -- any updated thinking on that?

Gene Lee -- Chief Executive Officer

Yeah. I think right now, we're really focused on continuing the integration of Cheddar's, building a solid foundation for that brand and ensuring we get it on the right growth path before we consider doing anything else.

Operator

Our next question comes from Matt DiFrisco from Guggenheim Securities. Your line is now open.

Matt DiFrisco -- Guggenheim Securities -- Analyst

Thank you. I just had a follow-up and then a question. With respect to the fourth quarter changing the promotion, it sounds like for simplifying it, you're losing a customer that was overly discounted in the first place. Will that have a favorable effect to your labor margins? If you go back to Brian's question about the 90 basis point to deleverage, would the fourth quarter be set up to in theory have less deleverage because you're doing less promotional activity?

Gene Lee -- Chief Executive Officer

No, it's exactly the opposite. Buy One, Take One is a very, very profitable platform. It's not heavily discounted because it is a prepared meal that's going home with a consumer and it goes home without soup, salad, and breadsticks. So, the overall package, it's very additive, actually. So, it's a powerful driver, guest driver, and it's also, on average, I believe it's an average-type promotional construct.

Matt DiFrisco -- Guggenheim Securities -- Analyst

Glad I asked the question then. With respect to the $15 million in 2019, can you give us a little bit of detail on where that will be deployed? Is that just purely higher wages or is it more hours, in essence, more service for the customer? I'm wondering what types of customer-facing things are sales driving benefits they could have with that $15 million investment.

Gene Lee -- Chief Executive Officer

As last quarter, we're not going to talk about the specifics of where those investment dollars are going to go. They're going to go to improve our overall experience for our guests or our team members. For competitive reasons, we're not going to talk in a whole lot of detail about that.

Operator

Our next question comes from Gregory Francfort from Bank of America. Your line is now open.

Gregory Francfort -- Bank of America -- Analyst

Hey, I've got two questions. One is just on the -- I think you gave a labor bridge in the presentation and one of the components was the productivity of new restaurants. Are your new stores mixing significantly lower on labor and what are you doing differently that your existing stores are doing and can you apply some of those learnings to the existing stores?

Rick Cardenas -- Chief Financial Officer

Hey, Greg. This is Rick. The productivity is net of new restaurants. So, productivity was higher. We continue to add new restaurants into the mix. When they come on board, they're not as efficient as they normally will be as they move forward. So, productivity without new restaurants would have been higher than the 0.3 that we showed.

Gregory Francfort -- Bank of America -- Analyst

Understood. Got it. And then maybe Gene, a question for you -- just on the Cheddar's comp, I remember you saying at ICR that Cheddar's comps would probably be negative for a while. It seems like this is mostly driven by franchise stores coming on the books and you guys maybe taking the average check down. Can you help me understand how you're thinking how the Cheddar's business plays out in terms of comps and maybe when this drag goes away from the franchise stores that have come on? Is that an early'19 sort of dynamic or is that sort of an ongoing process?

Gene Lee -- Chief Executive Officer

It's a great question. It's an ongoing process. I look at the overall system. I think there's -- I tried to allude to this in my prepared comments. This is a complex business doing a lot of guests. We believe after being involved now for almost a year simplification is the key. We've got to simplify the processes. The restaurants that we've recently acquired, we're really focused on the fundamentals. We're focused on continuing to develop great general managers in these businesses. We have some staffing challenges in the restaurants that we've acquired recently.

So, I think about getting back to basics and making sure we have the right number of employees scheduled at the right time. I think one of the things we learn in this is when you buy a small franchisee where their owners aren't financiers, but they're really the operating owners and they operate the business. There's a lot of emotion. They're the heart and soul of these businesses. When you remove them, you might have a little bit more turnover than you thought. You have some cultural issues and it's going to take time to rebuild that and integrate those restaurants into a traditional corporate system.

I think that's what we're really going through. These restaurants that we bought -- I think there's 10 or 11 of them in Georgia -- these are really high-volume restaurants. Even with the significant decline they're still at the system average after this. So, we're really excited about the opportunity to get in there. We have access to resources in Atlanta because our huge base and our other businesses. It's going to take a little bit of time. But I would say that when we look at it, we're more optimistic today than we were when we bought the business about the opportunity.

We believe we can have a significant impact on basic restaurant operations and improve the overall delivery and guest experience to the consumer. I can't put a timetable on it for you. You just need to know that we're working really hard at doing these basic things. As I said, we're almost through the integration. Next year, we won't be talking about integration. Management won't be even referring to integration in the restaurants. It will be the only system they know. We've got a lot of work to do and we're really excited about where we're at and what the opportunities are.

Operator

Thank you. The next question comes from Greg Barshied from Citigroup. Your line is now open.

Fred Wightman -- Citigroup -- Analyst

Hey, guys. It's actually Fred Wightman on for Greg. In the past, you'd taken sort of a wait and see approach to any consumer benefits from the tax reform. Now that we're starting to see some increases in paychecks and take-home pay and you've talked about sort of that higher check average across the industry. Do you think it's safe to say we're seeing a tax benefit at the consumer level?

Gene Lee -- Chief Executive Officer

I think it's way too early to say that. I would, again -- we haven't had a week where we haven't had a significant interruption into our business because of weather. So, I think it's my belief it will take time for this extra incentive to get into our overall system into our economy, but it's got to be good news. It's how much of it flows to us. I'll go back to the well-positioned brands where great values equations are going to benefit. I think when I look at our portfolio, I think we have the opportunity to benefit from this.

Fred Wightman -- Citigroup -- Analyst

Great. For that $15 million of investment for next year, what's the cadence going to be like? Should that all hit in one Q or should we see a 50-50 split, sort of like we saw this year?

Rick Cardenas -- Chief Financial Officer

Fred, it's Rick. It should be spread pretty consistently throughout the year.

Operator

Thank you. Our next question comes from Howard Penney from Hedgeye. Your line is now open.

Howard Penney -- Hedgeye Risk Management -- Analyst

Thank you for the question. My question is also on the Olive Garden promotional exchange. In the past when you've changed promotions for previous other brands -- I'm thinking about LongHorn—you may have compromised traffic trends in a certain quarter, but it significantly improved profitability because of the change in the promotional cadence. Would you expect that to for Olive Garden?

Gene Lee -- Chief Executive Officer

No. I think we've seen some of that throughout the year as we've changed the cadence. I wouldn't expect at this point in time anything dramatically to change. LongHorn was a little bit different. We were coming off a deep value platform and going to a different type of offer. This is -- we're still in the same value range. It's just a different type of promotion.

We know that Buy One, Take One was very, very successful. We believe that we were overexposing it, just like Never-ending Pasta, we only run that once a year. We need to run Buy One, Take One once a year. I wouldn't expect a big swing in profitability because of this change.

Where the profitability does come into play as we move from nine to six is from a labor standpoint. We're moving less product around. We're having less all-team meetings to roll out new product. So, that's been embedded in our P&L throughout the year.

Howard Penney -- Hedgeye Risk Management -- Analyst

Thank you.

Operator

Our next question comes from Chris O'Cull from Stifel. Your line is now open.

Chris O'Cull -- Stifel -- Analyst

Good morning, guys. I had a follow-up to that last question. Gene, what have you seen in the data that causes you to be concerned the Buy One, Take One could be at risk of being overexposed? I believe we are lapping that promotion right now. Is that true? Are there any other comparison issues we should think about for the quarter?

Gene Lee -- Chief Executive Officer

No, you are correct. We're lapping that promotion from last year. I think it was more just our intuition that told us that long-term you've got to protect the integrity of these promotions over time. This is a great promotion. We wanted to have traffic drivability to continue on. We know if we run it 16 weeks a year, it's going to lose some of its effectiveness. So, to me, when you think about Never-ending Pasta Bowl, it's a great promotion, but you've got to rely on it once a year and enjoy it when it's going on and then take it away. To make it powerful, it can't be there all the time.

Chris O'Cull -- Stifel -- Analyst

Fair enough. Rick, thanks for the explanation on the G&A increase year over year, but it looks like you're running higher than the trend would suggest. Any other explanations for the G&A increase in the quarter and how much of the Q&A increase do you expect to reoccur in the fourth?

Rick Cardenas -- Chief Financial Officer

Yeah, Chris. As you said, mark to market was about $5.5 million. The workforce investment didn't just impact the restaurant labor line. It also impacted G&A, $2 million to $3 million. So, if you take those things out, we weren't that far off of where we were in Q2. So, we can't predict the stock market. So, we can't predict what's going to happen in the fourth quarter on mark to market, but the workforce investment in the fourth quarter should be similar to what it was in the third quarter in the G&A line.

Operator

Our next question comes from Andrew Strelzik from BMO Capital Markets. Your line is now open.

Andrew Strelzik -- BMO Capital Markets -- Analyst

Hey, good morning. Thanks for taking the question. I wanted to ask a question about the in-store business at Olive Garden. If I back out the numbers you gave on off-premise, it seems like the in-store business was relatively flat, which was similar to the industry. Was that something you're OK with? It just seems like I know you're taking less price, but it seems like relative to the industry, the gap has been narrowing. Have you seen any change in the trade-off between in in-store and off-premise as you continue to see the strong growth there?

Gene Lee -- Chief Executive Officer

I would say that obviously we're thrilled that our in-restaurant business is continuing. I think it actually grew -- they're holding up a little sign across the table here saying our in-store restaurant did grow a little bit, which is fantastic. I think the analysis that you made is we're equal to the industry. Well, the industry has got a lot of takeout growth in it too. That's really not a fair comparison. We're focused on it in its totality.

When we think about Olive Garden, our goal was to deliver an Olive Garden experience to people where and when they want it. We understand convenience is a big need state today. So, we look at it in its totality. I guess I would go to a day like Valentine's Day, where there's no room to dine in Olive Garden because we're so busy. It's our busiest takeout day of the year. So, we're able to deliver an Olive Garden experience to the consumer in a way they want it. They can't get into the restaurant, so they're going to take it home.

So, I think trying to isolate the two different need states is a mistake. We've got to look at it in its totality. There's definitely a continued focus on off-premise. We're trying to maximize our opportunity there. We are really focused on making sure we create a great in-restaurant experience because that's the biggest part of our business. Our research tells us that the consumer is still looking for a great in-house restaurant experience and those who provide it will continue to win.

Andrew Strelzik -- BMO Capital Markets -- Analyst

I appreciate the perspective on that. If I can squeeze one more in on LongHorn, actually -- you said price increases have been a bit lower the last couple quarters at the same time the mix has been ticking up. Is that a conscious decision on the pricing and should we expect a similar construct of check growth as we progress forward?

Gene Lee -- Chief Executive Officer

We are definitely trying to continue to create value through increasing the quality of the product in LongHorn and also watching what we're doing from a pricing standpoint. The mix is coming from a couple components. It's' coming from our simplification. We're actually selling more add-ons. The biggest part of it is a reduction in discounting. As we reduce our discounting pressure, our menu mix goes positive, which is just another form of creating value for the guest. When I look at the LongHorn mix for the quarter at 2% and only 0.7 price, flat guest counts -- we're doing this with a lot less discounting -- I feel really good.

Operator

Thank you. The next question comes from John Ivankoe from JP Morgan. Your line is now open.

John Ivankoe -- JPMorgan -- Analyst

Hi, thank you. I was curious about the chain versus independent shared dynamic, what you guys are seeing. I asked this question in the context of there being some significantly conflicting data that's out there of who's taking share versus who, chains or independents. So, I wanted to get your thought on that and also if there's somewhat of an outlook on '18 and '19 as you guys have been through many different cycles before and which side the pendulum switches in your opinion, the chains or independents.

Gene Lee -- Chief Executive Officer

I have been briefed recently on the recent CREST data. Again, CREST data is directional. What we're seeing is large chains and independents picking up a little share and small chains actually donating that share. So, that's the most recent trend, not a huge swing. We're talking 10, 15, 20 basis points here. It's not a lot of movement. But it does seem like it's coming out of small chains with large chains and independents growing. As far as when we look into the future, I do think the large players continue to have an advantage from a cost standpoint, from an advertising standpoint and we should continue to take share if we manage our business as effectively.

John Ivankoe -- JPMorgan -- Analyst

I ask this question also, Gene, in the context of small or even one-off restaurants that have a better ability to market before. There's also a lot of discussion about there being some generational preferences for like the truly independent owner-operator type of restaurant. Again, just really relying on your experience in this case, do you think that's true in '18 or '19 or is there still a broad enough swath of the population that appreciates a high level of consistency? Just the overall industry, not necessarily Olive Garden and LongHorn -- can it hold on to that share?

Gene Lee -- Chief Executive Officer

Two things, John -- first of all, the independent growth is a coastal problem. It's happening on the coasts. It's not really happening as much in Middle America. Secondly, I think that we're also at the top end of a cycle. I think we saw this in '05, '06, and '07 where there's a lot of capital out there for people to open independent restaurants. Usually, the independent growth slows down as that capital slows down. A lot of these restaurants cannot withstand any type of shock. As we saw in '09 and '10, a lot of them fell out. As we look forward, I think a lot can depend on the overall economic environment.

Operator

Our next question comes from Stephen Anderson from Maxim Group. Your line is now open.

Stephen Anderson -- Maxim Group -- Analyst

Yes, good morning. I wanted to discuss Cheddar's. I know you gave a guidance on fiscal '19 capex. Do you have any kind of estimate with regard to what you would like to spend to renovate some of the older Cheddar's that are out there, particularly on the franchise side, there's still a lot of older units that may not be up to the current prototype? Thank you.

Gene Lee -- Chief Executive Officer

One of the things we're most impressed with with Cheddar's is the durability of their buildings. They've got a great design that's been able to stand the test of time. I don't think that -- there's not any type of remodel program that's needed. There's a little bit of refresh. We've got to do some signage changes. For the most part, the buildings that we have bought are in great condition. We do have some transformational work in the kitchen with some new equipment that we're putting into some restaurants and there will be some capital there, but that's minimal.

Stephen Anderson -- Maxim Group -- Analyst

Thank you.

Operator

The next question comes from Jeremy Scott from Mizuho. Your line is now open.

Jeremy Scott -- Mizuho Americas -- Analyst

Hey, thanks. Good morning. Maybe just high-level, I was wondering when you have a quarter like this with so many different weather events how your takeout business performs. I realize the impact is across the board, but your comment that weather has a bigger impact today than it did five years ago because of the media focus, is some of that offset by the fact that you've laid the pipes primarily at Olive Garden to reach the customer at home. Are there any changes in your thought process around delivery?

Gene Lee -- Chief Executive Officer

First of all, there's a lot in that question. I would say weather doesn't help us from a takeout standpoint either. We get to a certain point with this weather pattern we're in. Restaurants are closed. We can't do takeout if we're closed. We take the safety of our team members very seriously. We close our restaurants. So, the takeout is not there.

The second part of the question around our attitude toward delivery, I would say we are focused on Olive Garden, on our large party catering. We see that as a huge opportunity. We're I the beginning parts of really starting to develop that. We are, again, as I said before, we're focused on these. The average order is $300.00. As we continue to grow that business, it has some impact. We're still talking with a lot of the third-party delivery companies trying to understand how this is all going to shake out. We're testing, doing our own delivery. So, we've got a lot of things happening right now and we'll continue to analyze it and make the right decision for our business when we have enough information that leads us to a conclusion.

Jeremy Scott -- Mizuho Americas -- Analyst

Have you seen takeout growth in any of your other brands? LongHorn, last time you mentioned, was half of Olive Garden. How has that trended in the last couple quarters?

Gene Lee -- Chief Executive Officer

We're obviously seeing good takeout growth in all of our brands, especially Longhorn, as the consumer demands convenience. So, it's a significant part of the growth store in all of our businesses, but we're focused -- we still believe we're focused on maximizing the opportunity in Olive Garden because the food travels so well. We have unique packaging. We have a unique product offering. There's a lot more focus on really growing that. I would say in our other businesses, we're going along with the demand of the consumer and we think that's the place to be.

Operator

The next question comes from Brian Vaccaro from Raymond James. Your line is now open.

Brian Vaccaro -- Raymond James -- Analyst

Thanks and good morning. Gene, I wanted to follow-up on John's industry question and also get your perspective on industry supply growth. It seems to be some indications that we're finally seeing some rationalization in recent quarters. I'm curious if that's consistent with what you're seeing and hearing from other teams in the field and also your view on supply growth over the next couple years.

Gene Lee -- Chief Executive Officer

On supply growth, I think what we're seeing is we're seeing some rationalization but we're seeing some good growth. The last CREST data I saw was that we're basically a net no increase in restaurant growth year over year. What we're seeing is the weaker players start to close some restaurants. We're seeing some independents fall out. We're seeing new restaurants come back in. The restaurant brands that are growing are strong. They're growing for a reason.

So, the example I like to use is when we open a Yard House and we do $8.5 million in sales, we didn't create $8.5 million in sales in that marketplace. We stole that $8.5 million. It's been redistributed. So, as we see these stronger players continue to open, it does put some additional pressure on the business.

I will tell you that the one thing I've noticed in the last 12 months or so which gives me confidence the environment is somewhat improving is our new restaurants are performing better. It does feed into our belief that we've got to continue to build restaurants closer to where people live. They may be less likely to travel distances they used to travel, especially if some of these malls lose their drawing power. But we've been pleasantly surprised to the upside how well our new restaurants are opening. That tells me a little bit about where we are economically.

Brian Vaccaro -- Raymond James -- Analyst

Alright. That's helpful. Then two quick follow-ups, if I could -- Rick, the cadence of the tax savings reinvestment, you were clear we saw $9 million in the third quarter, $11 million expected in the fourth quarter. As we think of the year on year impact, wouldn't the $15 million be sort of front-end loaded in Fiscal '19 or I'm not thinking of that correctly?

Rick Cardenas -- Chief Financial Officer

No, the $15 million wouldn't be frontend loaded in '19, but we had no investments last year or this Fiscal Year in Q1 and Q2. So, we will see an increase. If you think about the $20 million we made this year, assume that's going to flow naturally through next year and then the $15 million will also start flowing naturally through next year.

Brian Vaccaro -- Raymond James -- Analyst

Got it. And then last one for me, the weather that you've seen in March, if you assume April and May sort of normalize year on year, obviously knock on wood, but how much of a weather headwind for the fourth quarter would that equate to?

Gene Lee -- Chief Executive Officer

That's all incorporated in our guidance today. We're hoping that you all in New York saw your last storm yesterday. We said that last week too. Listen, weather is out of our control. There's nothing we can -- we don't worry about it. We focus on running great restaurants. When we have a weather event, we're focused on ensuring people are safe.

I think as Rick said in his comments -- we saw more of a normalized winter through the third quarter. When we got to the end of February and we looked at it, we said, "This is a normal winter." We've had the benefit of a couple of mild winters the last couple years. March may turn that upside down a little bit. We'll give you some color in the fourth quarter when March is done.

Operator

The last question comes from Matt DiFrisco from Guggenheim Securities. Your line is now open.

Matt DiFrisco -- Guggenheim Securities -- Analyst

Thanks. I just had a question with respect to the off-premise sales. I think you said it was 13% or so. Has that got delivery in there? I've seen you guys pop up a little bit more on GrubHub with Olive Garden and Yard House and some other brands. Just curious if you can give some comments on that.

Gene Lee -- Chief Executive Officer

Yeah. That's inclusive of all off-premise. You are seeing us pop up either via a test or we don't know that we're participating with them. They have a way of taking your menus and marketing your products. That's inclusive of everything, 13%. I thought the number that's impressive was 15% of our total sales for the quarter were from takeout.

Matt DiFrisco -- Guggenheim Securities -- Analyst

So, you don't have an agreement with Olive Garden and GrubHub? They're just taking you and listing you on there?

Gene Lee -- Chief Executive Officer

It depends. In some markets we do. There's a little bit of wild, wild west out there now.

Operator

Thank you, speakers. We show no further questions at this time.

Kevin Kalicak -- Senior Director, Investor Relations

Alright. Thank you. That concludes our call. I want to remind you that we plan to release fourth quarter results on Thursday, June 21st before the market opens with a conference call to follow. Thank you for participating in today's call.

Operator

Thank you. That concludes today's conference. Thank you for your participation. You may now disconnect.

Duration: 63 minutes

Call participants:

Gene Lee --Chief Executive Officer 

Kevin Kalicak -- Senior Director, Investor Relations

Rick Cardenas -- Chief Financial Officer

David Tarantino -- Baird -- Analyst

Brett Levy -- Deutsche Bank -- Analyst

Anna Papp -- AB Bernstein -- Analyst

Brian Bittner -- Oppenheimer & Co. -- Analyst

Will Slabaugh -- Stephens Inc. -- Analyst

John Glass -- Morgan Stanley -- Analyst

Jeff Farmer -- Wells Fargo -- Analyst

Matt DiFrisco -- Guggenheim Securities -- Analyst

Gregory Francfort -- Bank of America -- Analyst

Fred Wightman -- Citigroup -- Analyst

Howard Penney -- Hedgeye Risk Management -- Analyst

Chris O'Cull -- Stifel -- Analyst

Andrew Strelzik -- BMO Capital Markets -- Analyst

John Ivankoe -- JPMorgan -- Analyst

Stephen Anderson -- Maxim Group -- Analyst

Jeremy Scott -- Mizuho Americas -- Analyst

Brian Vaccaro -- Raymond James -- Analyst

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