Darden Restaurants Inc to Acquire Chuy's Holdings Inc-M&A Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Chris O'Cull - Stifel Financial Corp - Analyst : Thanks. Good morning, guys, and congratulations. Rick, I know in the past Chuy's believed the brand's unit potential was at least 350 unit. I'm just curious, was that the estimates you guys used to inform your purchase decision? Or do you believe that potential is greater? And then I have a follow-up. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Chris O'Cull - Stifel Financial Corp - Analyst : Okay. And then I believe Chuy's had plans to open 10 to 12 units in calendar '25 with many of those locations can having signed leases and analyze. Is the plan that there does Darden's plan takes still accelerate the pace of Chuy's development?

Question: Chris O'Cull - Stifel Financial Corp - Analyst : Okay. Thanks.

Question: Jim Salera - Stephens Inc - Analyst : Hi, guys. Thanks for taking my question. I wanted to ask on the off-premises mix. I know Chuy's has seen a pretty significant step-up in off-premises and as a percentage of their makes something like 13% in FY 2019, up to almost 30% in 1Q. How many you guys took over roofs? I believe you took it offers of third party. Do you have any thoughts around what the strategy is going to be for Chuy's was with the aggregators and kind of off-premises.

Question: Jim Salera - Stephens Inc - Analyst : Okay, great. Thanks, guys.

Question: Jeffrey Bernstein - Barclays Capital Inc - Analyst : Great. Thank you very much. And Rick, interesting to hear that maybe Darden can learn from those third party aggregators. Look forward to hearing more about that. My question is specific to your portfolio and seemingly with Chuy's, I believe we're now up to 10 brands, which is a impressive feat. I'm just wondering how you think about that from the customer's perspective. It would seem like with the addition of all these brands, there's going to be a benefit from the customer side of things and other also benefits on your end. But any thoughts around or greater interest in potentially loyalty or other things we're maybe the customer can benefit from staying within your universe, so portfolio of brands? Thank you.

Question: Jeffrey Bernstein - Barclays Capital Inc - Analyst : Got it. And then just to clarify, it looks like Chuy's with their 100 stores. I mean, the majority are the biggest presences in the Southeast. And some have said that the Mexican category is maybe a more challenging category to grow nationally just because there's different taste profiles and different regions. I'm just wondering about your thoughts as you presumably expand outside of Texas and outside of the Southeast, your confidence that the brand will resonate around the country. Thank you.

Question: Jeffrey Bernstein - Barclays Capital Inc - Analyst : Thank you.

Question: David Tarantino - Robert W. Baird & Co. - Analyst : Hi, good morning. Rick, I have a question just on your acquisition strategy in general, it seems like Chuy's is a very logical strategic move and a good set with their portfolio. And I know you have to look at these types of transactions when they become available to. But I'm curious as to those second one, second transaction and two years, I'm just kind of curious to get your philosophy on whether as you look forward, you're still open to these types of acquisitions whether you think that this is good enough for now? Or how are you thinking about the outcome of the next several years as it relates to these types of opportunities?

Question: David Tarantino - Robert W. Baird & Co. - Analyst : Great.

Question: Lauren Silberman - Deutsche Bank AG - Analyst : Thanks a lot. I wanted to ask about just the valuation Darden's multiple as well as the rest of the industry has pulled back still concerns on the consumer environment a little over 10 times as reported and 18.5 including synergies. Can you just talk about the considerations in terms of capital allocation and the best uses? Thank you.

Question: Lauren Silberman - Deutsche Bank AG - Analyst : Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Andrew Strelzik - BMO Capital Markets - Analyst : Hey, good morning. Thanks for taking the question. I guess I wanted to get your perspective on the Mexican category within casual dining specifically. And you mentioned kind of the faster growth profile of Mexican food and other categories outside of casual dining, some of the success of the cuisine types. But historically, I guess the casual dining has had some challenges scaling Mexican brands nationally. So I'm curious for why you think that has been the case why this might be different now and kind of the keys to achieving the growth potential for Chuy's? Thanks.

Question: Andrew Strelzik - BMO Capital Markets - Analyst : Thank you.

Question: Danilo Gargiulo - Sanford C. Bernstein & Co. - Analyst : I was wondering if you think your investment thesis. You're mentioning you're expecting future cash flows from Chuy's to a potential to be accretive to Darden. And I was wondering, in your investment thesis other than the cost synergies, what are you contemplating? In other words, what can you do with Chuy's that is justifying the 50% premium on their current stock price as of yesterday? Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: Danilo Gargiulo - Sanford C. Bernstein & Co. - Analyst : Thank you.

Question: Sara Senatore - BofA Securities Inc - Analyst : Thank you. And just a clarification on that comment. Lastly, interest mean and then a question and answer some of the Mexican category. You pointed out that the margins Chuy's, I think they are to me like they're probably higher than any concept in your portfolio, except for perhaps come Olive Garden. So I wanted to understand if there was an opportunity there. Synergies are primarily on G&A given. Yes, I think typically you don't want to see margins that go too high but perhaps the concerns for Mexican if there are a little different than from other cuisines. And then just on the category, and is that something that you think about? It looks like the category growth is slower than your other (inaudible) you operate, and it is that a constraint or the under penetration is such that you don't worry too much about it that category growth? Thanks.

Question: Sara Senatore - BofA Securities Inc - Analyst : Thank you.

Question: Gregory Francfort - Guggenheim Securities LLC - Analyst : Maybe just to follow-up on the synergy point of it. So to say the bulk of that would give the coming from the cost of sales. And that's in terms of the timing of when you bring Chuy's into your supply chain distribution, is that the having maybe six or nine months in, and that's why the synergies are mostly in 2026? Or just any reason for the timing of that, being 2026 rather than '25? Thanks.

Question: Gregory Francfort - Guggenheim Securities LLC - Analyst : Thank you.

Question: John Ivankoe - JPMorgan Chase & Co. - Analyst : Hi, thank you, Rick. I'm looking for a history lesson. I think you're one of the few people that could really give it. So yeah, as we kind of think about the brands over time, and I'm going to take you back to the 80s because I know you know the answer here. And we kind of think about brands that have kind of attempted to be full service, Mexican just kind of as defined these kind of being a big growing category for a lot of different reasons and the opportunity to kind of develop a national brand around full service, submit our Mexican. You're just not top of my mind, I know on the border Rio Bravo, Don Pablo's, Casa Guillardo, Chi-Chi's. So there's this kind of has been actually quite a lot of effort that has been put into developing this category in a national basis. And certainly I heard the answer to your question earlier, like you don't need it to be a national brand and we really are starting from a relatively small base. But you kind of, in hindsight, are there any common thread? Why so many kind of failed, you know, in this space? And if there are any kind of learnings again, based on your experience of wider Chuy's, I experienced could be something more sustainable and sustained customer frequency, which is what I understand the issue or was from any from my perspective, but sustained frequency where others, I did have an inability of sustaining frequency? Thank you. without the prior written consent of Thomson Reuters. 'Thomson Reuters' and the Thomson Reuters logo are registered trademarks of Thomson Reuters and its affiliated companies.

Question: John Ivankoe - JPMorgan Chase & Co. - Analyst : I got it. Thank you.

Question: Brian Harbour - Morgan Stanley & Co LLC - Analyst : Yeah, thanks. Good morning, guys. Just on the team member investments you mentioned is that really just kind of bringing them up to Darden benefits and wages. Is there any kind of broader change to the operating model that you fixed interest to make here? I think you did some of that was risk press. Does that affect the margin structure much in the future in your opinion?

Question: Brian Harbour - Morgan Stanley & Co LLC - Analyst : Thank you.

Question: Brian Vaccaro - Raymond James & Associates Inc - Analyst : Hi, thanks and good morning. You highlighted Mexican is a fast-growing category and I would think that includes some pretty rapid growth in the fast casual sector as well as several administrative Taco or Cantina concepts that seemed to be growing pretty rapidly. So I guess I'm curious how you see full service sort of from additional Tex-Mex sitting within that growth. And I'm curious if you think there are certain ways you might think about evolving the brand to align with some of those tailwinds, just wanted to get your sense on that.

Question: Brian Vaccaro - Raymond James & Associates Inc - Analyst : All right. That's great. And then a quick follow-up if I could on. I'm mindful that Chuy's store margins are up pretty significantly versus pre-pandemic levels. And I'm curious, you mentioned on the labor front, but or are there other areas you see opportunities to invest, reinvest perhaps in the ops or the guest experience as you see the brand growing floor? Thank you.

Question: Brian Vaccaro - Raymond James & Associates Inc - Analyst : Thanks very much.

Question: Steve Schofield - Terrapin Asset Management - Analyst : Hi, just a follow on to the prior questions. While is now the right time was Chuy's making it available at the right valuation.

Question: Steve Schofield - Terrapin Asset Management - Analyst : Okay, great. Thank you.