DARDEN RESTAURANTS, INC. (DRI) REPORTS Q4 – ALWAYS A LOT TO LEARN!

SALES SUMMARY

Darden Restaurants, Inc. (DRI) reported fourth quarter and yearend, 5/31/20 results late last week. The fourth quarter was predictably dismal, with total sales down 43.0% to $1.27 billion, obviously as a result of the coronavirus pandemic that directly affected March, April and May. Same store sales were down 39.2% at Olive Garden, down 45.3% at Longhorn Steakhouse, down 63.1% at Fine Dining (62.5% at The Capital Grille and 65.25 at Eddie V’s) and 65.4% for Other Businesses (58.5% at Cheddar’s, 70.7% at Yard House, 69.9% at Season’s 52, my favorite, and 66.1% at Bahama Breeze).

The Company lost $1.24 per share ($154.6M), after excluding non-cash items of $2.61 per share primarily relating to goodwill, trademark, and restaurant level  impairments.

It’s no surprise that Darden lost a fortune in Q4 ending May, reducing  operating costs wherever possible, focusing on off-premise sales activity to minimize losses, etc. We consider Darden to be one of the premier multi-concept full service casual dining operators on the planet, admirably transparent in  disclosure and commentary. Rather than rehash the financials, which our readers can access elsewhere, we prefer to discuss the highlights of the conference call. Many of our readers are full time restaurant operators. For their purposes, it’s more convenient and less expensive to listen carefully to CEO, Gene Lee and his capable  team than to retain highly paid, and, probably  less qualified, consultants.

To start with, sales after firming from the lows of late March through April and May, continued increasing the last week three weeks into June.

THE BUSINESS STRUCTURE HAS EVOLVED

Online ordering has increased more than 300% at Olive Garden, more than 400% at Longhorn, 58% and 49% of which is TO GO, respectively. Off-premise is obviously a major ongoing emphasis, in the hope that an important part of it can be retained after dining room activity has been rebuilt. It was disclosed that 10-15% of the restaurants are already comping positively, where there was a solid off-premise business, mid-week and mid-day business.

Darden has transitioned to accepting delivery orders as small as $50 (averaging well above that), ordered by  5pm the day before, delivered by third parties. The pandemic accelerated the consumers’ desire for convenience, in particular through digital engagement and Darden focused on helping the guest easily order both in and out of the restaurant, improving the wait to be seated, streamlining the order pickup and payment process . Contactless curbside pickup creates almost a “drive through in our parking lots”, and may be the future core of off-premise consumption.

Menus have been streamlined. Advertising and promotions have been reduced, because (as we interpret it) customers are more interested, for the moment, in convenience than “value”. As the business remains in a major state of flux, Darden will go slow in reintroducing their loyalty program, adding back menu items or re-engaging with the extreme value oriented customer. As they put it: “we’ve improved productivity in our restaurants through more streamlined menus. We’ve got to really go through that discovery process. I think the big work that needs to be done is to think about what we need to do inside the box to better support and stage curbside if it’s going to be that big part of our business….right now we don’t think it’s prudent to be promoting people into our restaurants ….. long waits to get into the dining rooms…. would just be creating more frustration for our guests to get in…..taking this opportunity to cleanse our marketing spend to understand as we put it back in what works better, what gets us the highest return on investment……don’t think this is the right time to be advertising. We think this is the right time to pull it back….then we’ll start to layer some advertising back in and promotion back in….the most significant thing we’ve done is streamline the menus and our processes and procedures and that’s forever.”

THE Q4 PANDEMIC RELATED COSTS WERE SUBSTANTIAL

The pandemic related expenses were discussed at length. New labor related expenses  include permanent sick leave, emergency pay, child care costs, pay and  benefits for furloughed employees, as well as previous Q4 targeted store manager bonuses. Health and safety programs for team members include health checks, personal protective equipment, enhanced sanitation processes, social distancing and frequent hand-washing. Frequent  paid sick leave is provided at the same time that guests are cautioned to not enter the restaurants if they are symptomatic. In addition to the permanent paid sick leave, a three-week emergency pay program  provided nearly $75 million during the fourth quarter to hourly team members who could not work.

THE RE-OPENING PROCEEDS (HOPEFULLY)

Management commented on the call that, as the opening phases progress, the 6 foot social distancing comes into  play more than whether the restaurant is 50%, 75% or 100% “open” for inside dining. Different seating configurations are being evaluated for maximum efficiency, including  partition erection. At the current time, Hourly Labor and Cost of Goods combined are better than a year ago, but the occupancy expense burden is yet to be determined based on seating and the off-premise vs. inside dining breakdown, and the Store Level  Management cost will deleverage while sales are lower.

Q1’21, ending AUGUST’20, AND BEYOND

As Yogi Berra put it: “Predictions are always difficult, especially about the future”.

Management is optimistic about getting back to 2-3% unit growth and the possibility of better real estate deals as competitors fall by the wayside. They stated that the Company is currently Operating Cash Flow positive, as of last week, with sales down 30%. Guidance was only provided for the current quarter, at approximately breakeven, with $75M of EBITDA. Just too many uncertainties beyond the next couple of months. They reiterated the planned  $250-300M of total capex in the current year, which includes $100-120M of maintenance  capex and 35-40 new locations. As we have often pointed out, D&A is not free cash flow.

There’s nobody better than Darden. We look forward to the next installment of “Dining with Gene”.

Roger Lipton