DARDEN (DRI) REPORTS SECOND QUARTER – WHAT CAN WE LEARN FROM THE BEST ?

We continue to look for data points and operational discussions from the best operators we can find. This allows our readers who are restaurant operators to consider “best practices”, and our financially driven followers to make more informed judgements about the future. (As Yogi Berra said: “Predictions are always difficult, especially about the future.”)

There is no better operator,  among publicly held full service casual dining companies, than Darden, and we view CEO, Gene Lee, as not only one of the most effective leaders in the industry but probably the most candid in terms of what is really happening out there. We therefore report briefly below the financial results (which you can read about in more detail elsewhere), but we like to provide our readers with the “color” that might not be as widely disseminated as the hard numbers.

The second fiscal quarter ending 11/29/20 showed same store sales down 20.6% on a blended basis, which included; down 19.9% at Olive Garden, down 11.1% at Longhorn Steakhouse, down 31.0% in the Fine Dining group, and down 28.6% in Other Business. Though diluted net earnings per share was down to $0.74/sh vs. adjusted EPS of $1.12, don’t worry about Darden. They had net earnings from continuing operations of $97M and EBITDA of$206M. All four segments of the business were profitable, from a low of $50.7M at Fine Dining to a high of $419M at Olive Garden. Relative to current guidance, management guided only to the current (third) quarter, including  diluted EPS of $.50-.75/sh and EBITDA of $170-210M.

The most interesting part of the formal report was the sales trend over the last month or so. On a blended basis, comps declined from a negative 23.4% in the W/E 11/8 to a negative 36.9% for the W/E 12/13. Olive Garden fell from down 21.9% to down 32.6%. Longhorn declined from down 12.0% to down 23.3%. The falloff was largely due to fewer  restaurants open with at least limited dining room capacity, going companywide from 92% open to 75.4%.

CONFERENCE CALL HIGHLIGHTS

Gene Lee started the call by describing how operations and menus have been streamlined and simplified, all designed to improve the guest experience. 25 million email addresses are now in the database and will be increasingly  useful to drive sales. More than 55% of off-premise sales were digitally ordered and paid for, representing 20% of Darden’s total sales for the quarter. Curbside pickup was rolled out during the quarter. Now provided, and apparently important to the guest, is waitlist visibility, whether ordering online or in person.

At Olive Garden, sales were limited by capacity restrictions, but operational efficiencies, the simplified menu and the elimination of promotion discounts strengthened margins. The marketing spend was directed to showcasing the off-premise experience and compelling menu items, rather than promotions. Off premise sales grew 83% in Q1 and represented 39% of sales.

Longhorn concentrated on increasing the quality of the guest experience and simplifying operations. Off premise sales increased by more than 175% and represented 22% of total sales.

Newly named President and COO, Rick Cardenas, described operating details including a reduction in marketing spend of almost $50M in the quarter, down 210 bp YTY. Restaurant level EBITDA margin was 17.9%, up 140 bp YTY. As of the moment, 77% of the restaurants have at least partial dining room capacity, versus a peak of 97% in the middle of Q2. Guidance in the current quarter included EPS of $0.50-0.75/sh, EBITDA of $170-210M and sales down 25-30% YTY. The broad range of Q3 expectations and the lack of further guidance are a function of the general uncertainties affecting the industry and the broad economy. Comp sales are down about 26%, blended, in the third quarter to date, ending last Sunday.

Gene Lee started his further commentary by describing the emergency pay program which provides three weeks of compensation to team members furloughed from dining room closures.

Lee talked about no definitive plans to gear up marketing in the near term. Development of new restaurants is also up in the air, openings on hold until 50% occupancy is a reality. The business model from the cost side is much stronger than it was pre-pandemic, so cannibalization can be less of a factor. Technology is a key going forward, and Lee described “clarity that this is going to be a curbside business.”

The Q&A session described how the cash contribution of marginal sales right now is 50%, used to be closer to 40% and some of those costs will come back as the sales mix stabilize. Going forward, cost of goods could be a bit lower and labor a little higher ($15 minimum  wage spreading) so overall store level margin will be basically back in the same place.

Gene Lee, responding to a question about the potential of ghost kitchens, said Darden is an on-premise restaurant company. He expects the on-premise sales to come back stronger than ever, accompanied by some reduction of the off-premise side. Off-premise will be auxiliary, presumably higher than at pre-pandemic levels. Importantly, his view regarding delivery remains:  “Logistics of moving that last mile….really cuts into the profitability and something that we don’t want to be involved in”. He also said that the guests don’t like to look at menus on the phone and the waitlist visibility now in place is important. Technology can be further improved off-premise but he doesn’t see a great deal of technological advances in-store.  Regarding “virtual brands”:  Lee wants to stay focused on running the brands that they have spent years building, rather than diluting the operational effort.

There is a strong focus currently on ensuring the appearance and quality of the food 30-50 minutes after it has left the restaurant. Streamlining the menu has helped to improve the quality of the remaining items. Family packs are an increasing emphasis within the  off-premise effort. Regarding the use of handheld devices and other technology advances, Lee views these developments as more important to speed and satisfaction of the guest than cost savings. The company is committed to keeping service levels high, viewed as an important differentiator for the various Darden brands.

Roger Lipton