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

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

FEEDBACK FROM BLOOMIN’ BRANDS (BLMN) – REGARDING OFF PREMISE SUCCESS AND  CORPORATE BREAK EVEN POINT

FEEDBACK FROM BLOOMIN’ BRANDS (BLMN) – REGARDING OFF PREMISE SUCCESS AND CORPORATE  BREAK EVEN POINT

We continue to look for new data points that will help us understand which restaurant chains have the best chance to survive, then prosper, and when.

We’ve previously asked the question as to how much of the new off-premise business will be retained as the dining room activity rebuilds, and that jury is still out. We’ve suggested that store level margins will suffer as dining rooms are only 25-50% open and operating expenses (especially labor and new sanitizing requirements) burden the bottom line. Our article in mid-May, describing developments at Darden (Olive Garden and Longhorn Steakhouse) suggested that YTY same store sales have to get back to something like down 25% to approximate corporate cash flow break even. All of that is confirmed by commentary from Bloomin’ Brands on May 5th, as well as highly qualified Michael Halen, at Bloomberg Intelligence, just this morning, 5/29.

From Management Conference Call, May 5th:

      “Have to get back to down 20-25% to be cash flow breakeven…. For our brands, we talked a lot about Outback and things and Carrabba’s on off-premises. But Bonefish and Fleming’s have taken it from virtually nothing. Bonefish had some, Fleming’s had hardly anything…..So I think at Bonefish, we’ve seen it. We’ll see what happens at Fleming’s…As of  May 5th: 2/3 takeout, 1/3 delivery (half and half third party/in house).”

As described below by Michael Halen, off-premise revenues at Outback and Carabba’s had tripled, from an average of 18%, so we figure overall sales were running down YTY an average of approximately 46%. Management also confirmed, above, that sales have to recover to roughly a negative  20-25% to approximate corporate cash flow breakeven.

Per: Michael Halen at Bloomberg Intelligence, on 5/29/20

“Bloomin’s same-store sales may drop double digits in 2020 as dining-room closings and high unemployment hurt sales, yet a strong off-premise business at Outback will mitigate losses. We see Outback’s in-house delivery service as a competitive advantage as it has wider margins, control of service and access to customer data.

“Off-Premise Sales as % of Total Before Coronavirus

(Bloomin’ Brands)Outback Steakhouse 15% & Carraba’s 21%, Cheesecake Factory 17%, Cracker Barrel 9%,Applebee’s 13%, IHOP 10%,Olive Garden 17%, Brinker (Chili’s&Maggiano’s 17% Texas Roadhouse 7%

Bloomin’s decision to prioritize direct delivery over third-party aggregators created a competitive advantage over casual-dining peers, as we see it. This includes wider margins, access to customer data — which allows for personalized marketing — and significantly faster delivery times (35 minutes). According to management, 74% of customers prefer self-delivery for the superior service and safety it provides. “Delivery is profitable, with more than 630 units offering the service. Bloomin’s recent partnership with DoorDash complements the existing self-delivery platform and expands the company’s reach to new customers.

“Delivery sales are now split evenly between in-house and third-party providers. Off-premise sales almost tripled from the beginning of March into the end of April. (05/29/20)”

OUR COMMENTARY

Aside from the typical description of off-premise sales building rapidly through April and early May, and the confirmation of corporate breakeven for full service casual diners around a negative 20-25%, we think the movement to self-delivery may prove to be an important new development. We are all aware of the extra expense, management challenge and corporate liability of self-delivery. However, control of “the last mile”, more complete customer interaction and the elimination of delivery charge from third parties could make self-delivery an increasingly attractive option. The 74% surveyed preference of customers toward self-delivery could prove to  be “anecdotal” but might also be an important indicator. Self delivery might especially appeal to regional chains, as opposed to multi-national giants, for whom The Brand is an important competitive advantage.

CONCLUSIONS

  • Off-Premise is here to stay
  • Overall margins will be hindered until restaurants get well over a negative 20%, back to at least full capacity, 
  • Cash breakeven for full service casual dining operators is approximately down 20-25% YTY
  • Self-Delivery is at least worth considering

Roger Lipton

DARDEN OPENS DINING ROOMS – WHAT CAN WE LEARN ?

DINING ROOMS ARE OPENING – WHAT CAN WE LEARN ? + OPERATING COST TRENDS

Darden Restaurants provided an update this morning on sales trends. Darden is a premier operator in the full service casual dining sector so their sales report provides us with an early look into sales  and profitability trends. Below is a table showing sales trends, in total and indicating the To-Go portion of Revenues.

We’ve spoken before about the unknown equation, once dining rooms are opened, between how much of the off premise sales are retained as the dining room revenues build. The positive possibility is that a good portion of the off premise increase can be retained  even after the dining room revenues have returned close to pre-pandemic levels. We won’t know the answer to this question for a while however, probably not until after a vaccine has allowed dining rooms to operate close to full capacity. In the meantime, we are all interested in cues as to what to expect. It is a given that full service restaurants cannot be cash flow positive with restaurants operating at even 50% of capacity. At 75%, perhaps, if the off-premise portion can be largely retained, but even that is questionable, considering higher labor (and other ) costs.

You can see from the table above that dining rooms contributed about $23.7k of average weekly sales at Olive Garden in the week ending 5/17 out of the $69.6k total (for the 398 or 47% of the system with dining rooms opened).  That was accompanied by a decline (from 4/26 to 5/17) in average weekly To-Go sales of $4.7K on the total system. Since only about half the system had opened dining rooms, it is implied that about about 9.4k of To-Go sales per store in the total system was cannibalized, or 40% of the total gain. At LongHorn, it is implied that the 275 units (52% of the system) added about 26k the week ending 5/17 but To-Go sales declined 6.4k in those stores with open dining rooms from 4/26 to 5/17,  which amounts to about $13k/store for the entire system, 50% of the overall gain. For our purposes, we figure 50% is an adequate approximation.

We can’t know whether this pattern will prevail, but let’s look at the following simplistic theoretical model. The pre-pandemic model is $5.0M of sales, consisting of $4.5M dine-in and $500k To-Go. The pandemic hits and Dine-In goes away but To-Go  becomes an impressive 40% of previous levels or $2M annualized. The pandemic ends. Total Sales go from $2M to $3M,  up by $1M, but $500k  of To-Go slips away so total sales are $3M-500k or $2.5M (still down 50% YTY). Sales go up another $1M to $4M but we lose another $500k of To-GO (to $1.0M), now doing $3.5M overall (still down 30% YTY). Sales go back to $5M, same as Pre-Pandemic, we lose another $500k of To-GO (to $0.5M) and we’re back where we started. Problem is: in today’s environment costs will be higher so our cash flow and profit margins will be lower. The hope therefore, based on this simplistic model, is that something less than 50% of the overall gain in sales will come from a reduction in To-Go sales, and also that costs won’t escalate.

MARGINS TO BE EXPECTED

It is relevant to the discussion above, as we try to anticipate what the sales recovery (which will happen ) will look like is that costs are inevitably going to be higher. We’ve written before that unintended consequences of the government stimuli will emerge over time. We’ve suggested that supply chain inefficiencies could cause commodity prices to move higher and it was  in the news today that egg prices are currently up 38% YTY, ground chuck is up 11% and pork is up 10%. Cheese is much lower, so pizza purveyors can further celebrate.

Labor continues to emerge as the biggest single harmful variable.  Crew members that have stayed on the job are receiving hazardous duty pay. Laid off employees are making more staying home than they were at the job so must be lured back with some sort of signing bonus.  This trend will not change. If somebody knows where the efficiencies will come from, other than possibly leveraging higher sales someday, we would like to hear about it.

DARDEN’S CASH BREAK EVEN POINT

Darden pointed out today that their current overall corporate cash burn is $10M per week, so that’s a rate of something over $500M per year at the current rate of sales. Darden is a company that has “normalized” revenues of about $8 billion per year, so cash flow is negative by about 6% of the previous level but 12% of the current $4 billion run rate. If we figure that 40% of incremental revenues flows through to cash flow (100%-28% food cost – 16% variable (half the 32% total) labor – 16% variable operating expenses such as marketing, utilities, waste removal, etc.etc.), that would require $1.25B of higher sales from current levels to get to cash breakeven, up 31% from here.  GAAP breakeven, covering $336M of last year’s D&A to would require another $840M of annualized sales or 21% on the current sales base, so Darden needs something like a 52% gain in sales from here to achieve break even on a GAAP basis.  That assumes that costs haven’t changed. This calculation is not supposed to be precise, but we believe the order of magnitude is instructive. We’re happy to entertain a discussion from the Company, analysts and/or investors, and adjust our analysis if justified.

CONCLUSION

The above discussion is not intended to single out Darden as a poor investment. We are neither long nor short DRI, and this Company is actually the best managed diversified full service  publicly held casual dining  operator in the world, as far as we are concerned. It is only because they are so well managed and so consistently candid in their disclosures that we focus on their results. DRI has a lot of wood to chop to get back to where they want to be, and their competitors undoubtedly have at least as much ground to travel.

Roger Lipton

 

 

GENE LEE, CEO of DARDEN (DRI): “IT’S A WAR FOR TALENT – HERE’S A “TIP”

Gene Lee, CEO of Darden: “It’s a War for Talent” – HERE’s A TIP !!

We wrote last week about Gene Lee’s tutorial, within Darden’s quarterly conference call, regarding successful management of casual dining restaurants, including his comments relative to the “War for Talent”.

We attended the heavily attended MUFSO (Multi-Unit Food Service) Conference in Dallas earlier this week, and found the CEO Panel (from Del Taco, Longhorn Steakhouse, Red Robin, Smoothie King and Arby’s/Buffalo Wild Wings/Sonic) most interesting.

Most of the discussion was pertinent, but, honestly, predictable. In our four decades following the restaurant industry, attending hundreds of conferences and listening to what must be thousands of conference calls, that shouldn’t be too surprising. However, Todd Burrow’s, President of the very well run Longhorn Steakhouse (within Darden Restaurants) provided an interesting viewpoint relative to the hiring of store level talent. He didn’t say whether he was referring to “crew” or “management”, but the following thoughts would no doubt apply to both categories.

Todd wants to make the first day of employment at Longhorn “the best day of their life”. Higher management meets and greets the new arrival, and provides an enthusiastic orientation in terms of how pleased Longhorn is to have them, the great opportunities that lie ahead, etc.etc. No doubt there are specific training aspects to the first day, as well as paperwork to be done, but Todd stressed the emotional commitment of the company to the new recruit, really “selling it”. There wasn’t a great deal more detail provided, but you get the message, and I have not heard it put this way before. Naturally, this will only carry the company and the new employee so far, but at least the relationship starts with some “romance”. As they say “you only get one chance to make a first impression”.

I honestly don’t remember whether Todd discussed the “last day” of employment. As an ex-operator (a long time ago), I would like to insert a few thoughts in that regard, which could be almost as important in terms of the corporate culture.

Later in the day after the presentation, I ran into a human resource consultant that concentrates on building the corporate culture that all restaurants aspire to, and I asked him why the last day is important, and what he would include. He responded that, among other things, he would do an exit interview, obviously to determine the pluses and minuses in the mind of the departing employee. There were a few other less important suggestions but what wasn’t cited, and what I would like to add, is the following:

Treat the departing employee with as much respect and encouragement for his or her future, as you can possibly muster, perhaps even a bit more than you feel is deserved. The reason is: your remaining employees are paying attention. If your attitude toward the departing associate is “he was never that important”, “we will do fine without him (or her)”, “we’ll find someone better”, etc.etc., those remaining will get the impression that they are just a “disposable” commodity in your mind, to be used temporarily in your own interest. They will obviously be less committed to their future with your company and inclined to move along at the first opportunity to someplace that will (at least potentially) appreciate them more. Secondarily, if the employee did at least a reasonable job for you, they could come back at some point, and perhaps make an even better contribution in the future. So your departing message, under most circumstances, and it takes very little time or effort to do this is: “You did a fine job, gave it your best effort, we are a better company because of you, we wish you the best, if there is anything we can do to help you in the future don’t hesitate to ask, if things don’t work out in the new place we are still here, etc.etc.”

Costs you nothing. It’s the right thing to do. Will send an important message to remaining associates, and will pay big dividends over time.

Roger Lipton Continue reading GENE LEE, CEO of DARDEN (DRI): “IT’S A WAR FOR TALENT – HERE’S A “TIP”

DARDEN (DRI) REPORTS EXCELLENT QUARTER WITHIN TOUGH ENVIRONMENT, WHAT’S COOKING?

DARDEN (DRI) HAS EXCELLENT QUARTER IN STILL TOUGH ENVIRONMENT, WHAT’S COOKING?

Darden Restaurants, Inc. (DRI) has just proved to be the exception to the recent rule among restaurant operators. They reported an excellent quarter, with blended same store sales up 3.3%, and traffic up a bit (which hardly anybody else is accomplishing).

Having just listened to the conference call with analysts, we consider the dialogue to be a short tutorial on “best practices” within the casual dining industry. For the sake, among our readers, of operating executives, we think the blocking and tackling fundamentals that are driving the results, as described by Gene Lee, CEO, are worth paying attention to.  As Gene pointed out, perhaps echoing Nick Saban, the world class coach of The Crimson Tide football team, it’s “all about the process”.

Summarizing the numbers, DRI beat the estimates for same store sales (a blended 3.3%) and EPS, improved store level EBITDA margins slightly (which is a rarity these days) and raised SSS and EPS guidance for the year slightly. The rise in EPS guidance was mostly a function of the very low tax rate just reported. As impressive as  anything else was the traffic improvement in the quarter, accompanied by slightly better store level EBITDA, better than almost anybody else in Casual Dining.

The most pertinent operating details include:

Olive Garden’s 5.3% comp was accomplished with an emphasis on value and convenience, and a 13% improvement in off premise sales, bringing that portion of the business to 13%. (More on this “opportunity” later.) Longhorn had a 3.1% positive comp, guest counts were up 0.3%, had only one price promotion in the quarter, versus two a year ago, trying to move to more full pricing, and menu mix was positive by 1.8%. Off premise at LH was also positive but no number was given.  Cheddar’s had SSS of negative 4.4%, still rebuilding operational standards. The original company operated Cheddar’s stores were down 2.3%, reacquired stores were down 6.7%, with obviously more work to do. The new President at Cheddar’s has been previously with DRI’s Bahama Breeze, obviously well thought of. Food and beverage costs were positive by 20 bp (pretty good these days), labor costs unfavorable by 70 bp (wage inflation of 5%, expected to continue), other restaurant expenses favorable by 20 bp, EBITDA at store level impressively improved 20 bp to 18.2%. G&A expense better by 30 bp. The tax rate in the quarter was only 4%, and was the primary reason they beat analyst estimates by about $0.10. The normal tax rate these days would be about 12%. In terms of guidance, total sales for the year are expected to be up 5-5.5%, SSS up 2-2.5%, diluted EPS $5.52 to $5.65, all up slightly.

Of more interest to us, and we think to operators among you, was the qualitative discussion. We urge you to read the full transcript, which we will be happy to forward to you upon request, and the highlights were as follows:

Casual dining, and QSR are in a “war for talent”. Consumer confidence may be at a high, but not all boats are rising. Only those restaurants adequately staffed and properly trained, can deliver against the potential increased demand. The 5% reported increase in labor costs, which is expected to continue, is not a result of management “reinvesting tax savings”, but a necessity in a tighter labor environment. Parenthetically Gene Lee added that is is “hard for lower volume businesses to attract great team members”, and that is obviously a competitive advantage for DRI. Broadly speaking, DRI management considers that their chains “cannot grow rapidly without strong management retention, the key to successful and sustainable growth”.

dCheddar’s is improving steadily, indications are positive, a result of intensive attention, leadership, organizational structure, working on process, simplifying and standardizing operations, increased accountability.  They are expecting and monitoring day to day and week to week improvement, and “it will happen”. Only when operational standards are being met will unit expansion take place, the objective being 7-10% unit growth, with a backfill strategy, considered the top of the growth range that allows operational standards to be maintained. (An interesting commentary from this excellent operator, juxtaposed against the 35% unit growth at Shake Shack (SHAK), about which we have cautioned) Applied more broadly to all  DRI’s concepts, restaurant chains  “cannot grow rapidly without strong management retention, the key to driving sustainable growth.”

The improvement at Olive Garden is a function of a healthier consumer, four years of focus on the core consumer, putting value back into the menu, continuously searching for new ways to improve the value proposition, staying engaged and relevant to the customers while staying “true to who we are”, especially trying to appeal to Millennials.

Size and scale is one of DRI’s core strengths.  It helps to improve the employment proposition, which supports the consumer proposition.  This ties into attracting, hiring, and retaining key employees. DRI is continuously trying to become more efficient at non-consumer facing functions, allowing for more investment at the store level.

There was very strong reaction by Gene Lee when discussing third party delivery. While there is a strong focus at DRI on off-premise, 13% of sales at OG and growing at 13%, with an objective of getting to 20% of sales, third party delivery tests are not encouraging. They are not happy with the economics of third party delivery, they doubt it will “enhance the brand” with “how it is executed”, and aren’t confident it “can enhance growth with scale”. They want to protect the current profitability of the current off premise business. A bit of detail was provided regarding DRI’s off premise activity. They cater with an order of at least $100, ordered 24 hours in advance. They have no interest in delivering a $10 meal. They are very proud of the “packaging and process” within OG’s off premise activity.  Their goal is to be “on-time and correct”, and creation of a compelling experience in this regard. In summary, Gene Lee said “I do not expect to go with a third party, I really don’t like that business”. My take: Never say never, but those are his words as if this morning.

Lots of lessons here.

Roger Lipton