Tag Archives: DRI

UPDATED CORPORATE DESCRIPTIONS – DAVE & BUSTER’S (PLAY), RAVE RESTAURANT GROUP (RAVE), DARDEN (DRI), CRACKER BARREL (CBRL) – with relevant transcripts

UPDATED CORPORATE DESCRIPTIONS – DAVE & BUSTER’S (PLAY), RAVE RESTAURANT GROUP (RAVE), DARDEN (DRI), CRACKER BARREL (CBRL)

DAVE & BUSTER’S ENTERTAINMENT (DAVE)

https://www.liptonfinancialservices.com/2022/06/dave-busters-entertainment/

RAVE RESTAURANT GROUP (RAVE)

https://www.liptonfinancialservices.com/2022/09/rave-restaurant-group-inc-rave/

DARDEN RESTAURANTS (DRI)

https://www.liptonfinancialservices.com/2022/07/darden-restaurants/

CRACKER BARREL OLD COUNTRY STORE (CBRL)

https://www.liptonfinancialservices.com/2022/06/cracker-barrell-cbrl-write-up/

DARDEN REPORTS THEIR FIRST FISCAL QUARTER, ENDING AUGUST, BASICALLY IN LINE WITH GUIDANCE, WHAT CAN WE LEARN?

Darden Restaurants (DRI), operating 1,875 locations,  is one of the best managed publicly held full-service restaurant companies, owning Olive Garden, Long Horn Steakhouse, “Fine Dining” (Capital Grille and Eddie V’s) and “Other” (Season’s 52 – my favorite, Cheddar’s, Yard House, Bahama Breeze). If anybody can successfully cope with the continuing challenging environment, it is “DRI”. They reported their first fiscal  quarter, ending August, basically in line with previous guidance.

Total revenues in Q1 were up 6.1% to $2.4 Billion. Blended same store sales were up 4.2% and EPS was down as expected to $1.56/share vs. $1.76. On a monthly basis, blended SSS were up mid-3% in June, low 1% range in July and about 8% in August (lower gas prices?). Each of the individual segments had positive same store sales and lower profit margins. The Company repurchased $199M of its stock during Q1, with $912M remaining under the current $1B authorization. Guidance for the current year, ending May’23 remained unchanged: SSS of 4-6%, 55-60 openings, diluted EPS of $7.40-8.00/share.

The reported results are of course important, along with the formal commentary and guidance, and there are myriad places to find that information. . For our purposes,  since Darden provides more complete and candid conference call commentary than most, we like to  report on that event.

THE CONFERENCE CALL

The quarter ending August provided what they called “a return to normal seasonal patterns”. In Q1’, ending August, a year ago, the Covid rebound was in place. Sales were firm, and stores were of necessity understaffed, so comparing against last year’s bottom line was predictably difficult. Restaurant labor was only 50 bp higher, driven by hourly wage inflation of just over 9%, fortunately offset by better productivity. Total restaurant labor inflation, including management, was 7.5%. A larger detriment this year was CGS, up 280 bp, including robust commodity inflation of 15%.  Restaurant expenses were 10 bp higher, driven by higher repairs and maintenance due to supply chain challenges and utilities inflation of 16%. Marketing was 20 bp higher, with increased testing of digital and television marketing. G&A expense was 130 bp lower, driven by a $7M reduction in deferred compensation plans and equity compensation expense. While Operating Income margin of 10% was 220bp lower than in August’21, it was 60 bp better than pre-Covid Aug’19.

Blended SSS, as indicated above, were up 4.2% and all segments against Pre-Covid August ’19 (Q1 fiscal ’20) are equally encouraging. Sales at Olive Garden were 3.7% above last year, and average weekly sales (AWS) were 101% of the pre-Covid level, especially promising considering a the heavy promotional activity and couponing three years ago. Long Horn sales were up 6.6% YTY, and AWS were up 126% vs pre-Covid. Q2 Sales in the Fine Dining segment were up 8.6% YTY, and AWS were 120% of the pre-Covid levels. The “Other” segment sales were up 9.9% YTY, and AWS were 109% of the pre-Covid levels.

Looking ahead to the balance of the May’23 fiscal year: EPS will be between $7.40 and $8 for the year. In the Q2 to date, sales trends are above the high end of the annual SSS outlook range (4-6%).  Management speculated that lower gas prices recently may be a contributing factor.

Inflation seems to be “just a bit” affecting households making less than $50,000/year, most noticeable at Olive Garden and Cheddar’s. In the first quarter, total inflation was roughly 9.5% and total pricing was approximately 6.5%, almost 300 basis points below inflation, and less than most competitors. It is expected that the gap between pricing and inflation, having peaked in the first quarter., will moderate through the 2nd and 3rd quarters, and reverse in Q4. In the same way, the profit margin decline should moderate in Q2, with commodity inflation somewhat better at 13%, generating positive EPS in the second half, “flat to slightly below” for the full year.

Management’s summary of marketing principles is instructive: “First, it needs to elevate brand equity by bringing the brand’s competitive advantages to life. Second, it should be simple to execute. We will not jeopardize all the work we have done to simplify operations, which allows our teams to consistently deliver exceptional guest experiences. And finally, it will not be at a deep discount. We are focused on providing great value to our guests, but doing that in a way that drives profitable sales growth.”

It sounds like SSS comparisons YTY will continue to be difficult, depending on gas prices, going against the Covid-rebound late last year until the last week of December when, in December ’21, the Variant hit and ran through February’22.

Digital is 10% of total ($240M out of $2.4B) and 62% of Off-Premise, therefore about $387M, which is about 16% of total. Since delivery is minimal, To-Go is essentially the same as Off-Premise, which accounted for 24% of total sales at Olive Garden, 14% at Long Horn Steakhouse and 13% at Cheddar’s, apparently minimal at Capital Grille and the others. Since customers have learned new ways to get served by casual dining restaurants, the result is less dining room traffic, exacerbated by that fact that some consumers are still afraid to eat in crowds. While Long Horn is generating Dine-In traffic above pre-Covid levels, most other brands are not.

Credit to David Palmer, the analyst at Evercore, whose conference call questioning pinpointed the decline in Dine-In activity (at Olive Garden) in comparison to pre-Covid. After a somewhat confusing (to me) discussion of Guest Count Retention (“GCR”), the apparent change in Dine-In traffic, recent Q4 and Q1 vs. pre-Covid Q4 and Q1, Palmer suggested that the recent Dine-In traffic is down about 15% from three years ago. Management responded as follows:

“Yes, David. Let me start by saying your numbers are right. Does that present an opportunity in the dining room? Absolutely. But we’re going to go about it in a manner that’s actually sustainable and that’s where we go back to — over the last three years, we’ve invested so much into under-pricing inflation. If you look at where Olive Garden’s pricing has been over the three years, combined three years is at 10%. When you look at where full-service CPI — restaurant CPI was for the same time-frame, it’s 17.5%. So we’ve actually significantly under-priced the industry and that is the way we believe to build back that guest. And Rick mentioned getting that one extra visit from our loyal guest, we think this is a sustainable, durable way to really get our guests back. I would argue that we’re starting to see the fruit of some of that, but it takes time.”

“The good news is that if our dining rooms aren’t back to full, we’ve got capacity. And as we continue to see some improvement, as we continue to do the things that we have been doing over the last few years, focusing on simplification, making it easier for our teams to do what they do, investing in our food, investing in our teams, then we’re going to have an even better experience as guests come back, and they are coming back. So, that just gives us more opportunity to grow in the long run because our dining rooms in some of our brands aren’t back to pre-COVID levels. That’s being offset in most of our brands by To Go.”

THE TAKEAWAY

Darden, generating almost $10B of sales from 1,875 restaurants is doing as well as can reasonably be expected. Management accurately states four competitive advantages: Significant Scale, Extensive Data and Insights, Strategic Planning, and a Results Oriented Culture. The consistent performance across multiple brands is admirable and there is no indication that they have lost their focus or ability to profitably gain market share. They have emerged from the Covid period in a superior competitive position, and have the financial and operational strength to continue in the same vein. Their commentary indicated that the recently reported firm sales trends are continuing, with less promotional activity than several years ago. Menu pricing has lagged the CPI and that of their peers, so customers should accept increases when necessary. Store level and corporate margins are now approximating pre-Covid levels, so rebuilding Dine-In traffic, if most of the Off-Premise buildup can be retained, could provide margin leverage. It’s been a literal “jungle” out there, but the worst of it could be over in terms of the rate of wage and/or commodity inflation. The Company is “returning cash to shareholders” to the tune of 4-5% stock repurchase (annually) and a dividend yield of about 4%. The balance sheet is strong with long term debt less than one times TTM EBITDA. With (1) unit growth above 3%, (2) same store sales growth assumed in the low to mid-single digits, (3) 4-5% of the stock retired annually, EPS and EBITDA per share annual growth should be in the double digits, and margin leverage could add to that. Darden’s Restaurants (DRI), trading at an Enterprise Value of about 11x trailing twelve-month EBITDA, represents excellent value.

Roger Lipton

UPDATED CORPORATE DESCRIPTIONS: DARDEN (DRI), NATHAN’S (NATH), KURA SUSHI (KRUS) – with relevant transcripts

UPDATED CORPORATE DESCRIPTIONS: DARDEN (DRI), NATHAN’S (NATH), KURA SUSHI (KRUS) – with relevant transcripts

DARDEN

https://www.liptonfinancialservices.com/2022/03/darden-restaurants/

NATHAN’S FAMOUS

https://www.liptonfinancialservices.com/2022/01/nathans-famous-nath-in-process/

KURA SUSHI

https://www.liptonfinancialservices.com/2022/04/kura-sushi-krus-write-up/

DARDEN REPORTS FOURTH QUARTER – AN EDUCATIONAL CONFERENCE CALL AND AN EXCELLENT INVESTMENT VALUE

DARDEN REPORTS FOURTH QUARTER – AN EDUCATIONAL CONFERENCE CALL AND AN EXCELLENT INVESTMENT VALUE

Darden reported fourth quarter and full year (ending May’22) results late last week. The headlines were mostly positive, but with lowered guidance for the first half of fiscal ‘23. Fourth quarter EPS was $2.24/share, beating estimates by $.02. Guidance for May ’23 was $7.40-8.00/share, below the $8.00+ previously expected. The quarterly dividend was raised from $.1.10 to $1.21 and a new $1 billion stock buyback (about 6% of the equity value) was announced, after buying back $237M in Q4. Comp sales were strong in the fourth quarter: Consolidated same store sales up 11.7%, with Olive Garden up 6.7%, Long Horn Steakhouse up 10.6%, Fine Dining up 34.5% and Other Business up 18.5%.

Beneath the surface, fourth quarter results were not quite as compelling as the headlines, with Q4 segment profit down at both Olive Garden and Longhorn Steakhouse. With the guidance in H1’23 lowered, the stock, after initially rising from $115 to $122, sold off and closed at around $115. It rallied the next day to $127, within a strong  daily stock market, and analysts remembering that Darden is THE class act within full service casual dining.

We have long felt that Darden’s quarterly conference calls should be required reading for restaurant operators as well as investors, because management’s candor, as well as long term operating performance, has been “best of breed”. Though long time CEO, Gene Lee, is retired, Rick Cardenas (President) and Raj Vennam (CFO), can be expected to  maintain that standard. Within that context, the most salient points as we see them, are as follows:

The general menu pricing strategy is to increase prices slower than inflation. Though sales have softened a touch in June, they are still in the 4-6% guidance range and stronger than industry peers. Operating costs were inflated by 7.5% in Q4, partially offset by pricing of 6% for the quarter and 3% for the year. Food and beverage expense was 300 bp higher in Q4, with food up 12%. Restaurant labor was down 40 bp, driven by operational simplification. Labor inflation was 7% YTY, primarily driven by hourly wages up 9%. Marketing spend was 230 bp lower. G&A expense was 140 bp lower. Restaurant level EBITDA was 19.9%, 40 bp above pre-Covid level. Corporate EBITDA margin was an impressive 16.6%, 170 bp better than pre-COVID. Staffing levels essentially are back at pre-COVID levels.  Hourly wage inflation is currently about 8%, total labor (including store management) up about 6%, embedded in guidance.

CONFERENCE CALL “COLOR”

On the conference call, management elaborated regarding sales trends intra-quarter, as well as short term expectations. Comps built from March to April and into May, with a “not dramatic”…“check management” at the modestly priced Cheddar’s. Olive Garden “to-go” is above 25%, Long Horn around 15% of sales, much higher than pre-Covid. 60% of to-go is digital, which is 10-12% of total sales. Darden has not embraced delivery, so the increase in to-go business is a result of investments made to reduce the friction in ordering, paying, and picking up. The much stronger comps at Long Horn, compared to Olive Garden is a result of Long Horn’s pre-Covid “refresh” of its concept.

LOOKING AHEAD

Reference was made to industry wide sales, including DRI, that have softened in June, but it was suggested that it could be seasonality that didn’t take place last year. On the other hand, management’s reference to current consumer “uncertainty” (as evidenced by horribly weak sentiment surveys), especially visible at the lower priced Cheddar’s, indicates a justifiable reluctance for management to be aggressive with guidance. On the positive side, cost of goods, including chicken and wheat and dairy, in particular, seems to have peaked and is expected to retreat. We suggest that the “2nd derivative” of wage increases (i.e. a change in the rate of increase) may have peaked as well, so, along with recently imposed higher menu prices, there could be further improvement of store level margins. Other than reiterating that store level margins should remain above pre-Covid levels, management did not go as far as we are suggesting. A further indication of management’s optimism is the increase in store openings, 55-60 in the current year, up from 37 in the year just ended.

CONCLUSION

Readers should review the operating statistics as presented in the “Corporate Descriptions” portion of this website. Below: (These Descriptions are current for every publicly held restaurant company.)

https://www.liptonfinancialservices.com/2022/03/darden-restaurants/

Best of Breed DRI has only rarely traded with an Enterprise Value less than the current 10.3X trailing twelve month EBITDA and equity value about 16x next twelve month EPS. With a secure dividend that was just increased to yield about 4% annually, and  a $1B stock buyback in place, DRI represents an attractive long term participation in the casual dining industry. Recession or not, people have to eat and they have lots of options within Darden’s portfolio of well managed brands.

Roger Lipton

THE WEEK THAT WAS, ENDING 3-25 – ANALYSTS ALREADY LIKED WINGSTOP, WENDY’S, FIRST WATCH, DARDEN, ONE COMPANY UPGRADED, WHICH WE WROTE UP A MONTH AGO

THE WEEK THAT WAS, ENDING 3-25 – ANALYSTS ALREADY LIKED WINGSTOP, WENDY’S, FIRST WATCH, DARDEN, ONE COMPANY UPGRADED, WHICH WE WROTE UP A MONTH AGO

FIRST WATCH (FWRG) AND DARDEN (DRI) PROVIDE GOOD REPORTS, HARD NOT TO LIKE THEM. ARCO DORADOS (ARCO) GETS UPGRADED

 

RE: First Watch (FWRG), ANDY BARISH, JEFFREY BERNSTEIN, GOLDMAN SACHS, continue to like it. ANDREW CHARLES wants to see more (I guess).

RE: Darden (DRI), BRIAN VACCARO, LAUREN SILBERMAN, JAMES RUTHERFORD, JEFFREY BERNSTEIN, analysts at Morgan Stanley all continue to like it. NICK SETYAN wants to see more (I guess).

RE: Wingstop (WING), NICK SETYAN likes it, in spite of Charlie Morrison leaving.

RE: Wendy’s (WEN),  IVAN FEINSETH likes it.

RE: Arcos Dorados (ARCO), ROBERT FORD upgrades to BUY.

RELEVANT TRANSCRIPTS FROM MOST RECENT CONFERENCE CALLS.

First Watch

https://seekingalpha.com/article/4497310-first-watch-restaurant-group-inc-s-fwrg-ceo-chris-tomasso-on-q4-2021-results-earnings-call

Darden

https://seekingalpha.com/article/4497545-darden-restaurants-inc-dri-ceo-gene-lee-on-q3-2022-results-earnings-call-transcript

https://seekingalpha.com/article/4497632-darden-restaurants-inc-2022-q3-results-earnings-call-presentation

Wingstop

https://seekingalpha.com/article/4487627-wingstop-inc-wing-ceo-charlie-morrison-on-q4-2021-results-earnings-call-transcript

Wendy’s

https://seekingalpha.com/article/4491773-wendys-wen-ceo-todd-penegor-on-q4-2021-results-earnings-call-transcript

https://seekingalpha.com/article/4492114-wendys-company-2021-q4-results-earnings-call-presentation

Arcos Dorados

https://seekingalpha.com/article/4495957-arcos-dorados-holdings-inc-s-arco-ceo-marcelo-rabach-on-q4-2021-results-earnings-call

https://seekingalpha.com/article/4495955-arcos-dorados-holdings-inc-2021-q4-results-earnings-call-presentation

YOUR SEARCH FOR VALUE CAN START WITH OUR “CORPORATE DESCRIPTIONS” – SIX FRESH WRITEUPS HERE: NOODLES, DARDEN, ARK, GOOD TIMES, RCI HOSPITALITY, FLANIGAN’S, – (JACK) added at Jefferies Conference this PM

THE SEARCH FOR VALUE CAN START WITH OUR “CORPORATE DESCRIPTIONS” – SIX FRESH WRITEUPS HERE: NOODLES, DARDEN, ARK, GOOD TIMES, RCI HOSPITALITY,  FLANIGAN’S – this website contains similar writeups on every publicly held restaurant company.

Jack in the Box added to Jefferies Conference – 1:30PM today, link below

Darden (DRI)

https://www.liptonfinancialservices.com/2021/11/darden-restaurants/

Ark Restaurants (ARKR)

https://www.liptonfinancialservices.com/2021/11/ark-restaurants-arkr-new-writeup-Lipton Financial Servicesperforming-solidly/

Good Times Restaurants (GTIM)

https://www.liptonfinancialservices.com/2021/12/good-times-restaurants-inc-gtim/

RCI Hospitality (RICK)

https://www.liptonfinancialservices.com/2021/11/rci-hospitality-rick-in-process/

Flanigan’s (BDL)

https://www.liptonfinancialservices.com/2021/11/flanigans-enterprises-bdl-in-process/

Noodles (NDL)

https://www.liptonfinancialservices.com/2021/11/noodles-ndls-q4-results-were-promising-updated-writeup/

Jack in the Box Presentation at Jefferies Conference: 1:30pm EST – link below

https://wsw.com/webcast/jeff222/register.aspx?conf=jeff222&page=jack&url=https://wsw.com/webcast/jeff222/jack/1814025

 

DARDEN (DRI) REPORTS STRONG AUGUST QUARTER, DRIVES STOCK TO ALL TIME HIGH, SUPPORTS FULL SERVICE CASUAL DINING SECTOR

DARDEN (DRI) REPORTS STRONG AUGUST QUARTER, DRIVES STOCK TO ALL TIME HIGH, SUPPORTS FULL SERVICE CASUAL DINING SECTOR

Darden (DRI) reported a strong quarter, driving its stock up 6.1% today to an all time high of $159. The “pin action”, as this is written, has moved Bloomin’ Brands up 5.25%, BJ’s up 4.3%, Cracker Barrel up 4.0%, Brinker up 6.3%, Ruth’s Chris up 4.1%, Red Robin up 7.1%, and Texas Roadhouse up 2.5%.

We consider Darden management, led by CEO Gene Lee, to be “best of breed” among full service dining companies, and their conference call commentary is uniquely candid and invariably instructive. The following is a summary of the results and their conference call discussion. We have underlined what we consider the most insightful of their remarks.

Q1’22, ending 8/29/21, in which the Company bought back $186M of stock, showed EBITDA of $370M, and diluted EPS from continuing operations of $1.76/share. That compares to 8/25/19 when EBITDA was about $288M and EPS was $1.38. Over the same two year period consolidated comp sales were up 4.8%, including Olive Garden (OG) down 1.5%, Longhorn Steakhouse (LH) up 20.9%, Fine Dining (FD) up 12.6%, and Other Business Virtually Flat.

MARGIN AND SALES DISCUSSION

The two year comparison, from Aug’19 to Aug’21 showed:  CGS 150 bp higher with investments in food quality and pricing below inflation, labor 110 bp lower due to efficiencies from operational simplification, including a narrower menu at OG, (partially offset by higher wages), Other Operational expenses 110 bp lower due to sales leverage, and marketing 220 bp lower. Consolidated restaurant level EBITDA at DRI was 290 bp better at 20.9%, and G&A was 30 bp higher (mostly stock compensation). Q1 at OG showed flat sales (because two years ago included “Buy One, Take One”) with segment profit margin up 220 bp. LH showed sales up 26% with profit margin up 250bp. Helping at LH is the 40% fewer crew members than at OG and relatively heavy geographical concentration in states such as GA and FL.  Fine Dining sales were up 24% with profit margin up 490bp, as pent up demand and increased Sunday dining have helped. The digital platform continued to grow, representing 60% of all off-premise sales, and off-premise sales were 27% at OG, 15% at LH.  They had previously used PayPal (used for 25% of mobile app transactions) and added Apple Pay and Google Pay during the quarter.  

INTRA-QUARTER SALES TRENDS, SEPTEMBER SO FAR

Q1 sales started strong in June, strengthened further and peaked in July, slowed in August with the Delta Variant, finishing Q1 at +4.8% cumulatively. Company comps are up 7% first three weeks of September. There have been some cancellations of large parties inside Fine Dining, but management still expects a strong holiday season.

STAFFING & SUPPLY CHAIN COMMENTARY

Top priority in Q1 was staffing of restaurants. Introduced was a new talent acquisition program that allows applicants to apply and schedule an interview within 5 minutes or less. Social media and a digital platform is netting more than 1,000 new team members per week, and staffing is now 90% of pre-Covid levels. The success of this enhanced recruiting effort has been more important, one way or another, than the ending of supplemental unemployment benefits. Staffing has been complicated by the contract tracing and quarantining requirements when an employee has been exposed to one of the Covids.  While stores are not 100% staffed, management does not believe they will need as many as previously due to productivity improvements during Covid. Hoping to hang on to current margins, as sales and operations normalize. (“no reason why we can’t hang on to these margins”).

Another important influence during Q1 was the supply chain challenge, as shortages and higher freight costs are now leading to 4% cost inflation and a planned 2% menu price increase.

GUIDANCE

Guidance versus the pre-Covid year ending 5/20 includes total sales growth up 7-9% over the two years. Total cost Inflation is expected to be about 4%, with commodities up 4.5% and total restaurant labor up 5.5%, including hourly inflation of about 7%. For the year ending 5/22, management expects EBITDA of $1.54B to $1.6B, with diluted EPS of $7.25 to $7.60 on $9.4B of sales. Have to go back to the year ending 5/19 to get a full year’s normalized comparison, which was $8.5B of revenues and $5.73/share of earnings from continued operations. Over three years, therefore, from 5/19 through 5/22 sales would be up about 10% and EPS (at the ’22 midpoint of $7.43) would be up about 30%.

OFF PREMISE, INCLUDING DELIVERY

They are not going to promote delivery, and don’t want to go too aggressively after off-premise in general  (“on the weekends, we have to throttle the off premise business”) because they don’t want to affect dine-in operations. A modest catering effort is improving but is not significant to the total.

MARKETING

There is very little couponing now, only about 1% of sales, and the check increase has only been about 2.5% over the last two years, less than the industry average of about 5%. The sales strength at LH can be attributed to its geographical footprint in states like Fl and GA.  Fine Dining sales trends are still lackluster in major cities like NYC (down 40%) and others, but there has been an uptick in Suburbia, apparently from pent up demand and better Sunday activity.  “Last 6-8 weeks have felt some pressure in Georgia and Florida….Texas in a world of its own, Northeast is performing OK but  has never really come back, have felt the Variant to varying degrees in Tennessee, KY, West Va…..Doesn’t make sense to advertise aggressively when restaurants are still not 100% staffed…we’re not going to know what the full potential at equilibrium is for a while…we don’t want to be discounting off a value platform……we’ve got to figure that out….we need to see what the competitive environment is…..and see what the economic backdrop is. Darden has not been pushing the Loyalty program during Covid, considering it a form of discounting (to highest use consumers)… “we were seeing positive trends in our loyalty program, a point based discount program, but  we don’t think that is the right way, in the long run, to do loyalty in the restaurant business”.

Roger Lipton

FULL SERVICE CASUAL DINING – WE GO TO SCHOOL WITH GENE LEE, CEO OF DARDEN (DRI)

FULL SERVICE CASUAL DINING – WE GO TO SCHOOL WITH GENE LEE, CEO OF DARDEN (DRI)

Gene Lee, and his management team at Darden (DRI), provide about the most candid description of current fundamentals among the publicly held full service casual dining companies. Not only are their reported results about the best in the industry, but they describe, on their quarterly conference call, how and why. Our summary below is of “best practices”, as produced by Darden, and the outlook as presented within their conference call on June 24th.

Darden’s most recent reporting period was their fourth quarter, ending at the end of May. Their two largest chains are Olive Garden and Longhorn Steakhouse. Important, but less material, are Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Season’s 52, Bahama Breeze and Eddie V’s.

GENE LEE’S SCRIPTED COMMENTARY

Gene Lee, CEO, commented that they have begun to see demand come back strongly. They are relying on Technomic for industry data,  which quantifies the casual dining industry at $189B in 2020, down from $222B in 2019. Though the industry has shrunk by 10% in units during the pandemic, Darden believes the industry will at least regain the 2019 level, implying that AUVs could be higher than before. Not mentioned was “price”, but that would obviously contribute to higher nominal sales.

Lee considers that the Darden business model has improved over the last year. “We’ve invested in food quality and portion size….made investments in our team members to ensure our employment proposition…..and we invest in technology, particularly within our to-go capabilities, to meet our guests growing need for …the off premise experience.”

RICARDO CARDENAS’ (COO) SCRIPTED COMMENTARY

Ricardo Cardenas, President and COO, described the operational simplification effort, which has improved execution and strengthened margins. Even as dining rooms have reopened, off-premise sales have remained strong, proving to be “stickier” than expected. During Q4 off-premise was 33% of sales at Olive Garden, 16% at Cheddar’s and 19% at Longhorn. Technology within online ordering has improved to-go capacity management and curbside delivery. During the quarter 64% of Olive Garden’s to-go orders were placed online and 14% of Darden’s total sales were digital transactions. Nearly half of all guest checks were settled digitally, either online or on tabletop tablets or via mobile pay. Cardenas described the effort to recruit and retain operational talent, claiming no systemic issues. Supply chain issues have also been largely avoided.

RAJESH VENNAM’ (CFO) SCRIPTED COMMENTARY

Rajesh Vennam, CFO, described how SSS compared to pre-Covid (2019), improved from negative 4.1% in March to positive 2.4% in May and positive 2.5% in the first three weeks of June. Though to-go sales have seen a gradual decline, this has been more than offset by in-store dining. In the fourth quarter, CGS was 90bp higher (investments in food quality and pricing below inflation), labor was 190bp lower (320 bp of simplification efforts, partially offset by wage pressures). Marketing was 200 bp lower. Restaurant EBITDA margin was at a record EBITDA of 22.6%, 310bp higher than pre-Covid. CGS inflation is expected to be about 2.5% and hourly labor inflation at about 6%.

QUESTION AND ANSWER DISCUSSION

Gene Lee talked further about the “employment proposition”. The store level margin allows for adequate wages, along with promotion of a thousand team members per year into management. When questioned about store level margin expectation, CFO Vennam indicated that store level EBITDA in the short term is expected to be 200-250 bp better than in 2019, with pricing of 1-2%, lower than CPI inflation of about 3%, but full year margin (ending 5/22) has yet to play out. Commodity inflation of 2.5% for the year will be 3.5-4.0% in the first half, expected to tail off to roughly flat by Q4. Chicken and seafood are elevated, also cooking oil and packaging, a little bit in dairy.

Lee feels that the throughput improvements, including menu simplification, allow for more sales capacity from this level. Mother’s Day sales were a record and mid-week capacity is not fully utilized. Consumer behavior is not yet normalized, so the mix between dine-in and off-premise is still uncertain.

When questioned about the sales improvement “flattening” in May and June, CFO Vennam pointed out that promotional levels are not as heavy now as in ’19, obviously helping the operating margins even with sales just modestly higher. Gene Lee commented later that the current advertising is generic, removing all incentives and discounts, with record operating margins, so marketing decisions going forward will obviously be carefully considered. Later in the call, Gene Lee talked about the Fine Dining segment also improving (a little later than Olive Garden and Longhorn) from down 12 in March to down 6 in May.

COO Cardenas described how technology is reducing “friction” in the guest experience, as well as for team members, making ordering and pickup easier. To further improve the process within the restaurant, a revamp of the point of sales system is planned.

Gene Lee talked about the potential to improve direct marketing to new digital customers, especially with the newly acquired ordering preferences. Lee emphasized the effort to improve the craveability of the menu, at the same time simplifying and improving the core items.

Relative to the addition of additional brands, Lee expressed great satisfaction with the improved returns within the existing portfolio. While not ruling anything out, he seemed to feel that there is substantial opportunity to profitably invest internally.

GENE LEE OPENS UP A LITTLE FURTHER

When pushed about why the sales recovery within Darden is not as fast as elsewhere, Gene Lee’s response was telling. “Because we’re not participating giving away food to third-party channels…not discounting heavily….not discounting cash through selling gift cards….we put up 25% fourth quarter restaurant margins….that’s what we’re focused on. A lot has changed…..virtual brands….guys, you got to get off this……this (Darden’s portfolio of brands) is the best business in casual dining, not even by a little bit anymore…..our guests are loving the experience ….they love the changes that we made….but we’re not chasing an index and we’re not chasing where we were in the past. We love our position today.”

Lastly, when questioned about what the new normal will look like, Gene Lee summarized by saying: “I think we’ve still got another six to nine months to understand (if we don’t have any more problems with Covid) what are going to be the normal behaviors….and then you start developing your market plans and you get tactical on how to get these folks into your restaurant or use you as an off-premise occasion.”

Roger Lipton

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

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