Tag Archives: Gene Lee



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.


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.  


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.


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 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%.


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.


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



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, 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, 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, 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%.


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.


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 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