Olive Garden Hit Hard by COVID in January

Compared to pre-COVID, all Darden segments except Olive Garden grew sales in the third quarter.

March 28, 2022 Ben Coley

January is historically a high-volume period for Darden Restaurants, but the environment was far from ordinary to begin 2022.

After achieving record sales and meeting profit expectations to start Q3 in December, CEO Gene Lee said the business faced its most challenging operating environment since the initial surge of COVID two years ago.

Employee exclusions were three times higher than the monthly peak experienced during Delta’s rise. Although the CDC reduced isolation requirements from 10 to five days, 8 percent of Darden’s workforce was excluded at some point in January. That includes more than 13,000 workers for a total of 65,000 days.

Some stores were down as much as 40 percent in labor, causing operators to limit hours and switch to off-premises only.

As for commodities, labor issues led to reduced supply and higher costs. Darden was also forced to use spot rate haulers in the quarter because of warehouse staffing challenges, driver shortages, and inflated shipping costs.

Amid those obstacles, back-to-back winter storms added to the pressured business. Sales were negatively impacted by more than $100 million in January. The slowdown, combined with sick pay, overtime, and inflation, dragged EBITDA margins by more than 100 basis points.

“The Omicron variant significantly impacted consumer demand, restaurant staffing, and operating expenses,” Lee said during the company’s Q3 earnings call. “We also experienced substantial weather impacts, all of which resulted in significantly lower sales and earnings than our internal expectations.”

In February, however, Darden proved what its restaurants are capable of when staffing becomes normalized. The month saw record sales—exceeding internal expectations—including a strong Valentine’s Day across all brands. Olive Garden in particular served more than a million customers, with off-premises mixing 35 percent. In December and February, EBITDA margins grew by nearly 100 basis points versus pre-COVID.

Darden is adding roughly 10,000 employees per quarter, and application flow is beginning to pick up. Staffing levels are greater than 95 percent of pre-COVID figures, although the company doesn’t believe it needs as many workers as it did before the pandemic because of productivity enhancements. Ninety-day turnover remains at a higher level than Darden prefers, so the brand is focusing more on training and helping new employees understand what the business is about.

“We feel much better about where we are in our staffing today than we did three months ago and three months before that,” said Rick Cardenas, president and COO.

Compared to pre-COVID, all segments except Olive Garden grew sales in the third quarter. The Italian chain earned $1.14 billion, versus $1.17 billion in 2020. Segment profit was lower as well, with Olive Garden seeing $240 million in Q3, compared to $246.7 million two years ago. In terms of average weekly sales, Olive Garden hauled in $100,035 per week per restaurant, or $5.2 million annualized AUV, compared to $103,998 in 2020, or $5.4 million annualized AUV.

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Olive Garden ended the third quarter with 881 restaurants.

Darden attributed Olive Garden’s performance to its geographic footprint and guest demographics being more sensitive to increased COVID case counts. Also, the brand has implemented significantly less marketing and promotional activity.

Marketing spend was $44 million lower, or about 50 percent down from pre-COVID levels. Cardenas said Darden is going to wait for equilibrium in the economic environment before investing more in that areas of business.

“We just want to find the right time to continue to increase that, but it probably won't get all the way back to pre-COVID levels, but we'll see where equilibrium comes,” Cardenas said.

Discounting as a way to improve sales doesn’t appear to be on the table either, with Darden believing it’s better to provide a high-quality experience that consumers are willing to pay for.

“We took out all discounting out of Olive Garden and all of our brands at COVID,” Cardenas said. “I mean we haven't added that back. Others have started to add that back, but we are continuing to maintain our strategy of keeping the discounts out of our brand. Again, as the environment changes, if the environment changes, we will consider anything, but we have a lot of options.”

This is how it shook out for the other brands:

LongHorn Steakhouse

2020

Sales: $510.7 million
Profit: $104.6 million
AWS: $76,101

2022

Sales: $612.7 million
Profit: $111.5 million
AWS: $87,671

Fine Dining (Capital Grille, Eddie V’s)

2020

Sales: $188.4 million
Profit: $46.7 million
AWS: $177,847

2022

Sales: $208.2 million
Profit: $47.7 million
AWS: $181,951

Other Business (Capital Burger, Cheddar’s, Yard House, Seasons 52, Bahama Breeze)

2020

Sales: $478.1 million
Profit: $69.5 million
AWS: $109,129

2022

Sales: $485.4 million
Profit: $67.2 million
AWS: $106,193

For Q3, food and beverage costs were 270 basis points higher, fueled by 11 percent commodity inflation, as well as investments in food quality, portion size, and pricing below inflation. Restaurant labor was 50 basis points higher, driven by more than 9 percent wage inflation and higher sick pay and overtime.

Darden’s pricing was 3.7 percent in Q3, and it’s projected to be roughly 6 percent in Q4. That would put pricing at just over 3 percent for the full fiscal 2022, which is well below the company’s expected 6 percent inflation for the year.

“If you actually look back to what we've done over the last few quarters and actually last couple of years, we've taken very little pricing,” CFO Raj Vennam said. “We said all along that we wanted to preserve the flexibility. We approach pricing very conservatively. And so we've been trying to hold off on pricing as much as the inflation would have dictated. And I think where we are now is 6 percent. While 6 percent seems high in terms of how historically we price, considering the environment and considering what we're pricing over two years, we don't think it's too much.”

For fiscal 2022, Darden projects $9.55 billion to $9.62 billion in sales compared to $7.81 billion in 2020, and 29-30 percent in comps growth, versus a drop of 11 percent two years ago. Commodity inflation is expected to be 9 percent and restaurant labor inflation is predicted to be between 6-6.5 percent, including hourly wage inflation approaching 9 percent. The company also projects 35 restaurant openings.

Darden's consolidated same-store sales rose 38.1 percent year-over-year, including 29.9 percent for Olive Garden, 31.6 percent for LongHorn, 85.8 percent for fine dining, and 55.2 percent for the other businesses.

Olive Garden ended Q3 with 881 restaurants followed by LongHorn (539), Cheddar’s (173), Yard House (85), The Capital Grille (61), Seasons 52 (44), Bahama Breeze (42), Eddie V’s (27), The Capital Burger (3).