Darden CEO Gene Lee didn’t pretend it was business as usual. The Olive Garden and LongHorn parent’s third-quarter review had almost nothing to do with the third quarter, where total sales lifted 4.5 percent to $2.35 billion.
As Lee told investors, “We’re clearly faced with more pressing matters to discuss.”
CFO Rick Cardenas said COVID-19’s impact on Darden arrived swiftly and with extreme force. For context, the company, which also directs The Capital Grille, Eddie V’s, Cheddar’s, Yard House, Seasons 52, and Bahama Breeze, started Q4 with positive same-store sales of 3 percent. Week 2 was flat. By the following week, as coronavirus headlines started to circulate, comps dropped nearly 21 percent. Same-store sales for Darden’s third fiscal week ending March 15 saw Olive Garden and LongHorn—riding consecutive gain streaks of 21 and 27 consecutive periods, respectively, fall 18.7 percent and 15.9 percent. The company’s fine dining segment plummeted 27.7 percent and the rest declined 27.5 percent.
You can see in the graph below just how steep the cliff was.
But more vividly, this wasn’t even the apex. As we know, the past week has proved one of the toughest in the industry’s history as states and cities continue to shutter dine-in business around the country. And overall consumer sentiment has rapidly shifted away from eating at restaurants in favor of buying food at grocers and making it at home.
Cardenas said Darden’s current week sales, through Wednesday, collapsed 60 percent. As of 4 p.m. that day, 60 percent of the company’s restaurants were mandated as to-go only locations; 16 percent faced other capacity constraints; and the remaining 24 percent were free of regulations, for now. But Darden still decided to operate them at reduced capacity of roughly 50 percent, while practicing social distancing recommended by health officials, Cardenas said.
On Friday, Lee informed Darden’s employees via memo that it was closing the entirety of the company’s dining areas and switching to a take-out, delivery-only model. Darden directs 1,812 total units. Any dining rooms still open were set to shut down Saturday night.
As has been the case with multiple casual-dining chains, Darden suspended its quarterly dividend payment and fully drew down on its $750 million credit facility to further shore up its cash balance. The company said it has about $1 billion on its current balance sheet and is trying to limit cash flows by aggressively managing costs and significantly reducing capital expenditures.
While Cardenas didn’t want to predict the level or length of any concrete sales reductions, if you assume a sales drop for 50 percent for the entire fourth quarter, Darden would stare down negative operating cash flow of about $300 million.
If the company had to fully close—doors locked and every light turned off—it would burn between $40 million to $50 million per week, Cardenas said.
Darden established a cross-functional crisis team led by Lee to address the COVID-19 pandemic. He said the action plan includes addressing business continuations, operations, communication, and supply chain. Lee is also not taking a salary and the company cut all travel.
On Wednesday, Darden implemented an emergency pay program that covers hourly employees for two weeks in restaurants facing business disruptions. This in addition to the permanent paid sick leave policy the company announced last week, where workers gain one hour of paid sick leave for every 30 hours on the job, starting with the past 26 weeks. The update allowed new employees to build sick leave as soon as they started, with a pay rate based on the employee’s 13-week average.
Lee said Darden’s supply chain hasn’t seen a major impact to date and they’re regularly cleaning restaurants with products on the CDC list of approved cleaning agents for COVID-19. “We are committed to keeping our restaurants open, where permissible, to be able to provide meals to the community in which we operate, whether that be off-premise or dine-in, where permitted,” he said. “And I’ll reiterate that we are committed to the health and safety of our team members and guests by offering limited or no-contact curbside pickup, and practicing social distancing in our seating configurations in all locations where we are permitted to operate our dining rooms.”
Even so, Lee admitted, there’s no question Darden is going to have to make dramatic changes to its cost structure and cut nonessential spending. What that looks like exactly, and the full-picture impact, is tough to predict.
Lee said he’s been in contact with the Trump administration and members of congress “to help them understand the unique challenge that we face in the full-service sector.” (The National Restaurant Association recently requested a $145 billion recovery fund).
I think that we’re going to fight as hard as we can to get our share of the off-premise business in the time. And I believe that we’ll all come out of it, the bigger ones, in a strong position,” says Darden CEO Gene Lee.
For Darden, the No. 1 priority is to develop a plan to keep employees on the payroll, Lee said. The company employs about 190,000 workers. Lee said talks have centered on being able to use government money to pay these people and avoid layoffs.
“What we do into the future will really depend on what kind of relief we may get from the administration to help pay our people,” said Lee, who added he was readying to have conversations with leaders in Washington Thursday.
Darden’s restaurant expenses, on a monthly basis, run about $20 million to $40 million. Rent is roughly $8 million per week, with manager salaries somewhere around $10 million.
So the government’s response is going to be a critical lever for Darden’s near-term decision making.
Lee hinted at a possible furlough program where employees still have access to benefits and don’t lose tenure.
“We’re really, really trying to work through keeping our people engaged, so when it’s time to ramp back up, that we can ramp back up quickly,” he said. “But we have to continue to work in concert with the government. And if they’re going to compensate the American public directly, then that has to be a part of our calculation as we think about our people.”
It’s taken, on average, six to 10 employees to run to-go only restaurants, he added. But it’s changing dramatically by the hour. Off-premises is growing about 20 percent year-over-year, and picking up as people change their behaviors in light of COVID-19 concerns.
Also shifting from a previous stance, understandably, Lee said, “everything is on the table,” with third-party delivery. “However, what we’re focused on right now is ramping up and using our team members to be able to keep them on our payroll and develop our own delivery capabilities, which our teams are ramping very, very quickly,” he said.
Darden is currently doing its own fulfilled delivery in markets, too. The company brought down the threshold where it now has available people to make deliveries (it used to be $75 and above). Basically, at least within the next few days, Darden will pretty much deliver Olive Garden wherever people want it to be delivered to, Lee said.
One of the main measures the company is taking is to stop construction on all new restaurants. Darden’s Q3 sales lift was helped along by the addition of 40 net new restaurants. That’s going to halt for the foreseeable future.
Lee said the company is negotiating with landlords to push off commencement of rent as well.
All of Darden’s advertising moving forward—which has been significantly reduced—will focus on to-go, especially for Olive Garden and LongHorn.
Lee said social distancing with employees has been a challenge. “People are washing their hands, we’re sanitizing every table after every visit. And we’ve instructed our people to really keep their face back and be able to reach with their hands, and be able to serve the guests the best they can in that environment,” he said.
Thus far, Darden has had no confirmed coronavirus cases among its 190,000 employees. “There are other places that are open and operating that are nowhere near as safe as our dining rooms,” Lee said.
In terms of what’s next, he said, the industry will survive COVID-19’s crippling impact to date.
“I think that the full-service casual dining business is an important piece of the overall economic engine of the United States. You look at just the six top chains, we employ over 0.5 billion people, and these are great jobs,” Lee said. “And people love working for us and consumers love us. And I think that we’re all innovative and we’re creative. I think that we’re going to fight as hard as we can to get our share of the off-premise business in the time. And I believe that we’ll all come out of it, the bigger ones, in a strong position.”
Cardenas added Darden hopes to emerge in an even stronger position than before, but it all depends on what happens to the consumer and the length and depth of this crisis economically. “As long as people continue to get paid, we think there’s a better chance that the bounce back is a quicker bounce back,” he said. “If unemployment gets to some pretty high levels and people aren’t getting paid, that’s a different story. But that said, if those things happen, and the inflation that we have been seeing for the last couple of years probably goes the other way, too.”