The current restaurant environment is quite dynamic, to say the least, Darden CEO Gene Lee said.
But unlike the past several months, there’s now a positive connotation. More people are getting vaccinated and customers are becoming increasingly confident in their ability to be mobile. Consumers are happy, and the mood change is definitely noticeable, Lee said.
“There’s a good vibe in our restaurants right now,” he said during Darden’s Q3 earnings call.
Those good vibes extend all the way up to the corporate office, especially given the company’s recent sales performance.
In the week ending March 21, Olive Garden’s same-store sales lifted 5.7 percent compared to 2019. In the same period, LongHorn Steakhouse’s comps increased 23.2 percent. The company used fiscal 2019 comparisons because of the impact of the pandemic on fiscal 2020 sales.
Here’s how same-store sales have trended for both brands since the end of February (figures are in comparison to 2019 levels):
Week ending February 28
- Darden: –15.9 percent
- Olive Garden: –17.4 percent
- LongHorn: –3.4 percent
Week ending March 7
- Darden: –13.9 percent
- Olive Garden: –15.3 percent
- LongHorn: 0.3 percent
Week ending March 14
- Darden: –11.1 percent
- Olive Garden: –11.6 percent
- LongHorn: 3.8 percent
Week ending March 21
- Darden: 5.4 percent
- Olive Garden: 5.7 percent
- LongHorn: 23.2 percent
Lee attributed a portion of the major jump in sales to the passage of the $1.9 trillion American Rescue Plan, which sent $1,400 checks to most Americans. But the CEO is wary of the length of the impact.
“We believe stimulus is a really big part of maybe the backend of the week ending [March 14] and the week ending [March 21]. And so we don’t have that stimulus in our outlook for the rest of the quarter. We know from history that that fades. This was a big stimulus package, but we’ll see how long it lasts. But right now, we’re thinking that it tails here pretty quickly.”
DARDEN’S COVID ROAD SO FAR:
Olive Garden Parent is Giving Employees a Pay Raise
Darden Will Pay Employees to Get Vaccinated
Darden CEO: Curbside Will Be Faster than Drive-Thru
Darden Won’t Let COVID-19 Change What Matters Most
Darden CEO Gene Lee Named Chairman of the Board
Darden CEO: Virtual Brands a ‘Distraction’
Pandemic Report: Olive Garden, Texas Roadhouse Have the Most Satisfied Guests
CEO Gene Lee forgoes salary as early impact hits
Challenges ‘far from over’ as Darden pivots to new business model
Darden makes progress in road to recovery
Olive Garden inches closer to life as normal
COVID could ignite Darden’s growth. Here’s why
For all of Q3, which ended February 28, Olive Garden’s same-store sales dropped 25.8 percent while LongHorn lowered 12.6 percent. Fine dining establishments (Capital Grille, Eddie V’s) decreased 45.2 percent and other businesses (Cheddar’s, Yard House, Seasons 52, Bahama Breeze) dropped 36.9 percent. During Q3, nearly 19 percent of sales were digital transactions. Additionally, 50 percent of all checks were settled via online, tabletop tablets, or mobile pay.
Olive Garden’s segment profit margin grew from 21.1 percent to 23.2 percent. This was driven by lower marketing expenses and simplified operations that reduced direct labor. LongHorn’s profit margin lowered from 20.5 percent to 18.1 percent as higher than average beef inflation and other investments drove higher food and beverage expenses.
Dining room availability grew from 94 percent at the end of February to 99 percent during the week ending March 21. Lee estimated that capacity is around 50 to 60 percent on average. Because of those restrictions, restaurants lose customers standing at the bar waiting for tables. In addition, guests are asked to wait outside instead of congregating in the lobby, so revenue is lost there, as well.
For right now, stores are following CDC guidelines, no matter what the local municipalities are allowing. Darden is headquartered in Florida, which removed capacity restrictions in restaurants back in September.
“We’re hoping the CDC comes along with the consumer and the consumer behavior,” Lee said. “We feel right now it’s still prudent to follow that guidance. There may be a point where we determine that guidance is out of date … But it’s too early to tell. Right now, we believe that the best course of action is to continue to follow the CDC guidelines.”
Dining room availability grew from 94 percent at the end of February to 99 percent during the week ending March 21.
Although dining room capacity is ramping up, off-premises has stuck fairly well at both Olive Garden and LongHorn. In the week ending February 28, off-premises mixed 37 percent at Olive Garden; that dipped slightly to 33 percent three weeks later. LongHorn’s off-premises has remained at 21 percent of sales for four consecutive weeks. Lee said he expects off-premises to fall off as more dining room space is available, but he believes the channel will still be more robust than it was pre-pandemic. At the start of COVID, new customers were driving to-go sales, and their frequency was pretty high—even better than existing customers.
All brands across Darden’s portfolio are offering curbside, and they all have the “I’m Here” feature in which restaurants are alerted to when a customer arrives. The piece of technology helped Olive Garden reach all-time highs in guest satisfaction ratings.
During the quarter, restaurants also implemented website enhancements to streamline the online checkout process. It resulted in a meaningful reduction in order abandonment rates.
Going forward, Darden is looking at some prototype changes to make it more convenient for employees to bring food to cars, COO Rick Cardenas said. Still though, a high percentage of customers are coming inside stores to pick up their order, so the company has to keep an in-restaurant type of experience for them, as well. In terms of modifications to existing restaurants, Darden is thinking about the most efficient way to make changes, whether it’s in the kitchen to create more room for packaging, or nixing the idea of a side door because of guests coming through the front side.
“We’re working through that. We don’t expect to make huge, huge investments in our existing restaurants for to-go,” Cardenas said. “We do have some investments to make, but they’re not that great.”
Darden ended Q3 with 1,822 stores, including 874 Olive Garden locations and 528 LongHorn restaurants. Looking ahead, the company expects to finish fiscal 2021 with a net of 33 new restaurants. In fiscal 2022, Darden projects roughly 35 new openings and capital expenditures of $350 million to $400 million ($150 million to $175 million for new restaurants and $200 to $225 million for maintenance/refresh/tech/other).
Lee listed several reasons as to why Darden’s 2022 unit guidance isn’t higher. For one, the company dismantled its development team at the start of the pandemic. It’s spent the last 90 to 120 days rebuilding the team. However, the true limiting factor is that after the company moves past letter of intent, every step in the development process has slowed significantly.
The CEO said the slowdown has a lot to do with people working remotely and the inability to negotiate leases as quickly. The biggest hangup is permitting and getting a restaurant inspected.
“There are external factors that are limiting us being able to open more restaurants,” Lee said. “We have the letters of intent signed, we just struggle past that point. We hope that when we get to ’23 we can get to the higher end of our 2 to 3 percent. We believe our pipeline is in good enough shape to get there. There’s enough availability out there, and we’re happy with the construct of the deals.”
