ORLANDO, FLA. – Darden Restaurants Inc.’s business has changed radically in a matter of weeks. A positive third quarter ended Feb. 23 has given way to a fourth quarter in which management’s focus is on survival of the business.
Same-store restaurant sales are down roughly 60%, said Ricardo Cardenas, chief financial officer. As of March 18, 60% of the company’s more than 1,800 locations are mandated as to-go only, 16% have other mandated capacity constraints and the remaining 24% have no mandates, but the company is choosing to operate them at reduced capacity to encourage social distancing.
“The shift in business momentum has been swift after announcements from state and local governments limiting restaurant operations,” Cardenas said. “For context, Darden's same-restaurant sales were positive 3% in the first week (of the fourth quarter), the second week was basically flat, and the third week was down almost 21%.”
By business segment, same-restaurant sales for the third week of the latest quarter were: Olive Garden was down 18.7%; Longhorn Steakhouse, down 15.9%; Fine Dining, down 27.7%; and other business, down 27.5%.
“Given the material declines we're seeing in our business, we will have to make dramatic change to our cost structure and cut nonessential spending,” said Eugene I. Lee, chief executive officer, during a March 19 conference call with financial analysts. “I'd like to emphasize that this is a rapidly changing environment, and as such, we are not able to reasonably estimate the impact to our business.”
In response, management fully drew down the company’s $750 million credit facility resulting in approximately $1 billion in cash on its balance sheet, is aggressively managing costs and “significantly” reducing capital expenditures, withdrawn its fiscal 2020 guidance and suspended its quarterly dividend payment.
In the absence of specific guidance for the fourth quarter of fiscal 2020,Cardenas said that assuming most restaurants have partial operations, such as to-go only, for each percentage point decline in sales for the fourth quarter diluted earnings per share will decline approximately 6¢ to 8¢. He estimated the company will burn through $40 million to $50 million per week as the coronavirus crisis continues.
“During these uncertain times, it's important to understand the strength of our balance sheet and history of our cash flows,” he said. “When looking at our historical operating cash flows, we've been able to generate enough cash to more than fund all of our needs. And while I can't predict the level or length of any reductions to our sales, assuming a sales decline of 50% for the entire fourth quarter would result in negative operating cash flow of approximately $300 million for the quarter.”
Lee said the company has been in contact with the Trump administration and Congress on a yet-to-be-defined financial relief package.
“The priority of those discussions has been on developing a plan to be able to continue to keep our team members on our payroll,” he said. “(We’re) trying to develop a plan which would use government money to pay them and not have to separate with our 190,000 team members.”
On March 18, Darden Restaurants implemented an “emergency” pay program that will cover hourly employees for two weeks who work in restaurants facing business disruption. The program is in addition to a permanent paid sick leave program the company implemented earlier.
“At this point, we don't see any major impacts to our supply chain,” Lee said. “We have been in discussion with all of our major suppliers, and they are confident that they can continue to supply our restaurants.”
Net income for the third quarter ended Feb. 23 was $232 million, equal to $1.92 per share on the common stock, up from $224 million, or $1.81 per share, in the same period a year ago.
Sales for the quarter were $2.4 billion, up from sales of $2.3 billion a year earlier.
Sales for each of the company’s business segments rose during the quarter, with Olive Garden sales rising 3.5%, LongHorn Steakhouse up 5.7%, Fine Dining up 8%, and Other Business up 4.3%.
“We actually had a pretty strong third quarter, with same-restaurant sales of 2.3% and diluted earnings per share of $1.90,” Cardenas said. “But obviously, that is behind us, and we're now focused on dealing with the unfolding situation.”