Darden Restaurants (NYSE:DRI) Reports Better Than Expected Results

Darden Restaurants (NYSE:DRI), the owner of Olive Garden, LongHorn Steakhouse, and other popular dining brands, reported better than expected results for the fourth quarter of fiscal 2020.

For the period ended May 31^st, sales declined 43% to $1.27 billion and were in-line with the Zacks' consensus estimate of $1.24 billion.

Despite an extra week of operations compared to last year, same-store sales fell 48% as government restrictions resulting from the COVID-19 outbreak kept restaurant doors closed.

The company posted a smaller than expected loss per share of $1.24 compared to the Zacks' consensus forecast of a loss of $1.59. The loss, however, marked a sharp contrast of the $1.76 earnings per share that Darden posted in the same quarter of last year.

Online Ordering, To Go Sales at the Forefront

The steep fourth-quarter sales declines were witnessed across Darden's brand portfolio including at its core Olive Garden and LongHorn Steakhouse restaurants where same-store sales decreased by 39% and 45% respectively. Steeper declines were recorded in the fine-dining segment which includes The Capital Grille and Eddie V's restaurants. Both brands had sales declines of more than 60%.

Sales at Darden's higher-end and specialty restaurant brands were hit harder in part because they offer fewer options for takeout and delivery service. Moreover, amid rampant U.S. unemployment and high economic uncertainty, constrained household budgets had little room for discretionary food spending. Revenue plummeted 71% at Yard House restaurants, 70% at Seasons 52, 66% at Bahama Breeze, and 59% at Cheddar's Scratch Kitchen.

Meanwhile, Darden's digital platform saw heavy traffic during the quarter. Online ordering increased more than 400% for LongHorn Steakhouse and more than 300% for Olive Garden. Left with no other choice, the company accelerated the deployment of online ordering for The Capital Grille, Eddie V's, Seasons 52, and Cheddar's Scratch Kitchen.

CEO Gene Lee commented, "The strategy we put in place five years ago helped us successfully navigate one of the most challenging periods in our Company's history. When our dining rooms closed, our operators did an amazing job of reimagining the guest experience by staying true to our back-to-the-basics operating philosophy".

Lately, it has been 'back-to-the-restaurants' for some consumers. Anxious diners ready to enjoy a meal away from the home after months of shelter-in-place orders have started to venture back out to Olive Garden and elsewhere. Darden noted that weekly same-store sales have improved steadily in June as more restaurants opened their dining rooms.

Forecasting Dozens of Store Openings Despite Pandemic Uncertainty

Reflecting the uncertain economic environment, management chose to forego its usual practice of providing an annual outlook but did offer guidance for the current quarter. It is expecting first-quarter FY21 revenue to be around $1.494 billion which represents a 70% decrease from the prior year's sales.

It also expects earnings per share to be greater than or equal to $0.00. For the first three weeks of the quarter through June 21^st, Darden's blended same-restaurant sales declined 33%. The company's forecast to at least breakeven in the current quarter, therefore, implies a significant uptick in customer traffic and sales over the next couple of months.

Darden also said it expects capital expenditures to be $250 million to $300 million and plans to open 35 to 40 net new restaurants in fiscal 2021. Of course, much of this will depend on COVID-19 developments and the pace of the economic recovery.

A credit to the company's financial health, based on the week ending June 21^st results, it is cash-flow positive and has more than $750 million of cash on the books. It also has ample headroom for additional funding with access to an extra $750 million credit facility.

Our Take-out

As of June 22^nd, 91% of Darden's dining rooms were open with at least limited seating capacity. Restrictions on spacing and safety weary customers suggest it will take a significant amount of time before the company returns to pre-pandemic sales and profit levels. It will have to continue to reinvent itself to adapt to changing consumer preferences towards pick-up and delivery service.

Restaurants with strong digital capabilities and flexible food and service offerings are likely to perform well in the post-pandemic world. Darden will need to lean on its To Go service. Despite its restaurants being largely opened during the first three weeks of June, To Go orders still accounted for 40% of Olive Garden sales and 28% of LongHorn Steakhouse sales from June 1^st to June 21^st.

As the full-service restaurant industry stages a revival, Darden will be looking to capitalize on pent-up consumer demand for the out-of-home dining experience. The struggle for market share will increasingly take place on the digital battlefield as Darden competes to win back hungry, tech-savvy customers across the country. Its scale, popular restaurant brands, and focus on digital growth should provide a competitive advantage.