Darden Restaurants (NYSE:DRI) recently reported fiscal third-quarter earnings results that showed solid sales and profit trends through late February. But those wins were overshadowed by the impact of COVID-19, which really began to hurt the business in early March. The related customer traffic slump threatens major financial strain for the owner of the Olive Garden and LongHorn Steakhouse brands.
The company's latest earnings report detailed a few of those challenges while citing the aggressive initiatives underway to preserve cash through the restaurant industry's historic disruption.
Let's take a closer look.
An ominous turn
Darden's backward-looking metrics were solid with comparable-store sales holding steady at 2.3%. The company even managed to return to customer traffic gains in the Olive Garden franchise to reverse last quarter's decline. Higher menu prices contributed to the sales growth and helped expand profitability for the broader business.
Yet its weekly sales trends painted a bleak picture for the fiscal fourth quarter that began in late February. In a presentation to investors, management said that comps turned slightly negative in the second week of the quarter after rising 3% in the prior week. The third week, which coincided with major social-distancing recommendations in the U.S. aimed at slowing the spread of coronavirus, showed a 21% slump in consolidated comps. Darden's fine-dining segment was the hardest hit with sales dropping almost 28%. LongHorn Steakhouse fared a bit better as comps fell 16%.
Prepping for the storm
Given the precipitous drop in customer traffic, Darden withdrew its operating guidance that called for modest sales growth in fiscal 2020. The company also took a few extraordinary financial moves in order to prepare for a potentially prolonged cash crunch.
It suspended its dividend and drew down completely on its $750 million credit line. Those initiatives pushed cash on hand to just over $1 billion, which executives say will be enough to see it through this crisis. "We believe this positions us well to deal with potential near-term volatility under the current market conditions," CFO Rick Cardenas said in a press release. The new loans were taken only out of "an abundance of caution," executives added.
Darden is prepared to keep supporting its 185,000 employees by offering sick leave in addition to a new emergency pay program. It is also doing all it can to promote a safe working environment. "The health and safety of our team members, their families, and our guests remains our top priority," CEO Gene Lee said.
The sales slump is likely to last deep into Darden's fiscal fourth quarter, which means Lee and his team might not have much more clarity to offer investors when the restaurant giant closes out fiscal 2020 in a few months and attempts to project sales trends for the new fiscal year. In the meantime, shareholders can expect significant volatility until global and local health organizations lift their recommended restrictions on social gatherings.