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Darden Restaurants Details Its Cash Challenge

By Demitri Kalogeropoulos - Mar 25, 2020 at 12:36PM

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The chain has just over $1 billion on the books.

Darden Restaurants (DRI 2.41%) is one of the businesses most directly affected by the COVID-19 pandemic. The owner of the Olive Garden and Longhorn Steakhouse brands has seen its sales collapse as state and local governments mandate the temporary halting of sit-down dining to promote social distancing.

The company's ability to weather that disruption has topped the list of investors' worries, so CEO Gene Lee and his team spent most of their latest earnings call outlining their plan to stay financially solvent. Let's look at highlights from that presentation, including why executives are confident any cash crunch will be many months away.

A waiter serves a table.

Image source: Getty Images.

Things changed rapidly

The shift in business momentum has been swift after announcements from state and local governments limiting restaurant operations.

-- CFO Rick Cardenas

Darden is dealing with a massive sales slump across most of its national footprint. While comparable-store sales were up 3% in the first week of March, continuing the modest acceleration trend that investors saw through the prior quarter, things rapidly turned south as coronavirus containment measures spread.

Weekly comps declined 21% in the third week of the quarter, and executives said they were down 60% at the start of the fourth week as most of its restaurants operated on a "to-go only" model. On the bright side, Darden is seeing no disruption to its supply of either food products or cleaning supplies that might threaten its ability to operate safely. "We are committed to keeping our restaurants open or able to provide meals to the communities in which we operate," Lee said.

Hoarding cash

While we have a strong balance sheet and a strong cash position, given the material declines we're seeing in our business, we'll have to make dramatic change to our cost structure and cut nonessential spending.

-- Lee

Darden isn't looking to cut corners on employee pay, and in fact has increased its paid-leave benefits. But management believes the historic collapse in sales volumes requires extreme, but temporary, financial measures.

To that end, the restaurant company suspended its dividend and drew down its entire $750 million credit line. It is slashing other costs and bringing its business investments close to zero for the time being. As a result, the chain is hoping to maximize the flexibility offered by its current cash position of approximately $1 billion.

Looking ahead

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.

-- Cardenas

While cautioning that the situation is fluid, and withdrawing its 2020 outlook, management provided what might be considered a likely estimate on its ability to stay solvent over the short term. If sales declines stay at about 50% through the entire fiscal fourth quarter, then Darden might burn through about $300 million through May, or just below one third of its current cash holdings.

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