Off-Premise Business Drives Darden (DRI), High Costs Ail

Darden Restaurants (NYSE:DRI), Inc.‘s LOCO in the Zacks Retail - Restaurants industry, continues to focus on the core menu, culinary innovation and providing regional flavors. It is also working toward strengthening its in-restaurant execution through investments in quality and simplification of operations to augment the guest experience. Also, it continues to focus on simplifying kitchen systems, improving sales planning and scheduling, operational excellence to improve guest experience, allowing menu customizations and making smarter promotional investments. The operational readjustments are likely to drive the company’s performance, going forward.

Maintaining liquidity during the pandemic is a herculean task during the pandemic. Darden stated that it has enough liquidity to survive the coronavirus pandemic for some time. As of Aug 29, 2021, the company’s cash balance totaled nearly $947.8 million compared with $1,214.7 million as of fiscal 2021-end. Lately, it is generating positive cash flow, which is adding to the positives. As of May 30, 2021, the company’s long-term debt is pegged at $936.7 million compared with $929.8 million at the end of fiscal 2021. However, the company’s times interest earned ratio during the quarter came in at 13.9, improving from 10.1 reported at the preceding quarter end.

Concerns/h3

The coronavirus outbreak has rattled the Retail - Restaurants industry and Darden is not immune to the aftereffects. Although the majority of dining services are open, traffic is still low compared with pre-pandemic levels. In August, sales slowed due to the negative impact of the Delta variant. We believe that the Delta variant of coronavirus might hurt traffic and sales in the upcoming periods.

Moreover, the company has been persistently shouldering increased expenses, which have been detrimental to margins. In the fiscal first quarter, total operating costs and expenses increased 37.7% year over year due to a rise in food and beverage costs, restaurant expenses as well as labor costs. For fiscal 2022, the company expects total inflation of 4% (up from the prior projection of 3%); commodities inflation of 4.5% (significantly up from 2.5% estimated earlier) and total restaurant labor inflation of 5.5%, which includes hourly wage inflation of 7% (compared with 6% anticipated earlier).

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Written By: Zacks Investment Research