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

By Zacks Investment ResearchStock MarketsOct 15, 2021 07:28AM ET
www.investing.com/analysis/offpremise-business-drives-darden-dri-high-costs-ail-200605210
Off-Premise Business Drives Darden (DRI), High Costs Ail
By Zacks Investment Research   |  Oct 15, 2021 07:28AM ET
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Darden Restaurants (NYSE:DRI), Inc.‘s DRI focus on off-premise sales, digitization initiatives and menu simplifications bodes well. A rise in labor and other operating expenses along with coronavirus-related woes is a concern.

Let’s discuss the factors highlighting why investors should retain the stock for the time being.

Factors Driving Growth

Even though capacity restrictions continue to ease, Darden’s off-premise sales remained strong during fiscal 2021 and first-quarter fiscal 2022. For first-quarter fiscal 2022, it contributed 27% of total sales at Olive Garden and 15% at LongHorn. Notably, the company has been benefitting from the technological enhancements related to online ordering, introduction of To Go capacity management and Curbside I'm Here notification. Going forward, the company intends to revamp its point-of-sale system to boost guest experience as well as to manage off-premise offerings.

Meanwhile, to reduce friction and enhance consumer convenience in the digital platform, Darden initiated streamlining of the order pickup process and payment methods. Backed by these initiatives, online ordering has increased sharply. Additionally, it is witnessing a sharp increase in To Go sales. During first-quarter fiscal 2022, 60% of all off-premise sales were placed digitally. Going forward, the improvements in business model are likely to reinforce its ability to boost restaurant value across its brands.

Darden, which shares space with Jack in the Box Inc. JACK, Papa John's International (NASDAQ:PZZA), Inc. PZZA and El Pollo Loco Holdings, Inc. 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

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

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

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