Darden Restaurants Inc (DRI) was a fairly popular income stock as seen by the over 20k followers on Seeking Alpha. Darden is one of those companies that suspended its dividend in response to the challenges of COVID-19. This was not surprising as in March and April 2020 local government restrictions closed many restaurants at least limited their operations. The need to preserve liquidity and reduce cash flow requirements led many restaurant chains to suspend their dividend. However, seemingly the worst is behind the restaurant business as some, such as Darden, have reinstated dividends. However, times are still tough as local government restrictions only permit limited indoor dining in many States. Darden Restaurants reinstated the regular quarterly cash dividend at $0.30 per share after skipping two quarters. Darden Restaurants action is in effect a cut since the quarterly cash dividend was $0.88 per share before the pandemic. It is unlikely that Darden will make up the two skipped quarters this year.
Overview of Darden
Darden was founded in 1968 and is currently based in Orlando, FL. Today, the company operates about 1,804 restaurants in the U.S. and Canada making it one of the larger casual dining restaurant chains. You may not know the name Darden, but you probably know its restaurant brands. Today, Darden owns and operates the Olive Garden, Longhorn Steakhouse, Capital Grille, Bahama Breeze, Cheddar’s Scratch Kitchen, Seasons 52, YardHouse, and Eddie V’s Prime Seafood brands. The largest brand is Olive Garden with about 868 restaurants and the second largest is LongHorn Steakhouse with approximately 522 restaurants. Total revenue was $7,807 million in fiscal 2019.
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Impact of COVID-19 on the Restaurant Business
In general, COVID-19 has certainly devastated the restaurant business. March and April were particularly bad months as many were forced to close temporarily. Reportedly, by early-May the coronavirus pandemic resulted in over 5.9 million lost jobs in six weeks. Total employment dropped from slightly over 12 million to roughly 6.4 million. To put this in perspective, the restaurant business had about 6.5 million jobs in 1990, twenty years ago. According to S&P Global, based on data from the U.S. Census Bureau, restaurant sales in March were down -28.7% and were down an astounding -48.7% in April.
However, many states allowed restaurants to operate as essential businesses since they served food, but with only for carry out or delivery business. This permitted many restaurants to at least to keep the doors open and muddle through the most difficult months. Even in states where they were permitted to remain open customers remained wary reducing traffic for seated dining. Data from Open Table reported an almost 100% reduction on a year-over-year basis for seated visitors in March and April, which was the bottom.
The net effect was that many restaurants suspended or cut their dividend. The list that I update on a weekly basis contains a good number of casual dining restaurant companies and a few fast food restaurant companies. Even Cracker Barrel (CBRL), which is a long-time dividend growth stock and a former Dividend Contender had to cut its regular and special dividend.
The onset of warm months permitted patio dining and more recently States are increasingly allowing limited indoor dining. Further, the significant amount of federal stimulus helped drive retail sales across all categories including restaurants. The net effect has been that revenue, cash flow, and earnings have improved. Although not yet returned to pre-pandemic levels it was enough to reinstate the dividend for some companies.
Darden Restaurants Dividend Suspension
Darden Restaurants first suspended its dividend very early in COVID-19 pandemic. On March 19th Darden announced Q3 fiscal year 2020 results that were decent in terms of sales growth and profit growth. However, the company took several actions in response to COVID-19. Regarding the dividend, the company announced:
The Board of Directors has suspended the quarterly cash dividend. The Board made this determination due to uncertainty driven by the significant reduction in effective restaurant seating capacity and other restrictions mandated by state and local governments in response to COVID-19. The Board of Directors intends to review the Company’s quarterly cash dividend policy as developments warrant.
Turning to our current week sales, through yesterday, same-restaurant sales are down roughly 60%. As of 4:00 pm yesterday, 60% of our restaurants are mandated ToGo only, 16% have mandated other capacity constraints and the remaining 24% have no mandates. But we are choosing to operate them at reduced capacity of approximately 50%, while practicing social distancing recommended by health officials.
To that end, we’ve made the following decisions in conjunction with our Board. First, we have announced that the Board has suspended our quarterly dividend payment. The Board intends to review our quarterly dividend policy as developments warrant.
At the time, the regular quarterly cash dividend was $0.88 per share. Darden Restaurants took several other actions after the dividend cut including drawing on its $750 million revolving credit facility and suspending its financial outlook for fiscal 2020. By April, the company had reduced its cash burn, cut director pay by 50%, and shored up liquidity through an equity offering. The equity offering resulted in a 6% dilution of existing shareholders.
Darden Restaurants Dividend Reinstatement and Cut
Improving sales through the Summer months and scaling back of local restrictions likely permitted more restaurants to reopen their inside seating. Even at reduced capacity this will be beneficial to most restaurants despite some customers still remaining hesitant to visit restaurants.
Darden reported Q1 FY 2021 results on September 24th. The company reinstated its quarterly regular cash dividend at this time at $0.30 per share. This gives a forward yield of about 1.2% at the current share price of $100.58. Specifically, the company stated:
Darden’s Board of Directors announced that it has reinstated a quarterly dividend and declared a quarterly cash dividend of $0.30 per share on the Company’s outstanding common stock. The dividend is payable on November 2, 2020 to shareholders of record at the close of business on October 9, 2020.
We generated over $160 million of free cash flow in the quarter and improved our adjusted debt to adjusted capital to 59% at the end of the quarter, well within our debt covenant of below 75%. Given our strong liquidity position, improvements in our business model, and better visibility into cash flow projections, our Board reinstituted a quarterly dividend. The board declared a quarterly cash dividend of $0.30 per share. This dividend represents 53% of our first quarter adjusted earnings after tax within our long-term framework for value creation. We will continue to have regular discussions with the Board on our future dividend policy.
Final Thoughts on Darden Restaurants Dividend Cut
One must keep in mind that there really is no easy fix for the restaurant business. In many states, they are for the most part still operating with limited seating, outdoor patio dining, dividers, masks for employees, enhanced cleaning and disinfection protocols, etc. It is likely that delivery, carry out, and limited seating is not sufficient for many casual dining restaurants to survive. The business is already known to have thin margins. The cold weather months will limit outdoor patio dining. Additionally, the likelihood of additional federal stimulus seems remote at this time.
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Data from Yelp has indicated that 60% of business on Yelp have closed their doors during the pandemic and restaurants have been hit the hardest. By August 31st, nearly 163,700 businesses on Yelp have closed and 32,100 are restaurants, and close to 19,600 or 61% have closed permanently.
That said, Darden Restaurants will likely be a survivor of the pandemic unlike many other casual dining restaurants. Before the pandemic it was doing relatively well, and the company is seemingly well run. It’s size and access to liquidity gives it an advantage. However, it may be a few years before the dividend returns to the pre-pandemic level.
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