Darden: 'Significant Amount of Work Ahead' with Cheddar's
The only real kink in Darden’s performance right now is Cheddar’s Scratch Kitchen, the 157-unit chain it spent nearly $800 million on last April. Darden had to lower its sales outlook at the end of fiscal 2018 in anticipation of Cheddar’s drag on sales. Q1 2019 was slated to be the first period Darden figured the brand into its blended comps base, and it estimated 1–2 percent growth in response. The parent of LongHorn and Olive Garden actually posted comps of 3.3 percent across its eight-brand portfolio to start the year, with Cheddar’s included, but the casual chain’s performance didn’t exactly surprise.
Darden had only two red comps in the quarter—Seasons 52 at negative 1.9 percent, and Cheddar’s, which clocked negative 4 percent.
Here’s a snapshot of the past five quarters for Cheddar’s in regards to same-store sales, year-over-year:
- Q1 2019: –4 percent
- Q4 2018: –4.7 percent
- Q3 2018: –2.2 percent
- Q2 2018: –2 percent
- Q1 2018: –1.4 percent
This isn’t a new or, really, surprising issue for Darden. When the company brought LongHorn into its portfolio 11 years ago following the $1.2 billion purchase of RARE Hospitality, Darden had plenty of logistical problems at hand. RARE’s profit dropped about 24 percent to $39.4 million on $986.9 million in revenue the year before Darden jumped in. That Q2 of 2007, its profit decreased 24 percent to $10.2 million on $269.2 million in revenue. Turning LongHorn into the consistent performer it is today didn’t happen in a single calendar turn. In fact, its only negative full year of same-store sales declines came during an integration phase similar to the one Cheddar’s is grappling with. Beer-focused Yard House, purchased by Darden for $585 million in 2002, faced the same early dip.
LongHorn, by the way, just grew comps 3.1 percent to notch its 22nd consecutive quarter of positive same-store sales. Yard House witnessed a modest lift of 0.6 percent.
So, by all measures, Darden should start to see these figures materialize at Cheddar’s. Right? Well, it’s turning out to be a rather complicated and multi-faceted task.
“I actually believe in my heart that the operational challenges we've had to face are making us really go back to the foundation of this business and get it right,” Darden CEO Gene Lee said during a conference call to recap the Q1 results. “And if we didn't face these challenges and things may have been a little bit better, we may have gotten to the growth aspect a little quicker and not been able to sustain that into the future because there were real cracks in the foundation.”
“And we've uncovered those cracks and now we will fix them to build a sustainable business.”
In Q1 2019, Cheddar’s total sales grew 6.5 percent. This was driven by organic new restaurant growth and franchised restaurant acquisition growth of 10.5 percent. It was offset by the 4 percent decline in same-store sales. Broken down, company restaurants absorbed a 2.3 percent hit, while the formerly franchised units declined 6.7 percent.
This split has been a challenge for Darden. Those numbers were 3.3 percent and 7 percent, respectively, last quarter. There were 25 franchised units at the time Darden announced its acquisition of Cheddar’s, and the company had to integrate the chain’s two largest franchisees. Lee said in the past that Darden weakened Cheddar’s base units by pulling resources to help staff those acquired stores. The company purchased 11 franchise units in the second quarter of last year.
“We remain focused on rebuilding the operations foundation at Cheddar's and improving execution,” Lee said. “Having the right leaders in the right places is fundamental to bringing our ‘Back to Basics’ operating philosophy to life at Cheddar's. We spent a significant amount of time during the quarter evaluating and evolving the leadership team.”
“With the acquisitions of the two franchised groups, there's a lot of differential on processes and procedures and we need to standardize it and we think there's some opportunity inside the original Cheddar's to standardize,” Lee added.
In July, Cheddar’s president Ian Baines stepped aside. Seasons 52 president Brian Foye also left after more than a decade directing Capital Grille, Bahama Breeze, and Seasons 52. Baines was Cheddar’s CEO before Darden’s acquisition of the brand and had some familiarity with the company. Previously, he was the CEO and president of Darden’s Smokey Bones concept, leaving in 2010 when it was sold. He then worked at Brinker International before joining UNO Restaurant Holdings as president and CEO in January 2013. Baines started at Cheddar’s in fall 2014.
Lee announced during the call that Darden tapped John Wilkerson to lead Cheddar’s about eight weeks ago. Wilkerson is a 25-year Darden vet who most recently served as president of Bahama Breeze. Dave George, the company’s chief operating officer, who is often credited with Olive Garden’s revival, is also dedicating “a significant amount” of his time working with the Cheddar’s team to bolster operations.
“It's important for me to reiterate that we are committed to improving the foundational elements of operations. Stabilizing our management teams, ensuring we are hiring and retaining great team members and developing and executing consistent standards are critical to Cheddar's success,” Lee said.
Lee added that Cheddar’s, slow out the gate or not, still has tremendous growth potential. Darden continues to tout its ability to maintain average weekly guest counts of about 6,000 as well.
He said retention numbers are improving at the employee level. Execution numbers are up, too. This has been a day one concern and glaring issue at Cheddar’s. Lee said he wants to see the retention numbers of management at the hour level crawl much closer to Darden norms. When Darden took over, many Cheddar’s units weren’t fully staffed to Darden’s liking.
“I've been doing this long enough to know that we can't grow rapidly without strong management retention and having an employee proposition that the employees stay with us. That's the key to driving sustainable growth,” he said.
“We have the right strategy for this business. We spent the last 90 days really working on the organizational structure and to make sure we had leadership in the right place. I think the team now is going to focus on process and they're going to focus on trying to simplify the operation and standardize it.”
One thing Darden discovered was the need to instill a culture of accountability at Cheddar’s, Lee said. “I think it's important to note that there's a lot of great people working in this brand and once we get them aligned on what we want them to do and how to—and give them the tools to do it well, I think we're going to see some improvement.”
There is no timetable for the turnaround. Lee said Darden is seeing day-to-day and week-to-week improvement, however.
"There is significant amount of work ahead, but with the focus and strong leadership we have today, I'm confident Cheddar's is on the right track," Lee said.
As for growth, Ricardo Cardenas, Darden’s chief financial officer, said Darden will “ramp it up from where it’s at today” once the fundamentals are in place. Darden plans to use a backfill strategy as it learns more about the growth potential. “We think that getting up toward that 7–10 percent unit growth is kind of a barrier,” he said.
Lee added that Darden has no real interest in other transactions at the moment. Instead, it will focus on stabilizing and “really getting back the Cheddar’s business.”
Lee also addressed the August story around a security breach at Cheddar’s. Federal authorities notified Darden that a legacy point-of-sale system at certain locations was compromised in a cyber attack incident involving units in 23 states. Darden estimated that exposure to be 567,000 payment card numbers, although it was still assessing the scope of the incident. The breach affected payment card information, including card numbers, from guests who visited the Cheddar’s restaurants from November 3, 2017 to January 2, 2018.
A silver lining here was that part of Darden’s integration of Cheddar’s into its system involved getting the brand on its proprietary POS. That dammed the issue.
“… we understand that we take the privacy and security of our guests' personal information very, very seriously and we regret this incident occurred,” Lee said. “It's important to note that this incident occurred on a Cheddar's former POS system that was permanently disabled in April when we completed the implementation of our proprietary POS system and Darden systems and networks were not impacted."