Earnings Call Transcript
Darden Restaurants Inc (DRI)
Earnings Call Transcript - DRI Q3 2020
Operator, Operator
Welcome to the Darden Fiscal Year 2020 Third Quarter Earnings Call. Your lines have been placed on listen-only until the question-and-answer session. I will now turn the call over to Mr. Kevin Kalicak. Please go ahead.
Kevin Kalicak, Investor Relations
Thank you, Regina. Good morning, everyone, and thank you for participating on today’s call. Joining me on the call today are Gene Lee, Darden CEO; and Rick Cardenas, CFO. As a reminder, comments made during this call will include forward-looking statements, as defined in the Private Securities Litigation Reform Act of 1995. These statements are subject to risks and uncertainties that could cause actual results to differ materially from our expectations and projections. Those risks are described in the Company’s press release, which was distributed this morning and in its filings with the Securities and Exchange Commission. We are simultaneously broadcasting a presentation during this call, which is posted in the Investor Relations section of our website at darden.com. Today’s discussion and presentation will include certain non-GAAP measurements and reconciliations of these measurements are included in the presentation. We plan to release fiscal 2020 fourth quarter earnings on June 25 before the market opens, followed by a conference call. Given the circumstances, we will only briefly discuss third quarter results and will spend the majority of the time discussing the impact of COVID-19. Additionally, I want to remind everyone about the calendar shift that moved Thanksgiving from the second quarter of last year to the third quarter of this year, resulting in one fewer operating day for our casual dining brands during the third quarter. Now, I’ll turn the call over to Gene.
Gene Lee, CEO
Thank you, Kevin, and good morning, everyone. I want to acknowledge that we’re clearly in a time of uncertainty as it relates to COVID-19. I know you have a lot of questions relating to the future, and we will try to answer them the best we can. First, I want to say thank you to our teams who are doing a great job managing through this adversity. Additionally, I want to thank them for the outstanding job they did in the third quarter; our results were impressive. As you see from our press release this morning, total sales from continuing operations were $2.35 billion, an increase of 4.5%. Same-restaurant sales increased 2.3% and adjusted net earnings per share were $1.90. However, today we're clearly faced with more pressing matters to discuss, given the rapidly changing environment and ongoing impact associated with COVID-19. To that end, I want to share with you what the Darden team is doing as it relates to the virus and the impact on our operations. Rick will share some of our quarter-to-date results and analysis on potential financial impacts. Turning to our ongoing response. We've established a cross-functional crisis team led by me, and we're in close contact with the CDC and other government agencies to ensure we have the most up-to-date information to inform the decisions we are making. We have developed an action plan addressing business continuity, operations, communication, and supply chain. Our plan is updated as we receive and process new information. The health and safety of our team members, their families, and our guests remain our top priority, and we continue to take steps to ensure the safety of our hourly team members and restaurant management teams. Yesterday, we announced that we're implementing an emergency pay program that will cover hourly team members for two weeks in restaurants facing a business disruption. This is in addition to the permanent paid sick leave policy we announced last week. At this point, we don't see any major impacts to our supply chain. We have been in discussion with all of our major suppliers, and they are confident that they can continue to supply our restaurants with safe, consistent goods to maintain service to our guests. Our restaurant teams are well-trained in food safety, sanitation, and managing through viruses. We are regularly cleaning our restaurants with products that are on the CDC list of approved cleaning agents for COVID-19. We are confident that we'll be able to maintain a steady flow of these products into our restaurants. We are committed to keeping our restaurants open where permissible to provide meals to the community in which we operate, whether that be off-premise or dine-in where permitted. And I'll reiterate that we are committed to the health and safety of our team members and guests by offering limited or no contact, curbside pickup, and practicing social distancing in our seating configurations in all locations where we are permitted to operate our dining rooms. 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 changes to our cost structure and cut non-essential spending. I'd like to emphasize that this is a rapidly changing environment, and as such, we are not able to reasonably estimate the impact on our business. The analysis that Rick will be providing is theoretical in nature and won't be able to predict the duration or scope of the impact at this time. Now, I'll turn it over to Rick.
Rick Cardenas, CFO
Thank you, Gene, and good morning, everyone. I want to start by saying that we had a pretty strong third quarter with same-restaurant sales of 2.3% and diluted earnings per share of $1.90. But obviously that is behind us, and we're now focused on dealing with the unfolding situation. Instead of going through the detailed financial results for this quarter in my prepared remarks, we have most of our usual financial discussion slides in the additional information section of our presentation. Turning to our results so far in the fourth quarter, the shift in business momentum has been swift after announcements from state and local governments limiting restaurant operations. For context, Darden's same-restaurant sales were positive 3% in the first week, the second week was basically flat, and the third week was down almost 21%. Same-restaurant sales for our third fiscal week ending March 15 by segment, where Olive Garden was down 18.7%, LongHorn was down 15.9%, Fine Dining was down 27.7%, and other business was down 27.5%. Our presentation has trends by week for our segments. 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 announced that the Board has suspended our quarterly dividend payment. The Board intends to review our quarterly dividend policy as developments warrant. Second, out of an abundance of caution, we are fully drawing down our $750 million credit facility to further shore up our cash balance, resulting in approximately $1 billion on our balance sheet. Third, we are limiting cash outflows by more aggressively managing costs and significantly reducing CapEx. Finally, given the level of volatility and uncertainty surrounding the future impact of COVID-19 on the broader U.S. economy and any specific impact on our company, we have withdrawn our previous fiscal 2020 guidance issued December 19, 2019. In the absence of specific guidance for the fourth quarter of fiscal 2020, we want to provide EPS sensitivity for the quarter. Assuming most restaurants have partial operations such as ToGo only, you can assume that for each percentage point decline in sales for the fourth quarter, which is 14 weeks, diluted earnings per share will decline approximately $0.06 to $0.08. During these uncertain times, it's important to understand the strength of our balance sheet and history of our cash flows. To that end, when looking at our historical operating cash flows, we've been able to generate enough cash to more than fund all of our needs. While I can't predict the level or length of any reductions in 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, including change in net working capital. As I mentioned earlier, we have approximately $1 billion in available cash. Given that, I believe we'll be able to weather this disruption to our business. And with that, we'll take your questions.
Operator, Operator
Our first question will come from David Palmer with Evercore ISI.
David Palmer, Analyst
Thanks. Good morning. As the country's largest casual dining company, it certainly makes sense that you'd be having discussions with the government right now. It's also my understanding that the industry, in particular the casual dining segment, has been a united front asking for some sort of a direct relief plan. Could you talk about some ideas that are realistically being considered, even if you're not counting on them for Darden's survival? Thank you.
Gene Lee, CEO
Good morning, David. Yes, we and I have been in contact with the administration and members of Congress to help them understand the unique challenges we face in the full-service sector. The priority of those discussions has been on developing a plan to keep our team members on our payroll, trying to develop a plan which would use government money to pay them and not have to separate with our 190,000 team members. That's been the focus of our discussions at this point.
David Palmer, Analyst
And is there a mechanism that they have decided on or even thought about to get that done?
Gene Lee, CEO
No, at this point in time, we're early in the discussion and there's just a lot happening in D.C. But they are well aware of the situation that full-service casual dining companies are really facing, which is different than franchise.
Operator, Operator
Your next question will come from the line of Jeff Farmer with Gordon Haskett.
Jeff Farmer, Analyst
Thank you. You did touch on it, but what is your monthly cash burn rate in the scenario you outlined, where the restaurant dining rooms are closed and you're only able to serve off-premise? And as a follow-up to that, I'm just curious if you think you can keep that off-premise number at Olive Garden anywhere close to that, I think it's $14,000 to $15,000 per week in a normalized environment?
Gene Lee, CEO
Hey, Jeff. On a takeout-only scenario, we would expect the variable margin to be positive. That’s very important for us is to ensure that we have positive variable margin on takeout. But our total EBITDA will be negative. We do believe that we can build up and are seeing growth in ToGo sales at Olive Garden and at LongHorn Steakhouse, significant growth in ToGo during this time period. I will say in a fully closed scenario, which is what we talked about a little bit ago, a fully closed scenario, a run rate cash burn rate is about $40 million to $50 million. But we think a full close is unlikely, meaning closing everything, including ToGo. Any variable margin we get from the takeout really helps offset that fully closed cash burn rate.
Jeff Farmer, Analyst
That's helpful. But that $40 million to $50 million that time period is over a month. Is that correct or in a quarter?
Gene Lee, CEO
Yes, $40 million to $50 million a week assuming we're fully closed. Now, we can probably take that cash burn rate down below $40 million. But that's just a range that we have and that's assuming we're fully closed again.
Operator, Operator
Your next question comes from the line of Katherine Fogertey with Goldman Sachs.
Katherine Fogertey, Analyst
Great. Thank you. Can you give us a little bit of color about how many people you would need in the restaurants if you're running ToGo only? And then, you kind of alluded to you’re seeing a big boost on Olive Garden and LongHorn around ToGo. Could you give more granular numbers about how that comp trend has moved in the three weeks like you split out the overall side? And then just finally, I know that you guys have not partnered with third-party delivery before, but just wondering, given this very unique set of circumstances here, does it make sense to maybe look at even a short-term solution on that front to help get food to customers? Thank you.
Gene Lee, CEO
It's taken us on average 6 to 10 team members ToGo-only restaurants to operate. I suspect it's been all over the place, and every day is changing dramatically. But I think when I looked at it yesterday, our off-premise business was growing about 20% versus last year. So it's picking up as people change their behaviors. As far as third-party goes, I would say that everything is on the table. However, what we're focused on right now is ramping up and using our team members to keep them on our payroll and develop our own delivery capabilities, which our teams are ramping up very quickly.
Katherine Fogertey, Analyst
So I understand you guys are looking at doing your own fulfilled delivery in certain markets?
Gene Lee, CEO
We're doing it now.
Operator, Operator
Your next question will come from the line of Nicole Miller with Piper Sandler.
Nicole Miller, Analyst
Thank you. Good morning. Could you please share how your conversation with your lender went? Also, what do you think is the intent of lenders when it comes to working with restaurants at any level? In the past, I understood that they would allow the ability to draw down on a revolver and adjust covenants as needed. This will be important again, possibly not for Darden since you've already had the conversation, but for many of your peers moving forward. If you could walk us through that, we would really appreciate it. Thank you.
Gene Lee, CEO
Yes, Nicole, we've had some really good conversations with our banks. We've got long-standing relationships with them. They were with us during the crisis in 2008. And so we just, as we said, as an additive of an abundance of caution, we drew down our revolver. They said they'd be there if we needed them before we did that. But we decided to do that just to get in front of anybody else that might want to. In terms of our covenants, we haven't gotten to a point where we're breaking our covenants. And so we haven't had those discussions. And even with our stock price today, we'd still be within our covenant.
Operator, Operator
Your next question comes from the line of Brett Levy with MKM Partners.
Brett Levy, Analyst
Thank you for having the call this morning. Could you discuss your conversations with landlords now that you are no longer the sole owner of your properties? Also, you mentioned labor issues in the first two weeks; how do you anticipate approaching this over the intermediate period, over the next two weeks and the following two months? Thank you.
Gene Lee, CEO
Yes. Brett, we've had no conversations with our landlords at this point in time. We have stopped all construction of all new restaurants, and we're negotiating with those landlords to push off the commencement of rent. As far as labor goes, we've implemented our emergency pay policy for those that are being impacted from a disruption standpoint. What we do in the future will really depend on what kind of relief we may get from the administration to help pay our people. But that's yet to be determined, and we continue to have conversations. I'll have conversations with the leaders in Washington as soon as I get off this call, so I really can't give a whole lot of guidance to that.
Brett Levy, Analyst
No, that makes sense. Regarding store capacity, what are your expectations? What feedback are you receiving from other areas that are currently fully operational or operating at half capacity? Do you have any insight on how we should view the next two weeks in terms of ongoing capacity within the units?
Gene Lee, CEO
Brett, the dynamic of this crisis is changing hourly. So I don't want to try to predict what is going to happen. All I can do is that we’re going to react. I am in contact with the governors of the largest states to talk to them about how we believe that our environments, if we practice good social distancing, are some of the safest places to be. And we'll continue to have those conversations. But we are not in control of that. We will react to what the local government wants to do and we'll do the best job that we can. But I have no way of predicting what's going to happen.
Operator, Operator
Your next question will come from the line of Sara Senatore with Bernstein.
Sara Senatore, Analyst
Hi. Thank you. I have a question. Could you provide some insight into consumer behaviors you're observing, particularly regarding geographic differences or other factors? The entire country is focused on this situation, which is a significant humanitarian issue. However, are you noticing varying behaviors outside the major affected areas, like on the coasts? Some data suggests that the location of your restaurants relative to population density or specific regions might influence this. I'm curious about whether you are seeing distinct differences in various parts of the country based on the immediate impact or if it seems that everyone is mostly reacting to the news. Any nuances you could share would be helpful as we consider how these behaviors might evolve over time. Thanks.
Gene Lee, CEO
Well, I would say that obviously the parts of the country that were impacted first obviously were down significantly before other parts of the country. Again, I would say more towards the middle of the country you're seeing a little bit more of a normalized behavior. And then in most of the Northeast is pretty much shut down except for off-premise. So it’s tough. The numbers are very difficult to read at this point in time because we haven't had the chance to bifurcate our sales report to areas that are open for business with a dining room and social distancing and those that are just open for ToGo. So our ability to analyze that has been a little difficult, just because it's changing so dramatically. But overall, you could see it as business travel started to decline. All the business centers took a major hit. And now with various closing down, I can't say consumer behavior is changed. It's just it depends on the situation.
Sara Senatore, Analyst
Okay, that's helpful. And just a follow-up on my question, yes.
Gene Lee, CEO
To provide some understanding of the Knapp region, during the week that just ended, the top-performing area was Texas, which did not experience any forced closures and saw a decline of roughly 29% in the casual dining sector. In contrast, the worst-performing area was down 61%. Overall, all regions are experiencing declines as people continue to practice social distancing. This information offers insight into the varying impacts on the casual dining business.
Sara Senatore, Analyst
Thank you. That's very helpful. And then just quickly on the cost, the cash flow, cash burn piece. And this is probably a naive question, but as I think about kind of the outlays, obviously, you have rent and occupancy that you talked about still paying and then you’re taking care of the people. Are there any other big buckets I should be thinking about as I think about what where this sort of cash outlays might be going, irrespective of what your revenues look like?
Gene Lee, CEO
You have already covered most of the points. If we consider our rent expenses on a monthly basis, it's approximately $20 million out of the total $40 million in restaurant expenses. Rent accounts for about $8 million a week, making it the largest non-salary expense contributing to our cash burn. Manager salaries are around $10 million, but that figure could change if the situation extends for a long time or if there are any developments from the government. We could reduce that amount if necessary to ensure that our staff continues to receive their pay.
Sara Senatore, Analyst
Okay. Thank you so much.
Operator, Operator
Your next question comes from the line of Andrew Strelzik with BMO.
Andrew Strelzik, Analyst
Hey, good morning. Thanks for taking the question. Kind of understanding the survival mentality right now, I guess I’m wondering how you’re thinking about advertising in this environment. You’ve kind of long touted your robust digital capabilities. Is there anything you’re doing in terms of mining that data to try to manage through the current environment?
Rick Cardenas, CFO
Andrew, given our current sales results, we are concentrating our advertising efforts on ToGo, particularly for Olive Garden and LongHorn, but we have significantly cut our advertising budget. While I won't go into detail on competitive matters, we plan to continue reducing our advertising expenditures where possible, focusing solely on enhancing our ToGo experience.
Andrew Strelzik, Analyst
Okay. And is there any more color you can provide on just what we should expect from CapEx?
Rick Cardenas, CFO
Basically, the only CapEx we would have is focused on curbing any capital spending. We are managing it aggressively. And that really includes stopping all non-essential capital spending. As Gene mentioned, we are basically shutting down new restaurant construction where we can. And so that cash burn number I had told you before includes CapEx.
Operator, Operator
Your next question comes from the line of John Ivankoe with JPMorgan.
John Ivankoe, Analyst
Hi. Thank you so much. I have several, if I may. Firstly, what is that non-essential CapEx number? I know not the number that you necessarily want to sustain, but I mean how close to zero could you actually get while continuing to keep up the operation where you want it to be?
Rick Cardenas, CFO
Very low single-digit millions a week.
John Ivankoe, Analyst
Okay. It really highlights how exceptional this situation is. From the perspective of restaurant operations, there are certain limits being suggested for gatherings, around 25 to 50 people, and those numbers seem to be decreasing. How do you manage that practically within the restaurant? Is there a specific threshold where you decide to limit the numbers to 25 or 50 guests, staff included? Additionally, how do you ensure social distancing among servers and guests, especially when some interactions require closer physical contact? Lastly, is there any consideration for using disposable dishware to enhance cleanliness and reduce contact?
Gene Lee, CEO
It’s a lot in there, John. You got it all in. Let me see if I can remember some of that. First thing we do is, once we get below 10 or less guests, we basically go right to ToGo. Most of our ordinances are 50% capacity, or a high number like 100, and how we execute that is we put someone at the front door and we count. We’ve had the number of employees, we are working on in those environments, limited menus. So we’ve got fewer employees in the building. We’ve got some high-volume restaurants with limitations of 100 people in the building that are still doing some fairly good numbers. So I feel like we’re really filling a need the consumer wants. As far as the social distancing with our team members, it’s a challenge. Most importantly, we’re working on hygiene. People are washing their hands, we’re sanitizing every table after every visit. We’ve instructed our people to really keep their face and back and be able to reach with their hands to provide the best experience they can in that environment. To date, out of our 190,000 team members, we have no confirmed cases. We’ve had a great protocol where we’ve got a significant amount of people that aren’t allowed to work because they may have some sort of symptoms. But we’ve got great processes in place. We deal with much more contagious viruses all the time, and we feel our dining rooms are some of the safest places right now. There are other places that are open and operating that are nowhere near as safe as our dining rooms.
John Ivankoe, Analyst
Gene, you mentioned a significant change in your cost structure. We've discussed the restaurant side, but is there anything on the general and administrative side that you would like to highlight regarding temporary versus structural changes? Specifically, I'm curious about your discretionary spending in G&A that may or may not involve changes in headcount.
Gene Lee, CEO
John, besides my decision not to take a salary, there are opportunities. We’ve eliminated all travel, and we will keep reviewing our staffing levels in the support center. I won’t make any comments since my team is listening. There will need to be some sacrifices for the organization, and we will keep reassessing as we gain a clearer understanding of our situation, which changes daily. Thank you, John.
Operator, Operator
Your next question comes from the line of Dennis Geiger with UBS.
Dennis Geiger, Analyst
Thanks for the question. Gene, just wondering if you could provide any perspective on kind of how you’re thinking about the industry and broadly the smaller chains and independence within this environment in particular, maybe relative to Darden’s brands. I know the focus here is on the immediate and the near-term. And I know you don’t have a crystal ball, but just any thoughts that you’ve got perhaps on how you think Darden’s brands are positioned, perhaps if we can look a little bit past and coming out of some of this relative to the competition if you care to share any of that? Thanks.
Gene Lee, CEO
Yes, I think we’re too early on in this crisis for me to have an opinion on that. I think that the full-service casual dining business is an important piece of the overall economic engine of the United States. You look at just the six top chains, we employ over half a billion people. These are great jobs, and people love working for us, and consumers love us. I think that we are all innovative and we are creative. I think that we are going to fight as hard as we can to get our share of the off-premise business in this time. I believe that we will all come out of it, the bigger ones in a strong position. We all have great people. Our people love working for us. Our customers love us, and we just got to manage through this, and I think the industry will be fine.
Dennis Geiger, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Brian Bittner with Oppenheimer & Company.
Brian Bittner, Analyst
Good morning. Thanks. Rick, the sensitivity analysis you gave us for the fourth quarter, I think you said every point in comp is worth about $0.06 to $0.08 of EPS. I’m assuming that includes things like the emergency pay program to cover hourly workers and whatnot, but can you just help us better understand what are you doing on your core operating costs per unit when we think about that sensitivity analysis? I think you did a great job of explaining the cash burn, and I think that’s pretty straightforward, but just trying to understand the cost assumptions in that same-store sales sensitivity analysis a little bit more?
Rick Cardenas, CFO
Yes, Brian. The estimate of $0.06 to $0.08 does factor in the emergency pay we mentioned. We are currently examining every line item of restaurant expenses in detail. While I can't provide a specific answer at the moment, the cash burn is similar to the burn in the profit and loss scenarios I shared. We have options to further decrease that amount if necessary. We are actively reviewing it, and remember that after drawing down the revolver, we will have $1 billion in cash, with a weekly cash burn of $40 million. This gives us considerable cash reserves to sustain operations for an extended period, even in the event of a complete shutdown. Our focus is on scrutinizing every expense to find reduction opportunities. Some expenses are more straightforward to cut than others, and some will require discussions with others, which we haven't had yet. However, one of the easier areas to cut is related to daily contracts for services like trash pickup since restaurants are not as busy. Our top priority is to ensure that we can continue paying our employees until we reach a point where we can no longer do so.
Brian Bittner, Analyst
Thank you. And Gene, it’s a bold move to take your salary to zero, and I wish you guys luck.
Gene Lee, CEO
Thank you, Brian. We are going to be fine.
Operator, Operator
Your next question comes from the line of Howard Penney with Hedgeye.
Howard Penney, Analyst
Hey. Thank you for the question. I know this is going to be a difficult one to answer, but if you even hear conversations you’re having with the government of different people that we don’t have conversations with, any thoughts on the duration and the timing of this, and what you might be looking at to determine the duration, or is it just basically the curves that we can all see? Thanks.
Gene Lee, CEO
Hi, Howard. I don’t want to speculate. I’m not an expert, and I’m looking at the same information every day, every hour that you are. When you look at the curves that they are predicting, I think that what I’m hearing is a peak at the end of May, beginning of June.
Howard Penney, Analyst
Awesome. Appreciate it. And thank you again for your commentary today. It's very helpful.
Gene Lee, CEO
Thank you, Howard. You bet.
Operator, Operator
Your next question comes from the line of Eric Gonzalez with KeyBanc.
Eric Gonzalez, Analyst
Hey, thanks for the question. I was just curious if you can go back to the off-premise conversation, and maybe talk about what you’re doing differently, which maybe you haven’t done in the past. I know you mentioned that you’re ahead of everything, so can you talk about delivery? And then just secondarily, on this dividend, I was just curious what things do you return to normal? How will you determine the size of the dividend?
Gene Lee, CEO
Regarding off-premise, we have already made significant progress. We are actively offering delivery services and are lowering the requirements for available personnel to facilitate these deliveries. Within the next 24 to 72 hours, we expect to be able to deliver Olive Garden to customers wherever they need it. As I mentioned previously, we are considering all options for third-party services. However, my current priority is to keep as many employees working as possible. I believe we can enhance our own delivery capabilities effectively. I will now hand it over to Rick to discuss the dividend.
Rick Cardenas, CFO
Hey, Eric. Yes. As we mentioned, we did suspend the dividend. All I can tell you is the Board is going to reevaluate that dividend when the conditions change. I can’t tell you where we will be or what the dividend will be. But I will say that in our capital returns to shareholders, the dividend is one of the most important things that we do to return capital to shareholders.
Operator, Operator
Your next question comes from the line of David Tarantino with Baird.
David Tarantino, Analyst
Hi. Good morning. My question, Gene, is on the pay of the hourly workers. I know you did the right thing. It seems to implement this emergency pay. But I just wanted to confirm the length of time that covers. And then, once that expires, what your thought processes on and how you keep these employees engaged for when times do get better down the road?
Gene Lee, CEO
Yes, David, currently the time commitment is two weeks following the disruption, but this may change based on the government's relief packages. We are aware that the government will begin sending checks directly to individuals instead of through us, which needs to be factored into our plans. We intend to keep our workforce engaged, possibly through our furlough program, enabling them to access benefits without losing their tenure. Our goal is to ensure that our team remains engaged so we can quickly ramp up operations when the time comes. However, we need to coordinate with the government since direct compensation to the public will influence our strategy regarding our employees.
David Tarantino, Analyst
Great. Thanks for that. And then, Rick, just in terms of cash priorities, I will be the optimist and thinking that you will work through the short-term period and then return to some sense of normalcy. So, I guess, what are your priorities once you get on the other side of this? Would it be to pay down debt or would you be looking to reinstate the dividend sooner rather than later?
Rick Cardenas, CFO
Thank you for your question, David. We consider the dividend very important. Despite the debt we are accruing, we are comfortable with it if we need to keep that level. We will review our cash flow projections moving forward and prioritize our capital duties, which include maintaining our restaurants, ensuring they are appealing. After that, we will focus on the dividend, then new unit expansion, and lastly, share buybacks. This has been our strategy for years, and we believe it will not change due to our current situation. Therefore, capital expenditures for maintaining our restaurants, dividends, and new unit growth may be adjusted based on future developments, followed by share buybacks. If we manage to reduce our revolving credit, we expect to return to our previous financial position, but that will be factored into our plans.
David Tarantino, Analyst
Great. Thank you and best of luck.
Rick Cardenas, CFO
Thank you.
Operator, Operator
Your next question comes from the line of Jeffrey Bernstein with Barclays.
Jeffrey Bernstein, Analyst
Great. Thank you very much. Rick, can you clarify the comments around sensitivity? I think you said this week comps were down 60%, down sharply from the 20% last week. So just to connect that guidance to your or to forward guidance, you said if comps are down 50% for the fourth quarter, cash burn would be $300 million. I’m assuming that’s relative to the $1 billion you have to try and demonstrate your sustainability. But can you compare that to the comments you made about down $40 million to $50 million per week? Are those all apples-to-apples or just want to clarify those details?
Rick Cardenas, CFO
Those figures are not directly comparable. The $40 million to $50 million per week is based on a scenario where we are completely closed, and it reflects a run rate. The scenario of a 50% decline that leads to $300 million takes into account some of those run rate costs, some emergency pay, and also the gradual decrease of our negative net working capital, though not entirely. It's important to note that the restaurant industry typically operates with negative net working capital. As sales decrease, we start to give back some of the working capital credits we've built up. If we are completely closed, the negative balance of that working capital will eventually be eliminated.
Jeffrey Bernstein, Analyst
Understood. Ultimately, just to clarify my last question, when the virus subsides, which we hope will be soon, is there any reason the business model won't return to full strength? I'm suggesting that there won't be any significant changes to, say, fiscal year 2022 earnings. Most people evaluate this company based on future years. I just want to ensure that any adjustments you’re making today won’t alter the long-term earnings growth trajectory from this point forward.
Rick Cardenas, CFO
Jeff, what we are trying to do is make sure that we come out of this even stronger than where we were when we came into it. But it all depends on what happens to the consumer and the length and depth of this crisis economically. As long as people continue to get paid, we think there’s a better chance that the bounce back is a quicker bounce back. If unemployment gets to some pretty high levels and people aren’t getting paid, that’s a different story. With that said, if those things happen and the inflation that we’ve been seeing for the last couple of years probably goes the other way too. So we haven’t looked two years into the future. We are looking hourly and weekly right now. But we believe that our position helps us become even stronger when we come out of this, but we can’t comment necessarily on what the margin structure is going to look like in two years.
Gene Lee, CEO
Hey, there are 10 people in the queue and I want to get to everybody. We have a hard stop at 9:30. We've got to get back to taking care of some things. So if you could keep it just to one question, that would be great. So I want to give everybody an opportunity. But that would really be helpful. Thank you.
Jeffrey Bernstein, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Jake Bartlett with SunTrust.
Jake Bartlett, Analyst
Great. Thanks for taking the question. My only question is just trying to understand the 60% that you talked about in the last week. I believe many jurisdictions have only limited dine-in sales, as kind of Monday. So does that really just include half of the impact of that trend to kind of really get down to the run rate of sales?
Gene Lee, CEO
Yes, Jake, most of those jurisdictions started Monday. We saw a little bit of a slowdown from Monday to Tuesday. But Tuesday to Wednesday was about the same amount, so about down 60%. As long as it stays that way, we hope that that will continue to be around that number, but we can’t comment on what we actually think is going to happen. That said, we are getting better and better on our ToGo business too. So as it becomes ToGo only, we'd hope to continue to grow that.
Operator, Operator
Your next question comes from the line of Andrew Charles with Cowen.
Andrew Charles, Analyst
Thank you. I see that Olive Garden has a small presence in the Seattle market, which has been the site of the first U.S. outbreak and could indicate trends for the country as a whole. Can you discuss the recent sales trends in this market to provide insights for the broader market? Additionally, Gene, what best practices have you learned from Seattle that could be applicable nationally? Please take your time. Thank you.
Gene Lee, CEO
Yes, thanks, Jake. I would say that the Seattle market, with the exception of the Downtown area, remained quite resilient, and sales maintained for a period until we began closing the dining room. Overall, it was acceptable. I base this comment on observing larger groups and numbers; we are also analyzing the individual figures, particularly by brand. I’m not sure if we’ve really gained insights that will guide us going forward. I believe our biggest challenge right now is figuring out how to effectively utilize our workforce and creativity to enhance our off-premise sales. I have strong confidence in our leadership and our operational team to prioritize this and ensure the business continues to grow during this crisis.
Andrew Charles, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Chris O’Cull with Stifel.
Chris O’Cull, Analyst
Thanks, guys. Good morning. Rick, I was hoping you could go into maybe just a bit more detail about what the company’s alternatives for cash liquidity would be if it happens to come to a point where you would need additional funds, and if you could just give a little bit more color there about some of the options that would be available. Thanks.
Rick Cardenas, CFO
Hey, Chris. We are hoping not to need any additional options. That’s why we pulled down our revolver to get roughly $1 billion in cash on our balance sheet to get us through this. That said, we’ve excellent banking relationships. We’ve been discussing other options with our banks. I don’t want to get into the details of that right now. But if we believe that, again, to be cautious, we need a little bit more, we think we’ve access to more without getting into any of the details.
Operator, Operator
Your next question comes from the line of John Glass with Morgan Stanley.
John Glass, Analyst
Thanks very much. And I also appreciate all that you provided in this tough time. Rick, you talked about Knapp at different times. You talked about your own sales most recently. Can you just clarify or do you think your trends are consistent with Knapp or are you outperforming or underperforming, we are all trying to get a sense of the benchmark for the industry. Historically, Darden has outperformed that, particularly in more challenging times? Can you just maybe, one, trip those numbers; and two, talk about qualitatively do you think you’re outperforming or underperforming peers?
Rick Cardenas, CFO
I don’t have the latest Knapp data for the week I mentioned, so I can't accurately assess whether we're outperforming them. However, I believe we were outperforming previously and hope to maintain that trend. We have significant potential to expand our ToGo business. My earlier comments were based on Knapp data from different regions in the country, but we currently lack that detailed information.
John Glass, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Matt DiFrisco with Guggenheim Securities.
Matt DiFrisco, Analyst
Thank you. Can you provide an estimate of the percentage of our base that is related to tourism or travel with the acquisition of Cheddar's? Additionally, when we come out of this, Gene, how do you think the process would unfold if, hypothetically, an employee tested positive for COVID in July or August? Would you consider closing the store? Is this situation going to be treated differently than other viruses that could affect the building and lead to store closures?
Gene Lee, CEO
No, John. I think that depending on the situation, such as how long the employee worked and how many days prior they were out before being diagnosed, retail establishments are generally not closing. We would conduct an additional level of cleaning if necessary, but I wouldn’t expect significant closures due to an employee being diagnosed with COVID-19.
Matt DiFrisco, Analyst
And then, on the tourist travel skew, if you don’t mind?
Gene Lee, CEO
Yes, Matt, we don’t have that information available, but I can tell you that one of our largest markets is Florida. We are still operating with our own capacity limits of 50% utilization in our restaurants. Even with Cheddar’s, which primarily serves the Southeast, we haven’t experienced as many mandated closures in that region compared to other parts of the country. However, it’s likely that tourism has decreased, particularly based on what we have observed recently. If you consider the last couple of weeks, it coincided with a significant spring break period, and we are currently in another peak spring break week. The effects we are noticing are much more significant in the fine dining sector than in casual dining at this time, which is reflected in our presentation.
Matt DiFrisco, Analyst
Thank you.
Operator, Operator
Your next question comes from the line of Gregory Francfort with Bank of America.
Gregory Francfort, Analyst
Thank you for the question. I know you mentioned the revolver drawdown. Were you able to make any changes to the amendments on those documents, specifically regarding the debt-to-capital covenant?
Rick Cardenas, CFO
We did not make any amendments to our capital or our debt right now.
Gregory Francfort, Analyst
Got it. And then, maybe just variable margin you talked about it. Is there a minimum hurdle at which variable margin is positive for ToGo mix, is that 5%, 10%, 15%, is there a level at which that doesn’t become a variable margin positive? Thanks.
Rick Cardenas, CFO
If we have very little ToGo business and someone is waiting to take the order, that's when the variable margin can become negative. However, our variable margins for ToGo are generally good. The situation is not straightforward because we have someone managing phone orders. If our ToGo business drops too low and we evaluate it on a restaurant-by-restaurant basis, negative variable margins could lead us to close that location. It's still early to make that determination. We also have managers in our restaurants who can assist with ToGo orders since they have fewer tasks in the dining room. This allows us to potentially reduce the number of hourly employees during this period by utilizing managers for some of the ToGo business as well.
Gregory Francfort, Analyst
Understood. Thank you.
Operator, Operator
Your next question comes from the line of Peter Saleh with BTIG.
Peter Saleh, Analyst
Hey. Can you guys hear me?
Gene Lee, CEO
Yes.
Rick Cardenas, CFO
Yes.
Peter Saleh, Analyst
Yes. Great, thanks. Can you guys just talk a little bit about if you have business interruption insurance. Does the business interruption insurance cover this type of situation on any kind of conversations you’ve been having with your insurers would be helpful.
Rick Cardenas, CFO
Hey, Peter. Yes, we do have business interruption insurance that covers the situation. The maximum we can recover is $10 million. We think based on what’s going on now, we will probably be able to recover all of that. I will say that it’s pretty rare to have some of this kind of coverage. We were pretty fortunate that we were able to get this coverage. We will hopefully try to keep it next year. Thanks.
Operator, Operator
Your next question comes from the line of Andy Barish with Jefferies.
Andy Barish, Analyst
Yes. I’m all set. Questions have been asked. Thanks for the time and stay safe.
Gene Lee, CEO
Thank you.
Operator, Operator
Your next question comes from the line of Jon Tower with Wells Fargo.
Jon Tower, Analyst
Hey, great. Hopefully, you can hear me okay. The question I have is regarding the lender side of the equation concerning negotiating power. Can you discuss any conversations you've had with landlords about the possibility of deferring rent payments in the future? Thanks.
Rick Cardenas, CFO
Hey, Jon. Other than the mention that Gene said about new restaurants slowing down construction, we haven’t had discussions yet with landlords on deferring rent or delaying our rent payments. We’re hoping not to have to get to that point, but we are probably going to start some discussions just to be sure that we have enough capital later. But we might not need to do that.
Operator, Operator
Your next question comes from the line of Priya Ohri-Gupta with Barclays.
Priya Ohri-Gupta, Analyst
Great. Thank you so much for squeezing me in, and I hope you can hear me clearly. My question was just around whether you guys have had conversations with the rating agencies at this point, and how much flexibility they are willing to afford, given sort of the fluidity of the nature of what we are seeing with COVID and some of your liquidity needs? Thank you.
Rick Cardenas, CFO
Yes, Priya. We have ongoing discussions with our rating agencies throughout the year, including some recent ones. I can’t provide details on their views regarding COVID-19, but I believe they are assessing the ratings of all companies based on current results. We are indeed in dialogue with them.
Kevin Kalicak, Investor Relations
Thank you. That concludes our call. I would like to remind you that we plan to release fourth quarter results on Thursday, June 25. Thank you for your time today.
Operator, Operator
Ladies and gentlemen, that will conclude your call for today. Thank you all for joining, and you may now disconnect.