The Chaos Report

How deep is the economic hole the U.S. has suddenly fallen into? No one knows.

And that’s the problem. We keep saying this complete lack of visibility about the future of the economy, is like going over a waterfall without having any idea of how distant a drop it is into the icy waters below.

And we had a very good example of that when Olive Garden released its earnings today. Or rather Darden Restaurants, which also owns LongHorn Steakhouse and some others. Olive Garden accounts for about 1/2 of Darden’s revenue.

Let’s point out that we are not singling out Olive Garden because we think it’s an unusual case, or they’re doing anything egregious, or anything particularly differently compared to other companies. In fact, Olive Garden’s parent company seems to be one of the “good guys”: they’ve already promised paid sick leave and emergency pay in relations to COVID-19. And the CEO isn’t taking his own salary for now.

We’re bringing this up because their parent company’s earnings came out today, and they made a pretty good amount of money recently. (Those endless breadsticks paid off!) And in fact, its stock surged today to close more than 8% higher.

Earnings announcements usually also involve a little guesswork, because companies are supposed to give guidance about their future. But Olive Garden’s parent company did something interesting: they gave no guidance—took no guesses. In fact, withdrew previous guidance and replaced it with nothing. Which is in a way the most responsible thing to do right now. But is highly unusual and scary.

Olive Garden’s parent company:

• Withdrew its projection for how it’ll do for the rest of the year. Didn’t revise. Withdrew. Meaning it’s projecting nothing. Management has figured out what each percentage point decline in sales will mean to its bottom line, but is making no prediction of how deep it expects those declines to be. NO VISIBILITY.
• Maxed out its external line of credit. Management indicated it did that preemptively out of “an abundance of caution”, meaning it felt it was wise to grab on to as much cash as it could. Which from this and other things all told adds up to about $1-billion dollars. But indicating it hasn’t had to spend that yet. Still, NO VISIBILITY.
• Suspended its cash dividend to shareholders. Because it may need that cash. The responsible thing to do, but another sign of NO VISIBILITY.

And according to CNBC, Olive Garden does carry business interruption insurance, but its policy maxes out at $10-million. (And that’s assuming the company that’s insuring it has sufficient liquidity.) This isn’t an example of no visibility, rather an underestimation of what a worst case scenario would look like. But can’t really hold management at fault for that.

The only bit of visibility in this report: a contention by the company’s CEO that “a full close is unlikely”. Meaning with 60% of locations currently under to-go only restrictions by local governments, either they’ll be supported enough by that to keep operating at reduced levels (they say 6-10 employees are needed to keep locations with closed dining rooms running), or they believe Coronavirus cases will become concentrated and isolated enough that they may be able to keep open or reopen some restaurants for sit-down dining in areas that may seem to be safe. But they didn’t give a projected timetable for that either.