DARDEN RESTAURANTS INC
10-Qs and 10-Ks
PROXIES
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
10-Q
|
|
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the quarterly period ended
February 26, 2023
or
|
|
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | ||||
For the transition period from
to
Commission File Number
(Exact name of registrant as specified in its charter)
|
|
|
||||||||||
|
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
||||||||||
|
|
|||||||||||
|
|
|
|
|||||||||
| (Address of principal executive offices) | (Zip Code) | ||||||||||
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered | ||||||
|
|
|
|
||||||
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
☒
Yes
☐
No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
☒
Yes
☐
No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
|
|
☒ | Accelerated filer | ☐ | |||||||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company |
|
|||||||||||||||||
| Emerging growth company |
|
|||||||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
☐
Yes
☒
No
Number of shares of common stock outstanding as of March 15, 2023:
120,929,455
.
TABLE OF CONTENTS
| Page | |||||||||||
| Part I - | Financial Information | ||||||||||
| Item 1. | |||||||||||
| Item 2. | |||||||||||
| Item 3. | |||||||||||
| Item 4. | |||||||||||
| Part II - | Other Information | ||||||||||
| Item 1. | |||||||||||
| Item 1A. | |||||||||||
| Item 2. | |||||||||||
| Item 6. | |||||||||||
2
Cautionary Statement Regarding Forward-Looking Statements
Statements set forth in or incorporated into this report that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan”, “outlook” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. The most significant of these uncertainties are described in Darden’s Form 10-K, Form 10-Q (including this report) and Form 8-K reports.
3
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
|
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||
| Sales | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
|
Food and beverage
|
|
|
|
|
|||||||||||||||||||
|
Restaurant labor
|
|
|
|
|
|||||||||||||||||||
|
Restaurant expenses
|
|
|
|
|
|||||||||||||||||||
|
Marketing expenses
|
|
|
|
|
|||||||||||||||||||
|
General and administrative expenses
|
|
|
|
|
|||||||||||||||||||
| Depreciation and amortization |
|
|
|
|
|||||||||||||||||||
| Impairments and disposal of assets, net |
|
(
|
(
|
(
|
|||||||||||||||||||
|
Total operating costs and expenses
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Operating income |
|
|
|
|
|||||||||||||||||||
| Interest, net |
|
|
|
|
|||||||||||||||||||
| Earnings before income taxes |
|
|
|
|
|||||||||||||||||||
| Income tax expense |
|
|
|
|
|||||||||||||||||||
| Earnings from continuing operations | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
|
Losses from discontinued operations, net of tax benefit of $
|
(
|
(
|
(
|
(
|
|||||||||||||||||||
| Net earnings | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Basic net earnings per share: | |||||||||||||||||||||||
| Earnings from continuing operations | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Losses from discontinued operations |
|
(
|
(
|
(
|
|||||||||||||||||||
| Net earnings | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Diluted net earnings per share: | |||||||||||||||||||||||
| Earnings from continuing operations | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Losses from discontinued operations |
|
|
(
|
(
|
|||||||||||||||||||
| Net earnings | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Average number of common shares outstanding: | |||||||||||||||||||||||
|
Basic
|
|
|
|
|
|||||||||||||||||||
|
Diluted
|
|
|
|
|
|||||||||||||||||||
See accompanying notes to our unaudited consolidated financial statements.
4
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
|
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||
| Net earnings | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
| Foreign currency adjustment |
(
|
|
(
|
(
|
|||||||||||||||||||
|
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $(
|
(
|
|
|
(
|
|||||||||||||||||||
|
Net unamortized gain (loss) arising during the period, including amortization of unrecognized net actuarial gain (loss), net of taxes of $
|
|
|
|
|
|||||||||||||||||||
| Other comprehensive income (loss) | $ |
(
|
$ |
|
$ |
|
$ |
(
|
|||||||||||||||
| Total comprehensive income | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||
See accompanying notes to our unaudited consolidated financial statements.
5
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
|
February 26,
2023 |
May 29,
2022 |
||||||||||
| (Unaudited) | |||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
|||||||
| Receivables, net |
|
|
|||||||||
| Inventories |
|
|
|||||||||
| Prepaid income taxes |
|
|
|||||||||
| Prepaid expenses and other current assets |
|
|
|||||||||
| Total current assets | $ |
|
$ |
|
|||||||
|
Land, buildings and equipment, net of accumulated depreciation and amortization of $
|
|
|
|||||||||
| Operating lease right-of-use assets |
|
|
|||||||||
| Goodwill |
|
|
|||||||||
| Trademarks |
|
|
|||||||||
| Other assets |
|
|
|||||||||
| Total assets | $ |
|
$ |
|
|||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ |
|
$ |
|
|||||||
| Accrued payroll |
|
|
|||||||||
| Accrued income taxes |
|
|
|||||||||
| Other accrued taxes |
|
|
|||||||||
| Unearned revenues |
|
|
|||||||||
| Other current liabilities |
|
|
|||||||||
| Total current liabilities | $ |
|
$ |
|
|||||||
| Long-term debt |
|
|
|||||||||
| Deferred income taxes |
|
|
|||||||||
| Operating lease liabilities - non-current |
|
|
|||||||||
| Other liabilities |
|
|
|||||||||
| Total liabilities | $ |
|
$ |
|
|||||||
| Stockholders’ equity: | |||||||||||
| Common stock and surplus | $ |
|
$ |
|
|||||||
| Retained earnings (deficit) |
(
|
(
|
|||||||||
| Accumulated other comprehensive income (loss) |
|
(
|
|||||||||
| Total stockholders’ equity | $ |
|
$ |
|
|||||||
| Total liabilities and stockholders’ equity | $ |
|
$ |
|
|||||||
See accompanying notes to our unaudited consolidated financial statements.
6
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three and Nine Months Ended February 26, 2023 and February 27, 2022
(In millions)
(Unaudited)
|
Common Stock
And Surplus |
|||||||||||||||||||||||||||||
| Shares | Amount |
Retained
Earnings (Deficit) |
Accumulated
Other Comprehensive Income (Loss) |
Total
Stockholders’ Equity |
|||||||||||||||||||||||||
| Balance at November 27, 2022 |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||||||||
| Net earnings | — | — |
|
|
|||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — |
(
|
(
|
||||||||||||||||||||||||
|
Dividends declared ($
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||
| Stock option exercises |
|
|
— | — |
|
||||||||||||||||||||||||
| Stock-based compensation | — |
|
— | — |
|
||||||||||||||||||||||||
| Repurchases of common stock |
(
|
(
|
(
|
— |
(
|
||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | — |
|
— | — |
|
||||||||||||||||||||||||
| Other | — |
(
|
— | — |
(
|
||||||||||||||||||||||||
| Balance at February 26, 2023 |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||||||||
| Balance at May 29, 2022 |
|
$ |
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||||
| Net earnings | — | — |
|
— |
|
||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — |
|
|
||||||||||||||||||||||||
|
Dividends declared ($
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||
| Stock option exercises |
|
|
— | — |
|
||||||||||||||||||||||||
| Stock-based compensation | — |
|
— | — |
|
||||||||||||||||||||||||
| Repurchases of common stock |
(
|
(
|
(
|
— |
(
|
||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans |
|
|
— | — |
|
||||||||||||||||||||||||
| Other | — |
|
— | — |
|
||||||||||||||||||||||||
| Balance at February 26, 2023 |
|
$ |
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||||||||
| Balance at November 28, 2021 |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
| Net earnings | — | — |
|
— |
|
||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — |
|
|
||||||||||||||||||||||||
|
Dividends declared ($
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||
| Stock option exercises |
|
|
— | — |
|
||||||||||||||||||||||||
| Stock-based compensation | — |
|
— | — |
|
||||||||||||||||||||||||
| Repurchases of common stock |
(
|
(
|
(
|
— |
(
|
||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | — |
|
— | — |
|
||||||||||||||||||||||||
| Other | — |
|
— | — |
|
||||||||||||||||||||||||
| Balance at February 27, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
| Balance at May 30, 2021 |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
| Net earnings | — | — |
|
— |
|
||||||||||||||||||||||||
| Other comprehensive income (loss) | — | — | — |
(
|
(
|
||||||||||||||||||||||||
|
Dividends declared ($
|
— | — |
(
|
— |
(
|
||||||||||||||||||||||||
| Stock option exercises |
|
|
— | — |
|
||||||||||||||||||||||||
| Stock-based compensation | — |
|
— | — |
|
||||||||||||||||||||||||
| Repurchases of common stock |
(
|
(
|
(
|
— |
(
|
||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans |
|
|
— | — |
|
||||||||||||||||||||||||
| Other | — |
|
— | — |
|
||||||||||||||||||||||||
| Balance at February 27, 2022 |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
See accompanying notes to our unaudited consolidated financial statements.
7
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited)
| Nine Months Ended | |||||||||||
|
February 26,
2023 |
February 27,
2022 |
||||||||||
| Cash flows—operating activities | |||||||||||
| Net earnings | $ |
|
$ |
|
|||||||
| Losses from discontinued operations, net of tax |
|
|
|||||||||
| Adjustments to reconcile net earnings from continuing operations to cash flows: | |||||||||||
| Depreciation and amortization |
|
|
|||||||||
| Impairments and disposal of assets, net |
(
|
(
|
|||||||||
| Stock-based compensation expense |
|
|
|||||||||
| Change in current assets and liabilities |
|
(
|
|||||||||
| Contributions to pension and postretirement plans |
(
|
(
|
|||||||||
| Deferred income taxes |
(
|
|
|||||||||
| Change in other assets and liabilities |
|
(
|
|||||||||
| Other, net |
|
|
|||||||||
| Net cash provided by operating activities of continuing operations | $ |
|
$ |
|
|||||||
| Cash flows—investing activities | |||||||||||
| Purchases of land, buildings and equipment |
(
|
(
|
|||||||||
| Proceeds from disposal of land, buildings and equipment |
|
|
|||||||||
| Purchases of capitalized software and other assets |
(
|
(
|
|||||||||
| Other, net |
|
|
|||||||||
| Net cash used in investing activities of continuing operations | $ |
(
|
$ |
(
|
|||||||
| Cash flows—financing activities | |||||||||||
| Proceeds from issuance of common stock |
|
|
|||||||||
| Dividends paid |
(
|
(
|
|||||||||
| Repurchases of common stock |
(
|
(
|
|||||||||
| Proceeds from issuance of short-term debt |
|
|
|||||||||
| Repayments of short-term debt |
(
|
|
|||||||||
| Principal payments on finance leases |
(
|
(
|
|||||||||
| Payments of debt issuance costs |
|
(
|
|||||||||
| Net cash used in financing activities of continuing operations | $ |
(
|
$ |
(
|
|||||||
| Cash flows—discontinued operations | |||||||||||
| Net cash used in operating activities of discontinued operations |
(
|
(
|
|||||||||
| Net cash used in discontinued operations | $ |
(
|
$ |
(
|
|||||||
| Decrease in cash, cash equivalents, and restricted cash |
(
|
(
|
|||||||||
| Cash, cash equivalents, and restricted cash - beginning of period |
|
|
|||||||||
| Cash, cash equivalents, and restricted cash - end of period | $ |
|
$ |
|
|||||||
| Reconciliation of cash, cash equivalents, and restricted cash: |
February 26,
2023 |
February 27,
2022 |
||||||||||||
| Cash and cash equivalents | $ |
|
$ |
|
||||||||||
| Restricted cash included in prepaid expenses and other current assets |
|
|
||||||||||||
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ |
|
$ |
|
||||||||||
8
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
| Nine Months Ended | |||||||||||
|
February 26,
2023 |
February 27,
2022 |
||||||||||
| Cash flows from changes in current assets and liabilities | |||||||||||
| Receivables, net |
|
|
|||||||||
| Inventories |
(
|
(
|
|||||||||
| Prepaid expenses and other current assets |
(
|
(
|
|||||||||
| Accounts payable |
|
|
|||||||||
| Accrued payroll |
(
|
|
|||||||||
| Prepaid/accrued income taxes |
|
|
|||||||||
| Other accrued taxes |
|
(
|
|||||||||
| Unearned revenues |
|
|
|||||||||
| Other current liabilities |
(
|
(
|
|||||||||
| Change in current assets and liabilities | $ |
|
$ |
(
|
|||||||
See accompanying notes to our unaudited consolidated financial statements.
9
Note 1.
Basis of Presentation
Darden Restaurants, Inc. (we, our, Darden or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden
®
, LongHorn Steakhouse
®
, Cheddar’s Scratch Kitchen
®
, Yard House
®
, The Capital Grille
®
, Seasons 52
®
, Bahama Breeze
®
, Eddie V’s Prime Seafood
®
and The Capital Burger
®
. As of February 26, 2023, through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for
2
joint venture restaurants managed by us and
34
franchised restaurants. We also have
32
franchised restaurants in operation located in Latin America, the Caribbean, and Asia.
COVID-19 Pandemic and Other Impacts to our Operating Environment
During fiscal 2022, increases in the number of COVID-19 cases throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, mostly in January 2022, subjected some of our restaurants to COVID-19-related restrictions such as mask and/or vaccine requirements for team members, guests or both. During fiscal 2022, along with COVID-19, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and other cost of goods sold. These events further impacted the availability of team members needed to staff our restaurants and caused additional disruptions in our product supply chain. During fiscal 2023, these events have continued to impact our operating results as wage and cost inflation continue to exceed recent norms.
Recently Adopted Accounting Standards
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires annual disclosures that increase the transparency of transactions involving government grants, including (i) information about the nature of the transactions and related accounting policy used to account for the transactions; (ii) the line items on the balance sheet and income statement affected by these transactions including amounts applicable to each line; and (iii) significant terms and conditions of the transactions, including commitments and contingencies. The guidance is effective for annual periods beginning after December 15, 2021. The Company adopted this guidance in the first quarter of fiscal 2023, but the adoption did not have a material impact on our financial statements.
10
Note 2.
Revenue Recognition
Deferred revenue liabilities from contracts with customers included on our accompanying consolidated balance sheets was comprised of the following:
| (in millions) | February 26, 2023 | May 29, 2022 | ||||||||||||
| Unearned revenues | ||||||||||||||
| Deferred gift card revenue | $ |
|
$ |
|
||||||||||
| Deferred gift card discounts |
(
|
(
|
||||||||||||
| Other |
|
|
||||||||||||
| Total | $ |
|
$ |
|
||||||||||
| Other liabilities | ||||||||||||||
| Deferred franchise fees - non-current | $ |
|
$ |
|
||||||||||
The following table presents a rollforward of deferred gift card revenue.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) | February 26, 2023 | February 27, 2022 | February 26, 2023 | February 27, 2022 | ||||||||||||||||||||||
| Beginning balance | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Activations |
|
|
|
|
||||||||||||||||||||||
| Redemptions and breakage |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Ending balance | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
11
Note 3.
Additional Financial Information
Supplemental Balance Sheet Information
The components of lease assets and liabilities on the consolidated balance sheet were as follows:
| (in millions) | Balance Sheet Classification | February 26, 2023 | May 29, 2022 | |||||||||||||||||
| Operating lease right-of-use assets | Operating lease right-of-use assets | $ |
|
$ |
|
|||||||||||||||
| Finance lease right-of-use assets |
|
|
||||||||||||||||||
| Total lease assets, net | $ |
|
$ |
|
||||||||||||||||
| Operating lease liabilities - current | $ |
|
$ |
|
||||||||||||||||
| Finance lease liabilities - current |
|
|
||||||||||||||||||
| Operating lease liabilities - non-current | Operating lease liabilities - non-current |
|
|
|||||||||||||||||
| Finance lease liabilities - non-current |
|
|
||||||||||||||||||
| Total lease liabilities | $ |
|
$ |
|
||||||||||||||||
Supplemental Cash Flow Information
|
Cash paid for interest and income taxes were as follows:
|
Nine Months Ended | |||||||||||||
| (in millions) | February 26, 2023 | February 27, 2022 | ||||||||||||
| Interest, net of amounts capitalized | $ |
|
$ |
|
||||||||||
| Income taxes, net of refunds |
(
|
|
||||||||||||
| Non-cash investing and financing activities were as follows: | Nine Months Ended | |||||||||||||
| (in millions) | February 26, 2023 | February 27, 2022 | ||||||||||||
| Increase in land, buildings and equipment through accrued purchases | $ |
|
$ |
|
||||||||||
| Right-of-use assets obtained in exchange for new operating lease liabilities |
|
|
||||||||||||
| Right-of-use assets obtained in exchange for new finance lease liabilities |
|
|
||||||||||||
| Net change in right-of-use assets mainly due to lease modifications resulting in reclassification of leases from operating to finance |
|
|
||||||||||||
Note 4.
Income Taxes
The effective income tax rate for continuing operations for the quarter ended February 26, 2023 was
13.2
percent compared to an effective income tax rate for the quarter ended February 27, 2022 of
12.5
percent. This change was primarily driven by higher net earnings from continuing operations. The effective income tax rate for continuing operations for the nine months ended February 26, 2023 was
13.0
percent compared to an effective income tax rate for the nine months ended February 27, 2022 of
13.1
percent. This change was primarily driven by the impact of federal tax credits and lower net earnings from continuing operations.
Included in our remaining balance of unrecognized tax benefits is $
6.1
million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations or as a result of the expiration of the statute of limitations for specific jurisdictions.
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1 percent excise tax on share repurchases that occur after December 31, 2022 and introduces a 15 percent corporate alternative minimum
12
Note 5.
Net Earnings per Share
Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding, none of which impact the numerator of the diluted net earnings per share computation.
Stock options, restricted stock and equity-settled performance stock units excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, were as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) |
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||||
| Anti-dilutive stock-based compensation awards |
|
|
|
|
||||||||||||||||||||||
Note 6.
Segment Information
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V’s and The Capital Burger in North America as operating segments. The brands operate principally in the U.S. within full-service dining. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. We have
four
reportable segments: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business.
The Olive Garden segment includes the results of our company-owned Olive Garden restaurants in the U.S. and Canada. The LongHorn Steakhouse segment includes the results of our company-owned LongHorn Steakhouse restaurants in the U.S. The Fine Dining segment aggregates our premium brands that operate within the fine-dining sub-segment of full-service dining and includes the results of our company-owned The Capital Grille and Eddie V’s restaurants in the U.S. The Other Business segment aggregates our remaining brands and includes the results of our company-owned Cheddar’s Scratch Kitchen, Yard House, Seasons 52, Bahama Breeze and The Capital Burger restaurants in the U.S and results from our franchise operations.
External sales are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.
Our management uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). These expenses include food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (collectively “restaurant and marketing expenses”). Non-cash lease-related expenses included in restaurant expenses (which is a component of segment profit) and lease-related depreciation and amortization are reported at the corporate level as these are expenses for which our operating segments are not being evaluated. Additionally, our lease-related right-of-use assets are not managed or evaluated at the operating segment level, but rather at the corporate level.
13
| (in millions) | Olive Garden | LongHorn Steakhouse | Fine Dining | Other Business | Corporate | Consolidated | ||||||||||||||||||||||||||||||||
| For the three months ended February 26, 2023 | ||||||||||||||||||||||||||||||||||||||
| Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Restaurant and marketing expenses |
|
|
|
|
(
|
|
||||||||||||||||||||||||||||||||
| Segment profit | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Depreciation and amortization | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Impairments and disposal of assets, net |
|
(
|
|
(
|
|
|
||||||||||||||||||||||||||||||||
| (in millions) | Olive Garden | LongHorn Steakhouse | Fine Dining | Other Business | Corporate | Consolidated | ||||||||||||||||||||||||||||||||
| For the nine months ended February 26, 2023 | ||||||||||||||||||||||||||||||||||||||
| Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Restaurant and marketing expenses |
|
|
|
|
(
|
|
||||||||||||||||||||||||||||||||
| Segment profit | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Depreciation and amortization | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Impairments and disposal of assets, net |
|
(
|
|
(
|
(
|
(
|
||||||||||||||||||||||||||||||||
| Purchases of land, buildings and equipment |
|
|
|
|
|
|
||||||||||||||||||||||||||||||||
| (in millions) | Olive Garden | LongHorn Steakhouse | Fine Dining | Other Business | Corporate | Consolidated | ||||||||||||||||||||||||||||||||
| For the three months ended February 27, 2022 | ||||||||||||||||||||||||||||||||||||||
| Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Restaurant and marketing expenses |
|
|
|
|
(
|
|
||||||||||||||||||||||||||||||||
| Segment profit | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Depreciation and amortization | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Impairments and disposal of assets, net |
(
|
|
|
|
(
|
(
|
||||||||||||||||||||||||||||||||
| (in millions) | Olive Garden | LongHorn Steakhouse | Fine Dining | Other Business | Corporate | Consolidated | ||||||||||||||||||||||||||||||||
| For the nine months ended February 27, 2022 | ||||||||||||||||||||||||||||||||||||||
| Sales | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Restaurant and marketing expenses |
|
|
|
|
(
|
|
||||||||||||||||||||||||||||||||
| Segment profit | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Depreciation and amortization | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||||||||
| Impairments and disposal of assets, net |
|
|
|
|
(
|
(
|
||||||||||||||||||||||||||||||||
| Purchases of land, buildings and equipment |
|
|
|
|
|
|
||||||||||||||||||||||||||||||||
14
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) | February 26, 2023 | February 27, 2022 | February 26, 2023 | February 27, 2022 | ||||||||||||||||||||||
| Segment profit | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Less general and administrative expenses |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Less depreciation and amortization |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Less impairments and disposal of assets, net |
(
|
|
|
|
||||||||||||||||||||||
| Less interest, net |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Earnings before income taxes | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
Note 7.
Impairments and Disposal of Assets, Net
Impairments and disposal of assets, net, in our accompanying consolidated statements of earnings were comprised of the following:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) | February 26, 2023 | February 27, 2022 | February 26, 2023 | February 27, 2022 | ||||||||||||||||||||||
| Restaurant impairments | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Disposal (gains) losses |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Other |
|
|
|
|
||||||||||||||||||||||
| Impairments and disposal of assets, net | $ |
|
$ |
(
|
$ |
(
|
$ |
(
|
||||||||||||||||||
Restaurant impairments for the quarter and nine months ended February 26, 2023 were related to (i)
one
underperforming restaurant with projected cash flows insufficient to cover its respective carrying values and (ii)
three
restaurant closures. Disposal gains for the quarter and nine months ended February 26, 2023 and February 27, 2022 were primarily related to the sale of properties. Other impacts for the quarter and nine months ended February 26, 2023 related to cancelled projects.
Note 8.
Stockholders’ Equity
Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of AOCI, net of tax, for the quarter and nine months ended February 26, 2023 were as follows:
| (in millions) | Foreign Currency Translation Adjustment | Unrealized Gains (Losses) on Derivatives | Benefit Plan Funding Position | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||
| Balance at November 27, 2022 | $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
| Gain (loss) |
(
|
(
|
|
(
|
||||||||||||||||||||||
| Reclassification realized in net earnings |
|
|
|
|
||||||||||||||||||||||
| Balance at February 26, 2023 | $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
| Balance at May 29, 2022 | $ |
|
$ |
(
|
$ |
(
|
$ |
(
|
||||||||||||||||||
| Gain (loss) |
(
|
(
|
|
(
|
||||||||||||||||||||||
| Reclassification realized in net earnings |
|
|
|
|
||||||||||||||||||||||
| Balance at February 26, 2023 | $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
15
The components of AOCI, net of tax, for the quarter and nine months ended February 27, 2022 were as follows:
| (in millions) | Foreign Currency Translation Adjustment | Unrealized Gains (Losses) on Derivatives | Benefit Plan Funding Position | Accumulated Other Comprehensive Income (Loss) | ||||||||||||||||||||||
| Balance at November 28, 2021 | $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
| Gain (loss) |
|
|
|
|
||||||||||||||||||||||
| Reclassification realized in net earnings |
|
(
|
|
(
|
||||||||||||||||||||||
| Balance at February 27, 2022 | $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
| Balances at May 30, 2021 | $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
| Gain (loss) |
(
|
(
|
|
(
|
||||||||||||||||||||||
| Reclassification realized in net earnings |
|
(
|
|
(
|
||||||||||||||||||||||
| Balance at February 27, 2022 | $ |
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
The following table presents the amounts and line items in our consolidated statements of earnings where adjustments reclassified from AOCI into net earnings were recorded.
| Amount Reclassified from AOCI into Net Earnings | |||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
|
(in millions)
AOCI Components
|
Location of Gain (Loss) Recognized in Earnings |
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||||||
| Derivatives | |||||||||||||||||||||||||||||
|
Commodity contracts
|
(1) | $ |
(
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||||
|
Equity contracts
|
(2) |
|
(
|
(
|
|
||||||||||||||||||||||||
|
Interest rate contracts
|
(3) |
|
|
(
|
(
|
||||||||||||||||||||||||
| Total before tax | $ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||
| Tax (expense) benefit |
|
(
|
|
(
|
|||||||||||||||||||||||||
| Net of tax | $ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||
| Benefit plan funding position | |||||||||||||||||||||||||||||
|
Recognized net actuarial loss - pension/postretirement plans
|
(4) | $ |
|
$ |
(
|
$ |
(
|
$ |
(
|
||||||||||||||||||||
|
Recognized net actuarial gain (loss) - other plans
|
(4) |
(
|
(
|
(
|
(
|
||||||||||||||||||||||||
| Total before tax | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||
| Tax (expense) benefit |
|
|
|
|
|||||||||||||||||||||||||
| Net of tax | $ |
(
|
$ |
(
|
$ |
(
|
$ |
(
|
|||||||||||||||||||||
(1)
Primarily included in food and beverage costs and restaurant expenses. See Note 10 for additional details.
(2)
Included in general and administrative expenses. See Note 10 for additional details.
(3)
Included in interest, net on our consolidated statement of earnings.
(4)
Included in the computation of net periodic benefit costs, which is a component of general and administrative expenses.
Note 9.
Stock-Based Compensation
16
generally determined based on our closing stock price on the date of grant. In addition, we grant cash-settled stock units (Darden stock units) which are classified as liabilities and are marked to market as of the end of each period.
The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes option pricing model for options granted during the periods presented, were as follows:
| Nine Months Ended | |||||||||||
| February 26, 2023 | February 27, 2022 | ||||||||||
| Weighted-average fair value | $ |
|
$ |
|
|||||||
| Dividend yield |
|
% |
|
% | |||||||
| Expected volatility of stock |
|
% |
|
% | |||||||
| Risk-free interest rate |
|
% |
|
% | |||||||
| Expected option life (in years) |
|
|
|||||||||
| Weighted-average exercise price per share | $ |
|
$ |
|
|||||||
The weighted-average grant date fair value of market-based performance stock units and the related assumptions used in the Monte Carlo simulation to record stock-based compensation for units granted during the periods presented, were as follows:
| Nine Months Ended | |||||||||||
| February 26, 2023 | February 27, 2022 | ||||||||||
| Dividend yield (1) |
|
% |
|
% | |||||||
| Expected volatility of stock |
|
% |
|
% | |||||||
| Risk-free interest rate |
|
% |
|
% | |||||||
| Expected life (in years) |
|
|
|||||||||
| Weighted-average grant date fair value per unit | $ |
|
$ |
|
|||||||
(1)
Assumes a reinvestment of dividends.
The following table presents a summary of our stock-based compensation activity for the nine months ended February 26, 2023.
| (in millions) |
Stock
Options |
Restricted
Stock/ Restricted Stock Units |
Equity-Settled
Performance Stock Units |
Cash-Settled Darden
Stock Units |
||||||||||||||||||||||
| Outstanding beginning of period |
|
|
|
|
||||||||||||||||||||||
| Awards granted |
|
|
|
|
||||||||||||||||||||||
| Awards granted performance impact | — | — |
(
|
— | ||||||||||||||||||||||
| Awards exercised/vested |
(
|
(
|
(
|
(
|
||||||||||||||||||||||
| Awards forfeited |
|
|
|
(
|
||||||||||||||||||||||
| Outstanding end of period |
|
|
|
|
||||||||||||||||||||||
17
We recognized expense from stock-based compensation as follows:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) |
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||||
| Stock options | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
| Restricted stock/restricted stock units |
|
|
|
|
||||||||||||||||||||||
| Equity-settled performance stock units |
|
|
|
|
||||||||||||||||||||||
| Cash-settled Darden stock units |
|
|
|
|
||||||||||||||||||||||
| Employee stock purchase plan |
|
|
|
|
||||||||||||||||||||||
| Director compensation program/other |
|
|
|
|
||||||||||||||||||||||
| Total stock-based compensation expense | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
Note 10.
Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as provided by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial derivatives to manage interest rate, commodity and compensation risks inherent in our business operations. Cash flows related to derivatives are included in operating activities.
By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or the market price of our common stock.
We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
We designate commodity contracts and equity forward contracts as cash flow hedging instruments. Our interest rate swap agreements are designated as fair value hedges of the related debt.
Further, we entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, employee-directed investments in our common stock within the non-qualified deferred compensation plan. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of our common stock investments in the non-qualified deferred compensation plan.
18
The notional and fair values of our derivative contracts were as follows:
| Fair Values | |||||||||||||||||||||||||||||||||||||||||
|
(in millions, except
per share data) |
Number of Shares Outstanding |
Weighted-Average
Per Share Forward Rates |
Notional Values | Derivative Assets (1) | Derivative Liabilities (1) | ||||||||||||||||||||||||||||||||||||
| February 26, 2023 |
February 26,
2023 |
May 29,
2022 |
February 26,
2023 |
May 29,
2022 |
|||||||||||||||||||||||||||||||||||||
| Equity forwards: | |||||||||||||||||||||||||||||||||||||||||
| Designated |
|
$
|
$ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||
| Not designated |
|
|
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total equity forwards (2) | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||
| Commodity contracts: | |||||||||||||||||||||||||||||||||||||||||
| Designated | N/A | N/A | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||
| Not designated | N/A | N/A |
|
|
|
|
|
||||||||||||||||||||||||||||||||||
| Total commodity contracts (3) | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||
| Interest rate related | |||||||||||||||||||||||||||||||||||||||||
| Designated | N/A | N/A | $ |
|
$ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||
| Not designated | N/A | N/A |
|
|
|
|
|||||||||||||||||||||||||||||||||||
| Total interest rate related | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||
| Total derivative contracts | $ |
|
$ |
|
$ |
|
$ |
|
|||||||||||||||||||||||||||||||||
(1)
Derivative assets and liabilities are included in receivables, net and other current liabilities, as applicable, on our consolidated balance sheets.
(2)
Designated and undesignated equity forwards extend through July 2026 and April 2027, respectively.
(3)
Commodity contracts extend through February 2024.
19
The effects of derivative instruments accounted for as cash flow hedging instruments in the consolidated statements of earnings were as follows:
| Amount of Gain (Loss) Recognized in AOCI | Amount of Gain (Loss) Reclassified from AOCI to Earnings | |||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||
| (in millions) |
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||||
| Equity (1) | $ |
(
|
$ |
|
$ |
|
$ |
(
|
||||||||||||||||||
| Commodity (2) |
(
|
|
(
|
|
||||||||||||||||||||||
| Interest rate (3) |
|
|
|
|
||||||||||||||||||||||
| Total | $ |
(
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||
| Amount of Gain (Loss) Recognized in AOCI | Amount of Gain (Loss) Reclassified from AOCI to Earnings | |||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) |
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||||
| Equity (1) | $ |
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||
| Commodity (2) |
(
|
|
(
|
|
||||||||||||||||||||||
| Interest rate (3) |
|
|
(
|
(
|
||||||||||||||||||||||
| Total | $ |
(
|
$ |
(
|
$ |
(
|
$ |
|
||||||||||||||||||
(1)
Location of the gain (loss) reclassified from AOCI to earnings is general and administrative expenses.
(2)
Location of the gain (loss) reclassified from AOCI to earnings is food and beverage costs and restaurant expenses.
(3)
Location of the gain (loss) reclassified from AOCI to earnings is interest, net.
The effects of derivative instruments in fair value hedging relationships in the consolidated statement of earnings were as follows:
| Amount of Gain (Loss) Recognized in Earnings on Derivatives | Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item | |||||||||||||||||||||||||
| Three Months Ended | Three Months Ended | |||||||||||||||||||||||||
| (in millions) |
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||||
| Interest rate (1)(2) | $ |
(
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||||||
| Amount of Gain (Loss) Recognized in Earnings on Derivatives | Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item | |||||||||||||||||||||||||
| Nine Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| (in millions) |
February 26,
2023 |
February 27,
2022 |
February 26,
2023 |
February 27,
2022 |
||||||||||||||||||||||
| Interest rate (1)(2) | $ |
(
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||||||
(1) Location of the gain (loss) recognized in earnings on derivatives and related hedged item is interest, net.
(2) Hedged item in fair value hedge relationship is debt.
20
| Amount of Gain (Loss) Recognized in Earnings | ||||||||||||||||||||||||||
| (in millions) | Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||
| Location of Gain (Loss) Recognized in Earnings on Derivatives | February 26, 2023 | February 27, 2022 | February 26, 2023 | February 27, 2022 | ||||||||||||||||||||||
| Food and beverage costs and restaurant expenses | $ |
|
$ |
(
|
$ |
|
$ |
|
||||||||||||||||||
| General and administrative expenses |
(
|
|
|
|
||||||||||||||||||||||
| Total | $ |
(
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||
Note 11.
Fair Value Measurements
The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis as of February 26, 2023 and May 29, 2022
.
| Items Measured at Fair Value at February 26, 2023 | |||||||||||||||||||||||||||||
| (in millions) |
Fair value
of assets (liabilities) |
Quoted prices
in active market for identical assets (liabilities) (Level 1) |
Significant
other observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
|||||||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||||||||
| Commodities futures, swaps & options | (1) | $ |
(
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||||
| Equity forwards | (2) | $ |
(
|
$ |
|
$ |
(
|
$ |
|
||||||||||||||||||||
| Interest rate swaps | (3) |
(
|
|
(
|
|
||||||||||||||||||||||||
| Total | $ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||
| Items Measured at Fair Value at May 29, 2022 | |||||||||||||||||||||||||||||
| (in millions) |
Fair value
of assets (liabilities) |
Quoted prices
in active market for identical assets (liabilities) (Level 1) |
Significant
other observable inputs (Level 2) |
Significant
unobservable inputs (Level 3) |
|||||||||||||||||||||||||
| Derivatives: | |||||||||||||||||||||||||||||
| Commodities futures, swaps & options | (1) | $ |
|
$ |
|
$ |
|
$ |
|
||||||||||||||||||||
| Equity forwards | (2) |
(
|
|
(
|
|
||||||||||||||||||||||||
| Interest rate swaps | (3) |
(
|
|
(
|
|
||||||||||||||||||||||||
| Total | $ |
(
|
$ |
|
$ |
(
|
$ |
|
|||||||||||||||||||||
(1)
The fair value of our commodities futures, swaps and options is based on closing market prices of the contracts, inclusive of the risk of nonperformance.
(2)
The fair value of equity forwards is based on the closing market value of Darden stock, inclusive of the risk of nonperformance.
(3)
The fair value of our interest rate swap agreements is based on current and expected market interest rates, inclusive of the risk of nonperformance.
21
The carrying value and fair value of long-term debt as of February 26, 2023, was $
880.9
million and $
850.8
million, respectively. The carrying value and fair value of long-term debt as of May 29, 2022, was $
901.0
million and $
896.9
million, respectively. The fair value of long-term debt, classified as Level 2 in the fair value hierarchy, is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.
The fair value of non-financial assets measured at fair value on a non-recurring basis, classified as Level 2 in the fair value hierarchy, is determined based on third-party market appraisals. As of February 26, 2023 and May 29, 2022, adjustments to the fair values of non-financial assets measured at fair value on a non-recurring basis, classified as Level 2, were not material.
Note 12.
Commitments and Contingencies
As collateral for performance on contracts and as credit guarantees to banks and insurers, we are contingently liable for guarantees of subsidiary obligations under standby letters of credit. As of February 26, 2023 and May 29, 2022, we had $
85.3
million and $
104.8
million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. As of February 26, 2023 and May 29, 2022, we had $
15.4
million and $
18.8
million, respectively, of surety bonds related to other payments. Most surety bonds are renewable annually.
As of February 26, 2023 and May 29, 2022, we had $
85.7
million and $
101.0
million, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of the maximum potential future payments discounted at our weighted-average cost of capital as of February 26, 2023 and May 29, 2022, amounted to $
71.2
million and $
83.6
million, respectively. In the event of default by a third party, the indemnity and default clauses in our assignment agreements govern our ability to recover from and pursue the third party for damages incurred as a result of its default. We do not hold any third-party assets as collateral related to these assignment agreements, except to the extent that the assignment allows us to repossess the building and personal property. These guarantees expire over their respective lease terms, which range from fiscal 2023 through fiscal 2034.
Note 13.
Subsequent Events
22
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below for the Company, which contains forward-looking statements, should be read in conjunction with the unaudited consolidated financial statements and the notes to such financial statements included elsewhere in this quarterly report on Form 10-Q (Form 10-Q) and the audited consolidated financial statements and the notes thereto included in our Form 10-K for the fiscal year ended May 29, 2022 (Form 10-K). In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Item 1A. Risk Factors” section of the Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Forward-Looking Statements” included elsewhere in this Form 10-Q.
To facilitate review of our discussion and analysis, the following table sets forth our financial results for the periods indicated. All information is derived from the unaudited consolidated statements of earnings for the quarters and nine months ended February 26, 2023 and February 27, 2022.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| (in millions) |
February 26,
2023 |
February 27,
2022 |
% Chg |
February 26,
2023 |
February 27,
2022 |
% Chg | |||||||||||||||||||||||||||||
| Sales | $ | 2,786.2 | $ | 2,448.9 | 13.8% | $ | 7,718.8 | $ | 7,027.1 | 9.8% | |||||||||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||||||||||||||
|
Food and beverage
|
887.0 | 752.7 | 17.8 | 2,500.6 | 2,132.2 | 17.3 | |||||||||||||||||||||||||||||
|
Restaurant labor
|
874.2 | 798.7 | 9.5 | 2,476.5 | 2,279.5 | 8.6 | |||||||||||||||||||||||||||||
|
Restaurant expenses
|
440.3 | 395.7 | 11.3 | 1,260.8 | 1,158.8 | 8.8 | |||||||||||||||||||||||||||||
|
Marketing expenses
|
28.2 | 27.2 | 3.7 | 89.6 | 73.0 | 22.7 | |||||||||||||||||||||||||||||
|
General and administrative expenses
|
107.0 | 83.3 | 28.5 | 285.7 | 289.7 | (1.4) | |||||||||||||||||||||||||||||
|
Depreciation and amortization
|
98.3 | 94.3 | 4.2 | 290.7 | 275.4 | 5.6 | |||||||||||||||||||||||||||||
|
Impairments and disposal of assets, net
|
1.3 | (3.8) | NM | (12.4) | (5.5) | NM | |||||||||||||||||||||||||||||
| Total costs and expenses | $ | 2,436.3 | $ | 2,148.1 | 13.4 | $ | 6,891.5 | $ | 6,203.1 | 11.1 | |||||||||||||||||||||||||
| Operating income | 349.9 | 300.8 | 16.3 | 827.3 | 824.0 | 0.4 | |||||||||||||||||||||||||||||
| Interest, net | 19.6 | 17.5 | 12.0 | 59.2 | 49.8 | 18.9 | |||||||||||||||||||||||||||||
| Earnings before income taxes | 330.3 | 283.3 | 16.6 | $ | 768.1 | $ | 774.2 | (0.8) | |||||||||||||||||||||||||||
| Income tax expense (1) | 43.5 | 35.4 | 22.9 | 100.2 | 101.2 | (1.0) | |||||||||||||||||||||||||||||
| Earnings from continuing operations | $ | 286.8 | $ | 247.9 | 15.7 | $ | 667.9 | $ | 673.0 | (0.8) | |||||||||||||||||||||||||
| Losses from discontinued operations, net of tax | (0.2) | (0.9) | (77.8) | (1.1) | (1.9) | (42.1) | |||||||||||||||||||||||||||||
| Net earnings | $ | 286.6 | $ | 247.0 | 16.0% | $ | 666.8 | $ | 671.1 | (0.6)% | |||||||||||||||||||||||||
|
Diluted net earnings per share:
|
|||||||||||||||||||||||||||||||||||
|
Earnings from continuing operations
|
$ | 2.34 | $ | 1.93 | 21.2% | $ | 5.42 | $ | 5.17 | 4.8% | |||||||||||||||||||||||||
|
Losses from discontinued operations
|
— | — | — | (0.01) | (0.01) | — | |||||||||||||||||||||||||||||
|
Net earnings
|
$ | 2.34 | $ | 1.93 | 21.2% | $ | 5.41 | $ | 5.16 | 4.8% | |||||||||||||||||||||||||
|
(1) Effective tax rate
|
13.2 | % | 12.5 | % | 13.0 | % | 13.1 | % | |||||||||||||||||||||||||||
| NM- Percentage not considered meaningful. | |||||||||||||||||||||||||||||||||||
23
The following table details the number of company-owned restaurants currently reported in continuing operations that were open at the end of the third quarter of fiscal 2023, compared with the number open at the end of fiscal 2022 and the end of the third quarter of fiscal 2022.
|
February 26,
2023 |
May 29,
2022 |
February 27,
2022 |
||||||||||||||||||
| Olive Garden | 893 | 884 | 881 | |||||||||||||||||
| LongHorn Steakhouse | 554 | 546 | 539 | |||||||||||||||||
| Cheddar’s Scratch Kitchen | 179 | 172 | 173 | |||||||||||||||||
| Yard House | 86 | 85 | 85 | |||||||||||||||||
| The Capital Grille | 61 | 62 | 61 | |||||||||||||||||
| Seasons 52 | 43 | 45 | 44 | |||||||||||||||||
| Bahama Breeze | 42 | 42 | 42 | |||||||||||||||||
| Eddie V’s | 29 | 28 | 27 | |||||||||||||||||
| The Capital Burger | 3 | 3 | 3 | |||||||||||||||||
| Total | 1,890 | 1,867 | 1,855 | |||||||||||||||||
OVERVIEW OF OPERATIONS
COVID-19 Pandemic and Other Impacts to our Operating Environment
During fiscal 2022, increases in the number of COVID-19 cases throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, mostly in January 2022, subjected some of our restaurants to COVID-19-related restrictions such as mask and/or vaccine requirements for team members, guests or both. During fiscal 2022, along with COVID-19, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and other cost of goods sold. These events further impacted the availability of team members needed to staff our restaurants and caused additional disruptions in our product supply chain. During fiscal 2023, these events have continued to impact our operating results as wage and cost inflation continue to exceed recent norms.
The ongoing effects to our operating environment along with other geopolitical and macroeconomic events, could lead to further wage inflation, staffing challenges, product cost inflation and disruptions in the supply chain that impact our restaurants’ ability to obtain the products needed to support their operations.
Financial Highlights - Consolidated
•
Total sales increased 13.8% and 9.8% to $2.79 billion and $7.72 billion for the third quarter and nine months of fiscal 2023 compared to $2.45 billion and $7.03 billion for the third quarter and nine months of fiscal 2022 driven by blended same-restaurant sales increases of 11.7% and 7.8% for each respective period and sales from 35 net new restaurants in the 12 months from February 27, 2022 to February 26, 2023.
•
Our net earnings from continuing operations were $286.8 million and $667.9 million for the third quarter and nine months of fiscal 2023 compared to $247.9 million and $673.0 million for the third quarter and nine months of fiscal 2022.
•
Reported diluted net earnings per share from continuing operations were $2.34 and $5.42 for the third quarter and nine months of fiscal 2023 compared to $1.93 and $5.17 for the third quarter and nine months of fiscal 2022.
Outlook
We expect sales for fiscal 2023 to be between $10.45 and $10.5 billion, driven by same-restaurant sales growth of 6.5 to 7.0 percent and approximately 55 new restaurant openings. Additionally, we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and for technology initiatives to be $550 to $575 million.
24
SALES
The following table presents our sales by segment for the periods indicated.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||
| (in millions) | February 26, 2023 | February 27, 2022 | % Chg | SRS (1) | February 26, 2023 | February 27, 2022 | % Chg | SRS (1) | |||||||||||||||||||||
| Olive Garden | $ | 1,301.2 | $ | 1,142.6 | 13.9 | % | 12.3 | % | $ | 3,608.6 | $ | 3,310.2 | 9.0 | % | 7.5 | % | |||||||||||||
| LongHorn Steakhouse | $ | 695.5 | $ | 612.7 | 13.5 | % | 10.8 | % | $ | 1,900.6 | $ | 1,727.0 | 10.1 | % | 7.5 | % | |||||||||||||
| Fine Dining | $ | 235.6 | $ | 208.2 | 13.2 | % | 11.7 | % | $ | 621.0 | $ | 565.7 | 9.8 | % | 8.6 | % | |||||||||||||
| Other Business | $ | 553.9 | $ | 485.4 | 14.1 | % | 11.7 | % | $ | 1,588.6 | $ | 1,424.2 | 11.5 | % | 8.9 | % | |||||||||||||
(1)
Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants that have been open, and operated by Darden, for at least 16 months.
Olive Garden’s sales increase for the third quarter and nine months of fiscal 2023 was primarily driven by U.S. same-restaurant sales increases combined with revenue from new restaurants. The increase in U.S. same-restaurant sales for the third quarter of fiscal 2023 resulted from a 9.3 percent increase in average check combined with a 2.7 percent increase in same-restaurant guest counts. The increase in U.S. same-restaurant sales for the nine months of fiscal 2023 resulted from a 8.9 percent increase in average check offset by a 1.3 percent decrease in same-restaurant guest counts.
LongHorn Steakhouse’s sales increase for the third quarter and nine months of fiscal 2023 was primarily driven by same-restaurant sales increases combined with revenue from new restaurants. The increase in same-restaurant sales for the third quarter of fiscal 2023 resulted from a 4.7 percent increase in average check combined with a 5.7 percent increase in same-restaurant guest counts. The increase in same-restaurant sales for the nine months of fiscal 2023 resulted from a 6.1 percent increase in average check combined with a 1.3 percent increase in same-restaurant guest counts.
Fine Dining’s sales increase for the third quarter and nine months of fiscal 2023 was primarily driven by same-restaurant sales increases combined with revenue from new restaurants. The increase in same-restaurant sales for the third quarter of fiscal 2023 resulted from a 3.7 percent increase in average check combined with a 7.7 percent increase in same-restaurant guest counts. The increase in same-restaurant sales for the nine months of fiscal 2023 resulted from a 5.6 percent increase in average check combined with a 2.8 percent increase in same-restaurant guest counts.
Other Business’ sales increase for the third quarter and nine months of fiscal 2023 was primarily driven by same-restaurant sales increases combined with revenue from new restaurants. The increase in same-restaurant sales for the third quarter months of fiscal 2023 resulted from a 6.7 percent increase in average check combined with a 4.7 percent increase in same-restaurant guest counts. The increase in same-restaurant sales for the nine months of fiscal 2023 resulted from a 7.1 percent increase in average check combined with a 1.7 percent increase in same-restaurant guest counts.
25
COSTS AND EXPENSES
The following table sets forth selected operating data as a percent of sales for the periods indicated. All information is derived from the unaudited consolidated statements of earnings for the quarters and nine months ended February 26, 2023 and February 27, 2022.
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| February 26, 2023 | February 27, 2022 | February 26, 2023 | February 27, 2022 | ||||||||||||||||||||
| Sales | 100.0 | % | 100.0 | % | 100.0 | % | 100.0 | % | |||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
|
Food and beverage
|
31.8 | 30.7 | 32.4 | 30.3 | |||||||||||||||||||
|
Restaurant labor
|
31.4 | 32.6 | 32.1 | 32.4 | |||||||||||||||||||
|
Restaurant expenses
|
15.8 | 16.2 | 16.3 | 16.5 | |||||||||||||||||||
|
Marketing expenses
|
1.0 | 1.1 | 1.2 | 1.0 | |||||||||||||||||||
|
General and administrative expenses
|
3.8 | 3.4 | 3.7 | 4.1 | |||||||||||||||||||
|
Depreciation and amortization
|
3.5 | 3.9 | 3.8 | 3.9 | |||||||||||||||||||
|
Impairments and disposal of assets, net
|
— | (0.2) | (0.2) | (0.1) | |||||||||||||||||||
| Total operating costs and expenses | 87.4 | % | 87.7 | % | 89.3 | % | 88.3 | % | |||||||||||||||
| Operating income | 12.6 | 12.3 | 10.7 | 11.7 | |||||||||||||||||||
| Interest, net | 0.7 | 0.7 | 0.8 | 0.7 | |||||||||||||||||||
| Earnings before income taxes | 11.9 | 11.6 | 10.0 | 11.0 | |||||||||||||||||||
| Income tax expense | 1.6 | 1.4 | 1.3 | 1.4 | |||||||||||||||||||
| Earnings from continuing operations | 10.3 | % | 10.1 | % | 8.7 | % | 9.6 | % | |||||||||||||||
Quarter Ended February 26, 2023 Compared to Quarter Ended February 27, 2022
•
Food and beverage costs increased as a percent of sales primarily due to a 2.7% impact from inflation and a 0.3% impact from menu mix, partially offset by a 2.0% impact from pricing.
•
Restaurant labor costs decreased as a percent of sales primarily due to a 3.0% impact from sales leverage, partially offset by a 2.0% impact from inflation.
•
Restaurant expenses decreased as a percent of sales primarily due to a 2.0% impact from pricing and sales leverage, partially offset by a 0.5% impact from higher utility costs, a 0.5% impact from higher repairs and maintenance expenses, a 0.2% impact from credit card expense, and a 0.4% impact from all other costs.
•
Marketing expenses decreased as a percent of sales primarily due to sales leverage.
•
General and administrative expenses increased as a percent of sales primarily due to a 0.6% impact from department and other administrative expenses and a 0.3% impact related to incentive pay accrual timing, partially offset by a 0.4% impact from sales leverage.
•
Depreciation and amortization expenses decreased as a percent of sales primarily due to sales leverage.
•
Impairment and disposal of assets, net increased as a percent of sales primarily due to gains recognized on the sale of properties for the quarter ended February 27, 2022.
Nine Months Ended February 26, 2023 Compared to Nine Months Ended February 27, 2022
•
Food and beverage costs increased as a percent of sales primarily due to a 3.7% impact from inflation and a 0.3% impact from menu mix, partially offset by a 2.0% impact from pricing.
•
Restaurant labor costs decreased as a percent of sales primarily due to a 2.6% impact from sales leverage and a 0.2% impact from improved productivity, partially offset by a 2.4% impact from inflation.
•
Restaurant expenses decreased as a percent of sales primarily due to a 1.2% impact from pricing and sales leverage, partially offset by a 0.4% impact from higher utility costs, a 0.4% impact from higher repairs and maintenance expenses, and a 0.2% impact from credit card expense.
•
Marketing expenses increased as a percent of sales primarily due to increased marketing media.
•
General and administrative expenses decreased as a percent of sales primarily due to a 0.4% impact from sales leverage and a 0.3% impact related to incentive pay accrual timing, partially offset by a 0.2% impact from department expenses.
•
Depreciation and amortization expenses decreased as a percent of sales primarily due to sales leverage.
26
•
Impairment and disposal of assets, net decreased as a percent of sales primarily due to gains recognized on the sale of properties.
IN
C
OME TAXES
The effective income tax rate for continuing operations for the quarter ended February 26, 2023 was 13.2 percent compared to an effective income tax rate for the quarter ended February 27, 2022 of 12.5 percent. This change was primarily driven by higher net earnings from continuing operations. The effective income tax rate for continuing operations for the nine months ended February 26, 2023 was 13.0 percent compared to an effective income tax rate for the nine months ended February 27, 2022 of 13.1 percent. This change was primarily driven by the impact of federal tax credits and lower net earnings from continuing operations.
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1 percent excise tax on share repurchases that occur after December 31, 2022 and introduces a 15 percent corporate alternative minimum tax (“CAMT”) on adjusted financial statement income. We currently are not expecting either the new IRA excise tax or CAMT provisions to have a material adverse impact to our financial statements.
LOSSES FROM DISCONTINUED OPERATIONS
On an after-tax basis, losses from discontinued operations for the quarter and nine months ended February 26, 2023 were $0.2 million ($0.00 per diluted share) and $1.1 million ($(0.01) per diluted share) compared with losses from discontinued operations for the same quarter and nine months of fiscal 2022 of $0.9 million ($0.00 per diluted share) and $1.9 million ($(0.01) per diluted share).
SEGMENT RESULTS
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V’s and The Capital Burger in North America as operating segments. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. Our four reportable segments are: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business (see Note 6 to our unaudited consolidated financial statements in Part I, Item 1 of Form 10-Q).
Our management uses segment profit as the measure for assessing performance of our segments. The following table presents segment profit margin
1
for the periods indicated.
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||||||||
| Segment | February 26, 2023 | February 27, 2022 | Change | February 26, 2023 | February 27, 2022 | Change | ||||||||||||||||||||||||||||||||
| Olive Garden | 22.5% | 21.0% | 150 BPS | 20.2% | 22.0% | (180) | BPS | |||||||||||||||||||||||||||||||
| LongHorn Steakhouse | 17.4% | 18.2% | (80) BPS | 15.7% | 17.5% | (180) | BPS | |||||||||||||||||||||||||||||||
| Fine Dining | 21.8% | 22.9% | (110) BPS | 19.4% | 21.4% | (200) | BPS | |||||||||||||||||||||||||||||||
| Other Business | 14.0% | 13.8% | 20 BPS | 13.2% | 15.0% | (180) | BPS | |||||||||||||||||||||||||||||||
| 1 Segment profit margin calculated as (sales less costs of food & beverage, restaurant labor, restaurant expenses and marketing expenses) / sales. | ||||||||||||||||||||||||||||||||||||||
The increase in Olive Garden’s segment profit margin for the third quarter of fiscal 2023 was driven primarily by positive same-restaurant sales, partially offset by increased food and beverage costs. The decrease in Olive Garden’s segment profit margin for the nine months of fiscal 2023 was driven primarily by increased food and beverage costs, partially offset by positive same-restaurant sales. The decrease in Longhorn Steakhouse’s segment profit margin for the third quarter and nine months of fiscal 2023 was driven primarily by increased food and beverage costs, partially offset by positive same-restaurant sales. The decrease in Fine Dining’s segment profit margin for the third quarter and nine months of fiscal 2023 was driven primarily by increased food and beverage costs, partially offset by positive same-restaurant sales. The increase in Other Business’ segment profit margin for the third quarter of fiscal 2023 was driven primarily by positive same-restaurant sales, partially offset by increased food and beverage costs.
The decrease in Other Business’ segment profit margin for the nine months of fiscal 2023 was driven primarily by increased food and beverage and restaurant labor costs, partially offset by positive same-restaurant sales.
27
SEASONALITY
Our sales volumes fluctuate seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. Holidays, changes in the economy, severe weather, effects of the COVID-19 pandemic and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Typically, cash flows generated from operating activities are our principal source of liquidity, which we use to finance capital expenditures for new restaurants and to remodel and maintain existing restaurants, to pay dividends to our shareholders and to repurchase shares of our common stock. Since substantially all of our sales are for cash and cash equivalents, and accounts payable are generally paid in 5 to 90 days, we are typically able to carry current liabilities in excess of current assets.
We currently manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable costs. Our publicly issued long-term debt currently carries the following ratings:
•
Moody’s Investors Service “Baa2”;
•
Standard & Poor’s “BBB”; and
•
Fitch “BBB”.
Our commercial paper has ratings of:
•
Moody’s Investors Service “P-2”;
•
Standard & Poor’s “A-2”; and
•
Fitch “F-2”.
These ratings are as of the date of the filing of this Form 10-Q and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.
On September 10, 2021, we entered into a $1 billion Revolving Credit Agreement (Revolving Credit Agreement) with Bank of America, N.A. (BOA), as administrative agent, and the lenders and other agents party thereto. The Revolving Credit Agreement is a senior unsecured credit commitment to the Company and contains customary representations and affirmative and negative covenants (including limitations on liens and subsidiary debt and a maximum consolidated lease adjusted total debt to total capitalization ratio of 0.75 to 1.00) and events of default usual for credit facilities of this type. As of February 26, 2023, we had no outstanding balances and were in compliance with all covenants under the Revolving Credit Agreement.
The Revolving Credit Agreement matures on September 10, 2026, and the proceeds may be used for working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. Loans under the Revolving Credit Agreement bear interest at a rate of LIBOR plus a margin determined by reference to a ratings-based pricing grid (Applicable Margin), or the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the Eurodollar Rate plus 1.00 percent) plus the Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement will be 1.000 percent for LIBOR loans and 0.000 percent for base rate loans. The Revolving Credit Agreement includes an alternative reference rate, which provides mechanisms for the use of the Secured Overnight Financing Rate as a replacement rate upon a LIBOR cessation event.
As of February 26, 2023, our outstanding long-term debt consisted principally of:
•
$500.0 million of unsecured 3.850 percent senior notes due in May 2027;
•
$96.3 million of unsecured 6.000 percent senior notes due in August 2035;
•
$42.8 million of unsecured 6.800 percent senior notes due in October 2037; and
•
$300.0 million of unsecured 4.550 percent senior notes due in February 2048.
The interest rate on our $42.8 million senior notes due in October 2037 is subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of February 26, 2023, no such adjustments are made to this rate.
We may from time to time repurchase our remaining outstanding debt in privately negotiated transactions. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements and other factors.
28
From time to time we enter into interest rate derivative instruments. See Note 10 to our unaudited consolidated financial statements in Part I, Item 1 of this report, which is incorporated by reference.
Net cash flows provided by operating activities of continuing operations increased to $1.14 billion for the nine months of fiscal 2023, from $916.5 million for the nine months of fiscal 2022. Net cash flows provided by operating activities include net earnings from continuing operations of $667.9 million and $673.0 million in the nine months of fiscal 2023 and 2022, respectively. Net cash flows provided by operating activities increased in fiscal 2023 primarily due to the change in working capital compared to fiscal 2022.
Net cash flows used in investing activities of continuing operations were $409.5 million for the nine months of fiscal 2023, compared to $280.9 million for the nine months of fiscal 2022. Capital expenditures increased to $410.5 million for the nine months of fiscal 2023 from $275.6 million for the nine months of fiscal 2022 reflecting an increase in new restaurant construction and remodel activity during fiscal 2023.
Net cash flows used in financing activities of continuing operations were $862.7 million for the nine months of fiscal 2023, compared to $1.24 billion for the nine months of fiscal 2022. Net cash flows used in financing activities for the nine months of fiscal 2023 included dividends paid of $443.3 million and share repurchases of $423.5 million, partially offset by the proceeds from the exercise of employee stock options. Net cash flows used in financing activities for the nine months of fiscal 2022 included dividends paid of $426.2 million and share repurchases of $834.1 million, partially offset by proceeds from the exercise of employee stock options. Dividends declared by our Board of Directors totaled $3.63 and $3.30 per share for the nine months of fiscal 2023 and 2022, respectively.
On June 22, 2022, our Board of Directors authorized a new share repurchase program under which we may repurchase up to $1 billion of our outstanding common stock. This repurchase program does not have an expiration and replaces the existing share repurchase authorization. During the quarter and nine months ended February 26, 2023, we repurchased 0.87 million and 3.3 million shares of our common stock, respectively, compared to 2.7 million and 5.8 million shares of our common stock, respectively, during the quarter and nine months ended February 27, 2022.
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales, costs or expenses, results of operations, liquidity, capital expenditures or capital resources.
Impairment of our assets, including goodwill or trademarks, adversely affects our financial position and results of operations, and our leverage ratio for purposes of our Revolving Credit Agreement. A leverage ratio exceeding the maximum permitted under our Revolving Credit Agreement would be a default under our Revolving Credit Agreement. At February 26, 2023, write-downs of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $861.4 million would have been required to cause our leverage ratio to exceed the permitted maximum. As our leverage ratio is determined on a quarterly basis, and due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.
FINANCIAL CONDITION
Our current assets totaled $890.9 million as of February 26, 2023, compared to $1.18 billion as of May 29, 2022. The decrease was primarily due to a decrease in prepaid income taxes as well as cash and cash equivalents.
Our current liabilities totaled $1.95 billion as of February 26, 2023, compared to $1.85 billion as of May 29, 2022. The increase was primarily driven by an increase in accounts payable as well as an increase in unearned revenues associated with gift card sales in excess of gift card redemptions.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales, costs and expenses during the reporting period. Actual results could differ from those estimates. We have discussed the development, selection and disclosure of those estimates with the Audit Committee. Our critical accounting estimates have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended May 29, 2022.
29
APPLICATION OF NEW ACCOUNTING STANDARDS
Information regarding application of new accounting standards is incorporated by reference from Note 1 to our unaudited consolidated financial statements in Part I, Item 1 of this report.
FORWARD-LOOKING STATEMENTS
Statements set forth in or incorporated into this report regarding the expected increase in the number of our restaurants and capital expenditures in fiscal 2023, projections for sales and all other statements that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan,” “outlook” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. In addition to the risks and uncertainties of ordinary business obligations, and those described in information incorporated into this report, the forward-looking statements contained in this report are subject to the risks and uncertainties described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended May 29, 2022 and in our Forms 10-Q (including this report), which are summarized as follows:
•
The disruption of our business and the global economy caused by the novel coronavirus (COVID-19) pandemic;
•
A failure to address cost pressures, including rising costs for commodities, labor, health care and utilities used by our restaurants, and a failure to effectively deliver cost management activities and achieve economies of scale in purchasing;
•
Economic and business factors and their impacts on the restaurant industry and general macroeconomic factors including unemployment, energy prices and interest rates;
•
The inability to hire, train, reward and retain restaurant team members and determine and maintain adequate staffing;
•
A failure to recruit, develop and retain effective leaders or the loss or shortage of personnel with key capacities and skills;
•
Increases in labor and insurance costs;
•
Health concerns arising from food-related pandemics, outbreaks of flu, viruses or other diseases;
•
Failures to maintain food safety throughout the supply chain and food-borne illness concerns;
•
Insufficient guest or employee facing technology or a failure to maintain a continuous or secure cyber network
•
Increased costs related to compliance with privacy and data protection laws and government enforcement, litigation or adverse publicity relating to potential failures thereof;
•
Insufficient or ineffective response to legislation or government regulation may impact our cost structure, operational efficiencies and talent availability;
•
Intense competition, or an insufficient focus on competition and the consumer landscape;
•
Changes in consumer preferences that may adversely affect demand for food at our restaurants;
•
An inability or failure to recognize, respond to and effectively manage the accelerated impact of social media;
•
A failure to identify and execute innovative marketing and guest relationship tactics and ineffective or improper use of other marketing initiatives and increased advertising and marketing costs;
•
Impacts of climate change, adverse weather conditions and natural disasters;
•
The inability to cancel long-term, non-cancelable leases that we may want to cancel or the inability to renew the leases that we may want to extend at the end of their terms;
•
Our inability or failure to execute a comprehensive business continuity plan following a major natural disaster such as a hurricane or manmade disaster, including terrorism;
•
The impact of shortages, delay or interruptions in the delivery of food and other products from third-party vendors and suppliers;
•
Our failure to drive both short-term and long-term profitable sales growth through brand relevance, operating excellence, opening new restaurants of existing brands and developing or acquiring new dining brands;
•
A lack of suitable new restaurant locations or a decline in the quality of the locations of our current restaurants;
•
Higher-than-anticipated costs or delays to open, close, relocate or remodel restaurants;
•
Risks associated with doing business with franchisees and licensees;
•
Risks associated with doing business with business partners and vendors in foreign markets;
30
•
Volatility in the market value of derivatives we may use to hedge commodity and broader market prices;
•
Volatility in the United States equity markets that may affect our ability to efficiently hedge exposures to our market risk related to equity-based compensation awards;
•
Failure to protect our service marks or other intellectual property;
•
Litigation, including allegations of illegal, unfair or inconsistent employment practices;
•
Unfavorable publicity, or a failure to respond effectively to adverse publicity;
•
Disruptions in the financial markets that may impact consumer spending patterns, affect the availability and cost of credit;
•
Impairment of the carrying value of our goodwill or other intangible assets;
•
Changes in tax laws or treaties and unanticipated tax liabilities; and
•
A failure of our internal controls over financial reporting and future changes in accounting standards.
Any of the risks described above or elsewhere in this report or our other filings with the SEC could have a material impact on our business, financial condition or results of operations. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. Therefore, the above is not intended to be a complete discussion of all potential risks or uncertainties.
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including fluctuations in interest rates, foreign currency exchange rates, compensation and commodity prices. To manage this exposure, we periodically enter into interest rate, foreign currency exchange rate, equity forward and commodity derivative instruments for other than trading purposes (see Note 10 to our unaudited consolidated financial statements in Part I, Item 1 of this report).
We use the variance/covariance method to measure value at risk, over time horizons ranging from one week to one year, at the 95 percent confidence level. As of February 26, 2023, our potential losses in future net earnings resulting from changes in equity forwards, commodity instruments and floating rate debt interest rate exposures were approximately $69.9 million over a period of one year. The value at risk from an increase in the fair value of all of our long-term fixed-rate debt, over a period of one year, was approximately $81.7 million. The fair value of our long-term fixed-rate debt outstanding as of February 26, 2023, averaged $853.2 million, with a high of $893.7 million and a low of $798.0 million during the nine months of fiscal 2023. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows by targeting an appropriate mix of variable and fixed-rate debt.
Item 4.
Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of February 26, 2023, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of February 26, 2023.
During the fiscal quarter ended February 26, 2023, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
31
PART II
OTHER INFORMATION
Item 1.
Legal Proceedings
See the discussion of legal proceedings contained in the third paragraph of Note 12 to our unaudited consolidated financial statements in Part I, Item 1 of this report, which is incorporated herein by reference.
Item 1A.
Risk Factors
There have been no material changes to the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended May 29, 2022.
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
The table below provides information concerning our repurchase of shares of our common stock during the quarter ended February 26, 2023.
| (Dollars in millions, except per share data) |
Total Number of
Shares Purchased (1) (2) |
Average
Price Paid per Share |
Total Number of
Shares Purchased as Part of Publicly Announced Plans or Programs |
Maximum Dollar Value of
Shares that May Yet be Purchased Under the Plans or Programs (3) |
||||||||||||||||||||||
| November 28, 2022 through January 1, 2023 | 466,632 | $ | 140.59 | 466,632 | $ | 745.9 | ||||||||||||||||||||
| January 2, 2023 through January 29, 2023 | 237,844 | $ | 145.67 | 237,844 | $ | 711.2 | ||||||||||||||||||||
| January 30, 2023 through February 26, 2023 | 162,976 | $ | 147.26 | 162,976 | $ | 687.2 | ||||||||||||||||||||
| Quarter-to-Date | 867,452 | $ | 143.24 | 867,452 | $ | 687.2 | ||||||||||||||||||||
(1)
All of the shares purchased during the quarter ended February 26, 2023 were purchased as part of our repurchase program. On June 22, 2022, our Board of Directors authorized a new share repurchase program under which we may repurchase up to $1 billion of our outstanding common stock. This repurchase program, which was announced publicly in a press release issued on June 23, 2022, does not have an expiration and replaces the existing share repurchase authorization.
(2)
The number of shares purchased includes shares withheld for taxes on vesting of restricted stock, shares delivered or deemed to be delivered to us on tender of stock in payment for the exercise price of options, and shares reacquired pursuant to tax withholding on option exercises. These shares are included as part of our repurchase program and deplete the repurchase authority granted by our Board. The number of shares repurchased excludes shares we reacquired pursuant to forfeiture of restricted stock.
(3)
Repurchases are subject to prevailing market prices, may be made in open market or private transactions and may occur or be discontinued at any time. There can be no assurance that we will repurchase any shares.
32
Item 6.
Exhibits
| Exhibit No. | Exhibit Title | |||||||
| 31(a) | ||||||||
| 31(b) | ||||||||
| 32(a) | ||||||||
| 32(b) | ||||||||
| 101.INS | XBRL Instance Document | |||||||
| 101.SCH | XBRL Schema Document | |||||||
| 101.CAL | XBRL Calculation Linkbase Document | |||||||
| 101.DEF | XBRL Definition Linkbase Document | |||||||
| 101.LAB | XBRL Label Linkbase Document | |||||||
| 101.PRE | XBRL Presentation Linkbase Document | |||||||
| 104 | ` | Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101) | ||||||
33
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| DARDEN RESTAURANTS, INC. | |||||||||||
| Dated: | April 4, 2023 | By: | /s/ Rajesh Vennam | ||||||||
| Rajesh Vennam | |||||||||||
| Senior Vice President, Chief Financial Officer | |||||||||||
| (Principal financial officer) | |||||||||||
34
TABLE OF CONTENTS
Part IprintItem 1. Financial Statements (unaudited)printNote 1. Basis Of PresentationprintNote 2. Revenue RecognitionprintNote 3. Additional Financial InformationprintNote 4. Income TaxesprintNote 5. Net Earnings Per ShareprintNote 6. Segment InformationprintNote 7. Impairments and Disposal Of Assets, NetprintNote 8. Stockholders EquityprintNote 9. Stock-based CompensationprintNote 10. Derivative Instruments and Hedging ActivitiesprintNote 11. Fair Value MeasurementsprintNote 12. Commitments and ContingenciesprintNote 13. Subsequent EventsprintItem 2. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsprintItem 3. Quantitative and Qualitative Disclosures About Market RiskprintItem 4. Controls and ProceduresprintPart IIprintItem 1. Legal ProceedingsprintItem 1A. Risk FactorsprintItem 2. Unregistered Sales Of Equity Securities and Use Of ProceedsprintItem 6. Exhibitsprint