We consider location to be a critical factor in determining a restaurant’s long-term success, and we devote significant effort to the site selection process. Prior to entering a market, we conduct a thorough study to determine the optimal number and placement of restaurants. Our site selection process incorporates a variety of analytical techniques to evaluate key factors. These factors include trade area demographics, such as target population density and household income levels; competitive influences in the trade area; the site’s visibility, accessibility and traffic volume; and proximity to activity centers such as shopping malls, hotel/motel complexes, offices and universities. Members of senior management evaluate, inspect and approve each restaurant site prior to its acquisition. Constructing and opening a new restaurant typically takes approximately 180 days on average after permits are obtained and the site is acquired.acquired and permits are obtained.
We systematically review the performance of our restaurants to ensure that each one meets our standards. When a restaurant falls below minimum standards, we conduct a thorough analysis to determine the causes, and implement marketingoperational and operationalmarketing plans to improve that restaurant’s performance. If performance does not improve to acceptable levels, the restaurant is evaluated for relocation, closing or conversion to one of our other brands. Permanent closures are typically due to economic changes in trade areas, the expiration of lease agreements, or site concerns. Accordingly, we continue to evaluate our site locations in order to minimize the risk of future closures or asset impairment charges.
We acquired Cheddar’s Scratch Kitchen on April 24, 2017, approximately five weeks before the end of our fiscal year. We plan to integrate many of Cheddar’s Scratch Kitchen’s operations into the Darden operational model during the 2018 fiscal year. The descriptions of our restaurant operations below do not include Cheddar’s Scratch Kitchen unless specifically mentioned.
Restaurant Operations
We believe that high-quality restaurant management is critical to our long-term success. Our restaurant management structure varies by brand and restaurant size. We issue detailed operations manuals covering all aspects of restaurant operations, as well as food and beverage manuals which detail the preparation procedures of our recipes. The restaurant management teams are responsible for the day-to-day operation of each restaurant and for ensuring compliance with our operating standards.
The management structures below describe our restaurant operations during the normal and fully operational conditions that were in place at the end of fiscal 2021. Over the course of fiscal 2021, as the COVID-19 pandemic impacted our business, the staffing levels of each our restaurants changed frequently, as our dining rooms operated under a range of capacity limitations that also varied from time to time, from state to state and city to city. As our restaurant operations continued to evolve in response to the pandemic, we have evolved our operational structure and made adjustments to restaurant staffing where appropriate. As a result, the descriptions below may not reflect the current or future structure of our restaurant operations.
Each Olive Garden restaurant is led by a general manager, and each LongHorn Steakhouse and Cheddar’s Scratch Kitchen restaurant is led by a managing partner. Each also has three to fivesix additional managers, depending on the operating complexity and sales volume of the restaurant. In addition, each restaurant typically employs an average of 80between 35 to 120200 hourly team members, most of whom work part-time. Restaurant general managers or managing partners report to a director of operations who is responsible for approximately sevenfive to teneleven restaurants. Each director of operations of Olive Garden and LongHorn Steakhouse reports to a Senior Vice President of Operations who is responsible for up to one hundredbetween 80 and 120 restaurants. Restaurants are visited regularly by operations management, including officer level executives, to help ensure strict adherence to all aspects of our standards.
standards and to solicit feedback on opportunities for improvement.
Each Cheddar’s Scratch Kitchen restaurant is led by a general manager or managing partner. Each also has two to six managersYard House and one to two culinary managers. In addition, each restaurant typically employs an average of 65 to 150 hourly team members, most of whom work part-time. The general manager or managing partner of each restaurant reports directly to an area director, who has operational responsibility for approximately three to ten restaurants. Restaurants are visited regularly by operations management, including officer level executives, to help ensure strict adherence to all aspects of our standards.
Each Bahama Breeze and Yard House restaurant is led by a general manager, and each The Capital Grille, Seasons 52 and Eddie V’s restaurant is led by a managing partner. Each also has twofour to eightten managers. Each Yard House, The Capital Grille, Yard House, Seasons 52 and Eddie V’s restaurant has one to three executive chefs,chef, and one to two sous chefs, and each Bahama Breeze restaurant has one to three culinary managers. In addition, each restaurant typically employs an average ofbetween 65 to 150200 hourly team members, most of whom work part-time. The general manager or managing partner of each restaurant reports directly to a director of operations, who has operational responsibility for approximately three to teneleven restaurants. Restaurants are visited regularly by operations management, including officer level executives, to help ensure strict adherence to all aspects of our standards.standards and to solicit feedback on opportunities for improvement.
Our Learning and Employee Development team in partnership with each brand’s training leader, together with senior operations executives, is responsible for developing and maintaining our operations training programs. These efforts include a 10an eight to 12-weektwelve-week training program for management trainees (seven to nine weeks in the case of internal promotions) and continuing development programs for all levels of leadership. The emphasis of the training and development programs varies by restaurant brand, but includes leadership, restaurant business management and culinary skills. We also use a highly structured training program to open new restaurants, including deploying training teams experienced in all aspects of restaurant operations. The opening training teams typically begin work one and a half weeks prior to opening and remain at the new restaurant for up to three weeks after the opening. They are re-deployed as appropriate to enable a smooth transition to the restaurant’s operating staff.
We maintain performance measurement and incentive compensation programs for our management-level team members. We believe that our leadership position, strong results-oriented culture and various short-term and long-term incentive programs, including stock-based compensation, enhances our ability to attract and retain highly motivated restaurant managers.
Quality Assurance
Our Total Quality Department helps ensure that all restaurants provide safe, high-quality food in a clean and safe environment.
Food Safety and our Total Quality Program
Through rigorous supplier and risk basedrisk-based product evaluations, we purchase only products that meet or exceed our product specifications. We rely on independent third parties to inspect and evaluate our suppliers and distributors. Suppliers that produce “high-risk” products are subject to a food safety evaluation by Darden personnel at least annually. We require our suppliers to maintain sound manufacturing practices and operate with the comprehensive Hazard Analysis and Critical Control Point (HACCP) food safety programs and risk basedrisk-based preventative controls adopted by the U.S. Food and Drug Administration. These programs focus on preventing hazards that could cause food-borne illnesses by applying scientifically-based controls to analyze hazards, identify and monitor critical control points, and establish corrective actions when monitoring shows that a critical limit has not been met. We require routine food safety verification for high risk products from our suppliers. Our total quality managers and third
Third party auditors visitinspect each restaurant regularly throughout the year to reviewassess food handlingsafety and sanitation practices. Our total quality team verifies the application of preventative controls through on-site support visits ensuring an effective and robust food safety system. Total quality managers provide support to provideoperations staff with education and training in food safety and sanitation.The total quality managersteam also serveserves as a liaison to regulatory agencies on issues relating to food safety.
Restaurant, Guest and Team Member Safety in Response to COVID-19
In response to the COVID-19 pandemic, throughout fiscal 2021, we have enhanced restaurant safety practices and made other enhancements to our operations to comply with state and local government regulations and health recommendations to ensure guest and team member wellness, maintain clean restaurants, practice social distancing and wear protective equipment. As the pandemic recedes in the United States, many of the additional COVID-19 protocols have been relaxed or removed as of the date of this report. Nevertheless, we are remaining vigilant and may reinstate any of the additional safety or health and wellness precautions if public health conditions worsen in any of our service areas or future government regulations require us to do so.
Purchasing and Distribution
Our ability to ensure a consistent supply of safe, high-quality food and supplies at competitive prices to all of our restaurant brands depends on reliable sources of procurement. Our purchasing staff sources, negotiates and purchases food and supplies from more than 1,500 suppliers whose products originate in more than 35 countries. Suppliers must meet our requirements and strict quality control standards in the development, harvest, catch and production of food products. Competitive bids, long-term contracts and strategic supplier relationships are routinely used to manage availability and cost of products.
In response to the COVID-19 pandemic, throughout fiscal 2021, we took several steps to enhance the safety and reliability of our supply chain.
•Safety: The Company’s cross functional COVID-19 task force implemented CDC-based guidelines for restaurants. We also implemented and communicated guidelines for our distributors and other suppliers providing services inside our restaurants, including required use of personal protective equipment (PPE). To support these enhanced safety protocols, we secured a supply of the necessary volumes of PPE and cleaning products for our restaurants and team members.
•Sourcing: As we transitioned to increased To Go business during the temporary closure of our dining rooms, we secured supplies of new and additional packaging products to better support food and beverage transport. We also sourced alternate formats of alcohol beverages for To Go in order to comply with state laws that permitted To Go sales of alcohol. To mitigate the potential risk of geographic trade disruptions, we created contingency plans in anticipation of supply chain obstacles. The purchasing team also mitigated obsolete/expiring inventory exposure by selling products to retail outlets for slow-moving items during capacity and dining room restrictions.
•Distribution: We increased inventory levels for brand-critical items, restaurant cleaning products, and PPE supplies to ensure sufficient supply of necessary products. An internal cross-functional team was created specifically to ensure successful restaurant ramp-down and quick reopening support.
We believe that our significant scale is a competitive advantage and our purchasing team leverages this purchasing capability. Our purchasing staff travels routinely within the United States and internationally to source top-quality food products at competitive prices. During the COVID-19 pandemic, we are monitoring our suppliers remotely, hosting virtual visits with potential new suppliers and conducting virtual request for proposal processes. We believe that we have established excellent long-term relationships with key suppliers and usually source our product directly from producers (not brokers or middlemen). We actively support several national minority supplier organizations to ensure that Darden incorporateswe incorporate women- and minority-owned businesses in all of itsour purchasing decisions.
We continuehave entered into long-term agreements with multiple third-party national distribution companies to drive automationdeliver food and supplies to our restaurants. Under these arrangements we maintain ownership of our supply chain by working with our suppliers, logistics partnersthe food and distributors to improve optimization with information visibility. Throughsupplies inventory through our subsidiary Darden Direct Distribution, Inc. (Darden Direct), and long-term agreements with our third party national. This inventory is stored in distribution companies, we maintain inventory ownership of food and supplies incompany warehouses that are wholly or primarily dedicated to Darden where practical to do so. Darden Direct further enables our purchasing staff to integrate demand forecasts into long-term agreements driving efficiencies in production economics when we collaborate with suppliers. Because of the relatively rapid turnover of perishable food products, inventories in the restaurants have a modest aggregate dollar value in relation to sales.
We continue to drive automation of our supply chain by collaborating with our suppliers, logistics partners and distributors to improve optimization with information visibility and other technological advances. These and other terms of Darden Direct’s long-term supply agreements further enable our purchasing staff to integrate demand forecasts into our purchasing operations, driving efficiencies in our operations.
Advertising and Marketing
Integrated marketing is a key element of our strategy, and our scale enables us to be a leading advertiser in the full-service dining segment of the restaurant industry. Olive Garden leverages the efficiency of national networkadvertising, on both traditional and streaming television, advertising. Olive Garden supplements thissupplemented with cable, local television andadditional targeted digital advertising.media investments. LongHorn Steakhouse uses local television and digital advertising to build engagement and loyalty by market. Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Yard House,Seasons 52, Bahama Breeze Seasons 52 and Eddie V’s do not use television advertising, but rely on local and digital marketing. In response to the COVID-19 pandemic, we significantly reduced our television advertising spending and directed our marketing efforts towards growing and promoting our To Go options and off-premise dining business for much of fiscal 2021. Our restaurants appeal to a broad spectrum of consumers and we use advertising to build awareness and strengthen our brands.brands’ relevance. We implement periodic promotions, as appropriate, to maintain and increase our sales and profits, as well as increase frequency of visitation by our guests.guest visits while maintaining overall profitability. We also rely on outdoor billboard, direct mail and email advertising, as well as radio, newspapers, digital coupons, search engine marketing and social media such as Facebook® and Instagram®, as appropriate, to attract, engage and retain our guests. We have developed and consistently use sophisticated consumer marketing research techniques to monitor guest satisfaction and evolving food service trends and expectations.marketplace dynamics.
In fiscal 2017,2021, we continued a multi-year effort to implement new technology platforms that allow us to digitally engage with our guests and team members and strengthen our marketing and analytics capabilities in thisan increasingly connected society. We also continued making improvements to our online and mobile ordering system for Olive Garden and LongHorn Steakhouse.Steakhouse and accelerated rollout of online and mobile ordering and payment systems across all of our other brands. In addition, we continued to further improve brand loyalty andworking on developing sophisticated customer relationship management programs, fordata analytics, and data-driven marketing approaches to effectively and efficiently target our brandsexisting and potential guests across our portfolio of brands. This enables us to increasetailor our messaging and offerings depending on guest visit history, preferences and brand loyalty.
Human Capital
Darden prioritizes our team members through our People Strategy that includes four strategic imperatives:
•Hire - Attract and select diverse team members that reflect our values and are committed to our results-oriented culture;
•Train - Teach our team members to perform in today’s environment and develop the frequencyskills to meet tomorrow’s needs;
•Reward - Invest in compelling programs that recognize team members when goals are achieved and further motivate our culture of visitswinning; and offer
•Retain - We keep our guests flexibility when making dining decisions. As we implement new platforms, weteam members engaged and motivated, ready to deliver results and grow their careers.
We closely track and assess a variety of metrics that help us to evaluate our performance of each of these imperatives.
Hire. We are integrating them into all guest touch pointscommitted to attracting, retaining, engaging and developing a workforce that mirrors the diversity of our guests. We track a variety of workforce statistics to help us understand the gender, racial and ethnic diversity of our team members, including restaurant operating systems to enable compelling personalized guest experiences.the following:
In fiscal 2017, Olive Garden continued to leverage Spanish language advertising to increase awareness and visits from Hispanic consumers.
Employees
AtKey Team Member Statistics as of the end of fiscal 2017,2021
| | | | | |
Total team members (hourly and salaried) | 156,883 |
Total number of hourly team members | 147,426 |
Percent of hourly team members – female | 58% |
Percent of hourly team members – members of racial or ethnic minority groups | 52% |
Total number of new hires of hourly team members during fiscal 2021 | 120,962 |
Percent of hourly new hires – female | 57% |
Percent of hourly new hires – members of racial or ethnic minority groups | 52% |
In addition to the gender, racial and ethnic diversity of our workforce, our team members are also very diverse in age; we employed over 175,000 people (team members) inemploy members of five generations of the United States population: Traditionalists, Baby Boomers, Generation X, Millennials and Canada, includingCentennials. We provide our EEO-1 report and additional details about our inclusion and diversity programs on our website at Cheddar’s Scratch Kitchen. Of these team members, approximately 165,000 were hourly restaurant personnel. The remainder were restaurant management personnel located in the restaurants or in the field, or were located at onewww.darden.com.
Train.We succeed because of our people, and with our success come rewards, recognition and great opportunities for our team members. We invest in our team members’ careers every step of the way by providing the tools they need to succeed in
their current roles, to grow personally and professionally, and to deliver exceptional experiences to our guests each day. With thousands of leadership positions across our restaurants, we provide a pathway and training for thousands of individuals across the country to advance from entry-level jobs into management roles. 65% of the participants in our restaurant support center facilitiesManager In Training program in Orlando, Florida, Irvine, Californiafiscal 2021 were internal promotions and 100% of the new General Managers or Irving, Texas. Our executives have an average of 15 years of experience with us. The restaurant general managers and managing partners average 12 years with us.Managing Partners during fiscal 2021 were internal promotions.
Reward. We believe that we provide working conditions and compensationpay and benefits that compare favorably with those of our competitors. Most team members, other than restaurant management and corporate management, are paid on an hourly basis. We offer our team members flexible work schedules and competitive pay and benefits, including paid sick leave and access to free counseling through our Work Life Assistance program for team members and their family. In March of 2021, we announced that every hourly restaurant team member company-wide would earn a minimum hourly wage of at least $10 per hour, inclusive of tip income, starting immediately, and we committed to increase that minimum wage to $11 per hour in January 2022 and $12 per hour in January 2023. We also announced approximately $17 million in one-time bonuses that were paid to our hourly restaurant team members to reward them for their hard work and dedication to serving our guests throughout the COVID-19 pandemic. During fiscal 2021, we provided nearly $24 million in supplemental pay programs to provide support to hourly team members impacted by closures of dining rooms due to the COVID-19 pandemic and paid time off to receive their COVID-19 vaccines. In addition, to reward our restaurant management teams, during fiscal 2021, we paid quarterly bonuses at above-target levels regardless of performance during those quarters. For our restaurant management teams other than general managers or managing partners, we also announced $6.5 million in one-time bonuses to reward their contributions to our success in navigating the pandemic. None of our team members are covered by a collective bargaining agreement. We consider our employeeteam member relations to be good.
Consistent with one of our core values of diversity, we are committed to attracting, retaining, engaging and developing a workforce that mirrors the diversity of our guests. Approximately 50 percent of our restaurant team member employees are minorities and over 53 percent are female. According to the People Report’s Human Capital Intelligence Report for April 2017,
the diversity of our operations leadership teams exceeds industry averages by nearly 1 percentage point for minority and 9 percentage points for female representation. At the vice president level and above, 21 percent of our leaders are minorities and 29 percent are female. The percentages of minority and female leaders at the vice president and above level rank above average in our industry. In addition, we achieved a 100 percent score on the Human Rights Campaign’s Corporate Equality Index for our business practices and policies toward our lesbian, gay, bisexual and transgender team members.
Consistent with our core values of respect, and caring and teamwork, in fiscal 1999 we established a program called Darden Dimes to help fellow Darden team members in need.Darden Dimes provides short-term financial grants to team members experiencing financial need caused by unexpected emergencies or catastrophic natural disasters. Participating team members donate as little as 10 cents from each paycheck to the Darden Dimes fund, which raises and grants moreapproximately $1.4 million annually.
Retain.As a full-service restaurant company, food is always top of mind, but our team members make the difference: they are at the heart of everything we do. We believe the guest experience can never exceed the team member experience, so we hire the best and retain them by fostering an environment of respect, where diversity of thought and background is valued and everyone has the opportunity to develop and grow their careers. In addition, our geographic footprint often puts us in a position to offer our restaurant team members jobs in their current roles when personal circumstances require relocation.
Despite impacts of COVID-19 on our business and our workforce, Darden’s consolidated turnover rate for hourly team members during fiscal 2021, was 95.4%, one of the lowest rates in the restaurant industry. Each of our brands experienced a turnover rate during fiscal 2021 that was lower than $1.5 million annually.the most recent relevant casual dining or fine dining turnover rate for their industry as reported in The People ReportTM by Black Box IntelligenceTM. Darden’s consolidated restaurant management turnover rate of 18.8% was also significantly lower than the industry benchmark and an improvement over fiscal 2020. Our executive leadership (vice president and above) has an average of over 16 years of experience with Darden. The restaurant general managers and managing partners average 13 years with us.
Information Technology and Cybersecurity
We strive for leadership in the restaurant business by using technology as a competitive advantage and as an enabler of our strategy. We have implemented technology-enabled business solutions targeted at improvedto improve financial control, cost management, guest service and employee effectiveness.effectiveness, as well as enable e-commerce. These solutions are designed to be used across restaurant brands, yet are flexible enough to meet the unique needs of each restaurant brand. Our strategy is to fully integrate systems to drive operational efficiencies and enable restaurant teams to focus on restaurant operations excellence.
Restaurant hardware and software support for all of our restaurant brands is provided or coordinated from the restaurant support center facility in Orlando, Florida. A high-speed data network sends and receives critical business data to and from the restaurants throughout the day and night, providing timely and extensive information on business activity in every location. Our data center contains sufficient computing power to process information from all restaurants quickly and efficiently. Our information is processed in a secure environment to protect both the actualour data and the physical computing assets. We guard against business interruption by maintaining a disaster recovery plan, which includes storing critical business information off-site, testing the disaster recovery plan at a host-site facility and providing on-site power backup. We periodically perform third-party cybersecurity audits following the standard set by the National Institute of Standards and Technology. We also conduct third-party security reviews of our network, processes and systems on a regular basis. We use internally developed proprietary software, cloud-based software as a service (SaaS) as well as purchased software, with proven, non-proprietary hardware. This allows processing power to be distributed effectively to each
All Darden brands share a secure, robust digital platform with online ordering and other guest-facing capabilities. We also have deployed mobile applications with online ordering and other features for all of our restaurants.casual dining brands and for most of our specialty restaurant brands. We successfully leveraged these digital capabilities over the last year to address changing guest needs. We will continue to invest in these platforms and applications to enhance the guest experience.
We maintain a robust system of data protection and cybersecurity resources, technology and processes. We regularly evaluate new and emerging risks and ever-changing legal and compliance requirements. We make strategic investments to address these risks and compliance requirements to keep Company, guest and team member data secure. We monitor risks of sensitive information compromise at our business partners where relevant and reevaluate the risks at these partners periodically. We also perform annual and ongoing cybersecurity awareness training for our management and restaurant support center team members. In addition, we provide annual credit card handling training following Payment Card Industry (PCI) guidelines to all team members that handle guest credit cards.
Our management believes that our current systems and practice of implementing regular updates will positionpositions us well to support current needs and future growth. We use a strategic information systems multi-year planning process that involves senior management and is integrated into our overall business planning. We provide data protection and cybersecurity reports to the Audit Committee of the Company’s Board of Directors on a quarterly basis and periodically to the full Board of Directors. Information systems projects are prioritized based upon strategic, financial, regulatory, risk and other business advantage criteria.
Competition
The restaurant industry is intensely competitive with respect to the type and quality of food, price, service, restaurant location, personnel, brand, attractiveness of facilities, availability of carryout and home delivery, internet and mobile ordering capabilitescapabilities and effectiveness of advertising and marketing. The restaurant business is often affected by changes in consumer tastes; national, regional or local economic conditions; demographic trends; traffic patterns; the type, number and location of competing restaurants; and consumers’ discretionary purchasing power. We compete within each market with national and regional chains and locally-owned restaurants for guests, management and hourly personnel and suitable real estate sites. We also face growing competition from the supermarket industry, which offers “convenient meals”convenient meals in the form of improved entrées, and side dishes or meal preparation kits from the deli section.or prepared foods sections. In addition, improving product offerings at fast casual restaurants and quick-service restaurants and expansion of home delivery services, together with negative economic conditions, could cause consumers to choose less expensive alternatives. We expect intense competition to continue in all of these areas.
Other factors pertaining to our competitive position in the industry are addressed under the sections entitled “Purchasing and Distribution,” “Advertising and Marketing” and “Information Technology”Technology and Cybersecurity” in this Item 1 and in our Risk Factors in Item 1A of this Form 10-K.
Trademarks and Service Marks
We regard our Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Yard HouseThe Capital Burger ®, Seasons 52®, Bahama Breeze®, Seasons 52®, Eddie V’s Prime Seafood®,Darden® , Wildfish Seafood Grille®,Darden® and Darden Restaurants® service marks, and other service marks and trademarks related to our restaurant businesses, as having significant value and as being important to our marketing efforts. Our policy is to pursue registration of our important service marks and trademarks and to vigorously oppose vigorously any infringement of them. Generally, with appropriate renewal and use, the registration of our service marks and trademarks will continue indefinitely.
Franchises, Joint Ventures and New Business Development
As of May 28, 2017,30, 2021, we operated 1,6951,834 restaurants through subsidiaries in the United States and Canada. We own all of those locations, except for 92 restaurants managed by us and owned by joint ventures. The joint ventures pay management fees to us, andin which we hold a majority ownership. We control the joint ventures’ use of our service marks. Franchisees or licenseesmarks and the joint ventures pay management fees to us, which are not material to our consolidated financial statements.
As of May 30, 2021, franchisees operated 4533 franchised restaurants in the United States and Canada.
Our restaurant operations24 franchised restaurants outside of the United States and Canada are conducted through area development and franchise agreements.States. We have area development, franchise and/or franchiselicense agreements in place with unaffiliated operators to develop and operate Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, The Capital Grille and LongHorn SteakhouseBahama Breeze restaurants in:in the following regions:
Middle East (Qatar, Kuwait, Saudi Arabia and the •United Arab Emirates),States,
•Mexico,
•Central and South America (Brazil, Colombia,Chile, Costa Rica, Dominican Republic, Ecuador, El Salvador Guatemala, Honduras, Nicaragua and Panama), and
Malaysia.•Philippines
As of May 28, 2017, franchisees operated 33 franchised restaurants located throughout these regions.
The restaurant developments under the area development agreements are in various states of progress, and the open and operating franchised restaurants are all reflected in the table under the “Introduction” section of this Item 1. We do not have an ownership interest in any of these franchisees, but we receive license fees under the area development and franchise agreements and royalty income under the franchise or license agreements. The amount of income we derive from our joint venture and franchise arrangements is not material to our consolidated financial statements.
We license the sales and distribution of several items including Olive Garden salad dressings, salad croutons, extra virgin olive oil, balsamic vinegar, LongHorn Steakhouse seasoning and Olive Garden seasoning through various channels including wholesale distribution chains and major grocery chains. The amount of income we derive from these licensing arrangements is not material to our consolidated financial statements.
Seasonality
Our sales volumes fluctuatehave historically fluctuated seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. Holidays,However, throughout fiscal 2021, a variety of factors, including the impacts of COVID-19 on our business, government actions taken to respond to COVID-19 and to stimulate the United States’ recovery from COVID-19, and changing consumer preferences caused fluctuations in our sales volumes that were different than our typical seasonality. Additionally, holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the historical seasonality of our business and these other factors, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
Government Regulation
We are subject to various federal, state, local and international laws affecting our business. Each of our restaurants must comply with licensing requirements and regulations by a number of governmental authorities, which include health, safety and fire agencies in the state or municipality in which the restaurant is located. The development and operation of restaurants depend on selecting and acquiring suitable sites, which are subject to zoning, land use, environmental, traffic and other regulations. To date, we have not been significantly affected by any difficulty, delay or failure to obtain required licenses or approvals.
The COVID-19 pandemic caused a panoply of federal, state and local government regulations affecting our business to be issued and frequently revised on a daily and/or weekly basis beginning in March 2020 and continuing through most of fiscal 2021. Regulations relating to paid sick leave, opening and closing of bars, restaurants and dining rooms, business hours, sanitation practices, To Go alcohol sales, guest spacing within dining rooms and other social distancing practices and PPE usage by both team members and guests have materially affected the way we operate our business and serve our guests. By the end of fiscal 2021, very few COVID-19-specific operating restrictions remained in place in the United States, but we continue to monitor the COVID-19 pandemic and it is possible certain regulations could be reimposed in the future if the United States or portions thereof experience additional outbreaks.
During fiscal 2017, 12.62021, 9.8 percent of our sales were attributable to the sale of alcoholic beverages. Regulations governing their sale require licensure by each site (in most cases, on an annual basis), and licenses may be revoked or suspended for cause at any time. These regulations relate to many aspects of restaurant operation, including the minimum age of patrons and employees, hours of operation, advertising, wholesale purchasing, inventory control and handling, and storage and dispensing of alcoholic beverages. As a result of the impact of COVID-19 pandemic on restaurants, many states have modified their regulations to permit To Go sales of alcoholic beverages, and in some locations we now offer a variety of alcoholic beverages, including in bottles, from draft and mixed drinks To Go. The failure of a restaurant to obtain or retain these alcoholic beverage licenses or to comply with regulations governing the sale of alcoholic beverages would adversely affect the restaurant’s operations. We also are subject in certain states to “dram-shop”“dram shop” statutes, which generally provide an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated person who then causes injury to himself or a third party. We carry liquor liability coverage as part of our comprehensive general liability insurance.
We also are subject to federal and state minimum wage laws and other laws governing such matters as overtime, tip credits, working conditions, paid leave, safety standards, and hiring and employment practices. Changes in these laws during fiscal 2017 have not
Since 1995, Darden has had a material effect on our operations.
We currently are operating under a Tip Rate Alternative Commitment (TRAC) agreement with the Internal Revenue Service. ThroughTRAC requirements, which include increased educational and other efforts in each restaurant to increase the restaurants, thereporting compliance of employees with respect to cash tips, are applied across all of our brands. Compliance with TRAC agreementrequirements reduces the likelihood of potential chain-wide employer-only FICA tax assessments related to cash tips that are unreported by employees at Darden’s covered units. Consistent with our long-standing agreement with the IRS, we work proactively with IRS personnel responsible for unreported cash tips.tip compliance to ensure that we are taking the appropriate steps to continue to meet our TRAC obligations.
We are subject to federal and state environmental regulations, but these rules have not had a material effect on our operations. During fiscal 2017,2021, there were no material capital expenditures for environmental control facilities and no material expenditures for this purpose are anticipated.
Our facilities must comply with the applicable requirements of the Americans with Disabilities Act of 1990 (ADA) and related state accessibility statutes. Under the ADA and related state laws, we must provide equivalent service to disabled persons and make reasonable accommodation for their employment, and when constructing or undertaking significant remodeling of our restaurants, we must make those facilities accessible.
We are subject to federal and state regulations relating to employer-provided health insurance, but these rules have not had a material effect on our operations. We continue to monitor the status of the health care reform law enacted by Congress in March of 2010 (Affordable Care Act)discussions at the federal and related rules and regulations.state levels.
We are subject to laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content and menu labeling. We are subject to laws and regulations requiring disclosure of calorie, fat, trans fat, salt and allergen content. Provisions in the Affordable Care Act require restaurant companies such as ours to disclose calorie information on their menus and to make available more detailed nutrition information upon request; however, regulations implementing those statutory provisions have been delayed until May 2018.
We are subject to laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud. An increasing number of governments and industry groups worldwide have established data privacy laws and standards for the protection of personal information, including social security numbers, financial information (including credit card numbers), and health information. As a merchant and service provider of point-of-sale services, we are also subject to the Payment Card Industry Data Security Standard issued by the Payment Card Industry Council (PCI DSS).
We are subject to anti-corruption laws in the United States and in the international jurisdictions where we do business, including the Foreign Corrupt Practices Act. We are also subject to a variety of international laws relating to franchising and licensing of intellectual property in the various countries across the world where we are engaged in franchising our restaurant brands.
See Item 1A “Risk Factors” below for a discussion of risks relating to federal, state and local regulation of our business, including in the areas of health care reform, data privacy and environmental matters.
Sustainability
Darden’s commitment toThe sustainability of our food sources and restaurant operations is embedded as a key component of providing great service and food to our guests. It is an element that separates usAs business interruptions from the COVID-19 pandemic have receded during fiscal 2021, we enhanced our competitors,focus on our climate strategy, restaurant sustainability metrics and a contributorDarden’s Animal Welfare Council. We will continue to adapt our business success. Oursustainability approach is bothin the current economic environment with development or enhancement of integrated and strategic and spanspriorities in the near term across the enterprise, from the commoditiesfood we source to the operation of our restaurants. Conservation is a competitive advantage - it continues
We are proud to lower our operating costs over time, insulate our supply chain, and help us attract and retainoperate some of the most qualified employees - all increasingefficient restaurants in the successUnited States. Darden manages energy and water conservation within our restaurant operations and over the last decade we have realized a 20 percent reduction in energy use per restaurant and a 25 percent reduction in water usage on average per restaurant. In fiscal 2020, we experienced reductions in energy and water usage directly related to COVID-19 impacts to the business, and we do not expect these results to continue year-over-year. In addition to our energy and water footprint at the restaurants, we have also seen a continuous reduction in our carbon footprint. Since 2008, we have reduced our average greenhouse gas emissions per restaurant by 32 percent, as measured in accordance with the Corporate Accounting and Reporting Standard of the Greenhouse Gas Protocol.
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Greenhouse Gas (GHG) Emissions |
| | Fiscal Year Ended |
(in metric tons CO2e) | | May 31, 2020 | | May 26, 2019 | | May 27, 2018(2) |
Average Per Restaurant (1) (2) | | 424 | | | 444 | | | 460 | |
Total - Scope 1 and 2 (2) | | 774,200 | | | 783,940 | | | 766,302 | |
(1)Per restaurant Intensity Ratio includes only Scope 1 and 2 totals (as defined in the Corporate Accounting and Reporting Standard of the GHG Protocol) divided by the total number of restaurants.
(2)FY 2018 excludes Cheddar's Scratch Kitchen due to lack of verified GHG data prior to acquisition.
We shared Darden’s Food Principles in 2016 to outline our business.commitment to guests in areas of sustainable sourcing, nutritional disclosure, food safety and animal welfare. Darden’s Food Principles connect each of these strategic business efforts in a guest-centered platform, including sourcing and ingredient commitments to our guests. We have set commitments related to the
following food attributes: animal welfare, chickens raised without medically-important antibiotics, cage-free eggs and gestation crate-free pork. We are on track to meet our Food Principles commitments and we continue to monitor progress with our suppliers.
Building on our Food Principles, Darden established an Animal Welfare Policy that adopts an outcomes-based approach to continue to ensure high level of care for farm animals in the food supply chain. To implement this Policy, we established an Animal Welfare Council consisting of leading academics and thought leaders with expertise in the care of animals in food supply chains. The Council advises and supports the Company on our efforts to advance strategy and implementation of an outcomes-based approach to animal welfare, from supplier collaborations to reporting improvements. During COVID-19 interruptions, it was necessary to temporarily suspend Council meetings, but we virtually reconvened the Council in early 2021 to resume this important work.
More information about our sustainability strategy, our commitment to our guests on Food Principles and our progress to date is available at our website: www.darden.com/sustainability.www.darden.com.
Darden Foundation and Community Affairs
We are recognized for a culture that rewards caring for and responding to people. That defines service for Darden. The Darden Restaurants, Inc. Foundation (Foundation)(the Foundation) works to bring to life this spirit of service to life through its philanthropic support of charitable organizations across the country as well asand support for the volunteer involvement of our team members. The Foundation does this by focusing its philanthropic efforts on programs that enhance the communities in whichwhere our team members and guests live and work. In addition, team members at the Darden Restaurant Support Center are eligible for 16 hours per calendar year of paid time for approved community service activities during scheduled work hours.
In fiscal 2017, we2021, the Foundation awarded approximately $3.8$4.1 million in grants through the Foundation. We awarded grants to national organizations such as the American Red Cross, Feeding America, and the National Restaurant Association Education Foundation, as well as local nonprofits including Second Harvest Food Bank of Central Florida and the Heart of Florida United Way. These organizations provide service to the public through disaster preparedness, hunger relief, community engagement, disaster preparedness and the promotion of career opportunities in the culinary industry.
The unprecedented events of the year 2020 reinforced the importance of our long-term partnership with Feeding America. The need for food has increased due to the COVID-19 pandemic and food insecurity in communities of color is disproportionately high. In 2003, we beganfiscal 2021, the Darden Foundation awarded two grants totaling $2.5 million to help fund 15 refrigerated box trucks to increase access to nutritious food and address transportation needs at food banks that are under-resourced and serve a high percentage of people of color. In addition to enhancing mobile food pantry programs, the Foundation’s contributions support 191 food banks across the country and help provide meals for people facing hunger. The most recent donation marks a total of $12.3 million that the Foundation and Darden have contributed to the Feeding America network since 2010.
Our support of Feeding America and the fight against hunger goes hand-in-hand with our Darden Harvest program, which began in 2003 as a mechanism for gettingdelivering fresh and healthy food to people who need it. Each day, across mostevery one of our restaurants, we collect surplus, wholesome food that is not served to guests and, rather than discarding the food, we prepare it for donation to local nonprofit feeding partners. In fiscal 2017,2021, Darden contributed over 7approximately 5.7 million pounds of food, which is enough to feed more than 1,300 families of four, three meals a day for an entire year. In April 2017, the Darden Harvest program achieved a significant milestone when it reached a total of 100 million pounds of food donated over the life of program. That’s the equivalent of approximately 83more than 4.7 million meals provided to people in need across the communities served by Olive Garden, LongHorn Steakhouse, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s.our restaurants. As an added benefit of the Darden Harvest program, we are able to divert millions of pounds of surplus food from waste streams every year, making the Darden Harvest program a key part of our goal to one day send zero waste to landfills.
In fiscal 2021, as part of Darden’s commitment to inclusion and diversity, the Foundation donated $500,000 to Boys & Girls of America to support the creation, development, and implementation of programming that will help youth better understand diversity and combat racial discrimination. The new Youth for Unity curriculum will provide meaningful, action-oriented solutions to address social injustice and racial inequity and help foster the next generation of leaders, problem-solvers and advocates for change.
The Foundation’s funding helps support the National Restaurant Association Educational Foundation’s ProStart program, a national high school program that introduces students to the restaurant industry and provides them with an industry-driven curriculum on topics ranging from culinary techniques to management skills. The Foundation’s fiscal 2021 contribution of $200,000 also supports the Opportunity Youth-Restaurant Ready program to engage and encourage disconnected young people to pursue a path to employment and improve their quality of life.
We are also a proud member of the American Red Cross’ Disaster Responder Program, which enables the Red Cross to respond to the needs of individuals and families impacted by disasters anywhere in the United States. In fiscal 2021, the Foundation provided $250,000 to the American Red Cross for the program. In addition to financial support, our restaurants regularly donate meals to feed first responders and victims of natural disasters.
More information about the Foundation and its efforts to enhance the quality of life in the communities where we do business is available on our website at www.darden.com.www.darden.com.
Executive Officers of the Registrant
Our executive officers as of the date of this report are listed below.
Eugene I. (Gene) Lee, Jr., age 56, has been our President and CEO since February 2015. Prior to that, Mr. Lee served as President and Interim CEO since October 2014, and as President and COO of the Company from September 2013 to October 2014. He served as President, Specialty Restaurant Group from our acquisition of RARE in October 2007 to September 2013. Prior to the acquisition, he served as RARE’s President and COO from January 2001 to October 2007. From January 1999 until January 2001, he served as RARE’s Executive Vice President and COO.
Matthew R. Broad, age 57, has been our Senior Vice President, General Counsel, Chief Compliance Officer and Corporate Secretary since October 2015. Prior to joining Darden, he served as Executive Vice President, General Counsel and Chief Compliance Officer for OfficeMax, Incorporated from October 2004 to December 2013. Prior to that, he was Associate General Counsel with Boise Cascade Corporation from September 1989 to October 2004.
Todd A. Burrowes, age 54, has been our President, LongHorn Steakhouse since July 2015. He rejoined the Company after serving as President, Ruby Tuesday Concept and Chief Operations Officer of Ruby Tuesday, Inc. from June 2013 to July 2015. Prior to that, he served as Executive Vice President of Operations for LongHorn Steakhouse from May 2008 until June 2013. He joined the Company in 2002 as Regional Manager of LongHorn Steakhouse before being promoted to Director of Management Training. In 2004, he was promoted to Regional Vice President of Operations for LongHorn Steakhouse.
Ricardo (Rick) Cardenas, age 49, has been our Senior Vice President, Chief Financial Officer since March 2016. He was Senior Vice President, Chief Strategy Officer of the Company from July 2015 to March 2016, prior to which he served as Senior Vice President, Finance, Strategy and Technology from July 2014 to July 2015. He was Executive Vice President of Operations for LongHorn Steakhouse from June 2013 to July 2014 and Senior Vice President of Operations for LongHorn Steakhouse’s Philadelphia Division from June 2012 to June 2013. He served as Senior Vice President of Finance for Red Lobster, which the Company previously owned, from June 2010 to June 2012. Mr. Cardenas originally joined the Company in 1984 as an hourly employee and served in various positions of increasing responsibility, including Vice President of Finance for Olive Garden, prior to the positions described above.
David C. George, age 61, has been our President, Olive Garden and Executive Vice President, Darden Restaurants since March 2016, prior to which he was President of Olive Garden since January 2013. He served as our President of LongHorn Steakhouse from October 2007, when we acquired RARE, until January 2013. Prior to the acquisition, he served as RARE’s President of LongHorn Steakhouse from May 2003 until October 2007. From October 2001 until May 2003, he was RARE’s Senior Vice President of Operations for LongHorn Steakhouse and from May 2000 until October 2001 was RARE’s Vice President of Operations for The Capital Grille.
Sarah H. King, age 47, was named our Senior Vice President, Chief Human Resources Officer in March 2017. Prior to joining Darden, Sarah spent 19 years with Wyndham Worldwide Corporation in various human resources leadership positions worldwide. Most recently, from 2010 through 2017, she served as Executive Vice President, Human Resources for Wyndham Vacation Ownership.
John W. Madonna, age 41, has been our Senior Vice President, Corporate Controller since January 2016, prior to which he served as our Senior Vice President, Accounting since January 2015. Prior to that, he was a Director in Corporate Reporting from June 2010 through June 2013 when he was promoted to Senior Director, Corporate Reporting and then to Vice President of Corporate Reporting in March, 2014. He joined the Company in 2005 as Manager, Corporate Reporting. He joined the LongHorn Steakhouse team in 2009 as Manager, Financial Planning & Analysis.
Item 1A. RISK FACTORS
Various risks and uncertainties could affect our business. Any of the risks described below or elsewhere in this report or our other filings with the Securities and Exchange Commission 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.
Risks Relating to the COVID-19 Pandemic
The COVID-19 pandemic has disrupted and may continue to disrupt our business, which has affected and could continue to materially affect our operations, financial condition and results of operations.
The COVID-19 pandemic, federal, state and local government responses to COVID-19 and our Company’s responses to the outbreak have all disrupted and may continue to disrupt our business. In the United States over the course of fiscal 2021, state and local governments imposed a variety of restrictions on people and businesses and public health authorities offered regular guidance on health and safety. In response to the COVID-19 pandemic and these changing conditions, during the fourth quarter of fiscal 2020, we closed the dining rooms in all of our restaurants for some portion of the quarter and operated in a To Go or To Go plus delivery format only. As a result, we began fiscal 2021 with significant limitations on our operations, which over the course of the fiscal year varied widely from time to time, state to state and city to city. During November 2020, rising case rates resulted in certain jurisdictions implementing restrictions that again reduced dining room capacity or mandated the re-closure of dining rooms. Once COVID-19 vaccines were approved and moved into wider distribution in the United States in early 2021, public health conditions improved and almost all of the COVID-19 restrictions on businesses have eased. As of the date of this report, all of our restaurants were able to open their dining rooms and few capacity restrictions or other COVID-19 restrictions remained in place in the United States. However, it is possible that future increases in cases or further localized or widespread outbreaks of COVID-19 in the United States could require us to again reduce our capacity or suspend our in-restaurant dining operations. The COVID-19 pandemic and these responses have affected and may continue to adversely affect our guest traffic, sales and operating costs and we cannot predict whether an increase in cases or localized or widespread outbreaks will occur and whether future government responses thereto may impact us. In addition, future increases in cases or further localized or widespread outbreaks of COVID-19 in the United States or elsewhere could negatively impact our suppliers, and we could face shortages of food items or other supplies at our restaurants and our operations and sales could be adversely impacted by such supply interruptions.
Risks Relating to Health and Safety
Health concerns arising from food-related pandemics, outbreaks of flu, viruses or other diseases may have an adverse effect on our business.
In addition to the novel coronavirus that causes COVID-19, the United States and other countries have experienced, or may experience in the future, outbreaks of other viruses, such as norovirus, avian flu or “SARS,” “MERS,” H1N1 or “swine flu,” or other diseases. To the extent that a virus or disease is food-borne, or perceived to be food-borne, future outbreaks may adversely affect the price and availability of certain food products and cause our guests to eat less of a product, or could reduce public confidence in food handling and/or public assembly. For example, public concern over avian flu may cause fear about the consumption of chicken, eggs and other products derived from poultry. The inability to successfully integrate Cheddar’s Scratch Kitchen into our business could harmserve poultry-based products would restrict our ability to achieveprovide a variety of menu items to our guests. If we change a restaurant menu in response to such concerns, we may lose guests who do not prefer the cost savingsnew menu, and other benefits we expect to be able to realize in the Cheddar’s Scratch Kitchen operations.
On April 24, 2017, we acquired Cheddar’s Scratch Kitchen. Our integration of Cheddar’s Scratch Kitchen’s business into our operations is a complex and time-consuming process that may not be successful. The primary areas of focus for successfully combining the business of Cheddar’s Scratch Kitchen with our operations may include, among others: retaining and integrating management and other key employees; integrating information, communications and other systems; and managing the growth of the combined company.
Even if we successfully integrate the business of Cheddar’s Scratch Kitchen into our operations, there can be no assurance that we will realize the anticipated benefits. We acquired Cheddar’s Scratch Kitchen with the expectation that the acquisition would result in various benefits for the combined company including, among others, business and growth opportunities and significant synergies from increased efficiency in purchasing, distribution and other restaurant and corporate support. Increased competition and/or deterioration in business conditions may limit our ability to expand this business. As such, we may not be able to realizeattract a sufficient new guest base to produce the synergies, goodwill, business opportunities and growth prospects anticipated in connection withsales needed to make the acquisition.
restaurant profitable. We rely heavily on information technology inalso may have different or additional competitors for our operations, and insufficient guest or employee facing technology or a failure to maintain a continuous and secure cyber network, free from material failure, interruption or security breach could harm our ability to effectively operate our business and/or result in the loss of respected relationships with ourintended guests or employees.
We rely heavily on information systems across our operations, including for marketing programs, employee engagement, management of our supply chain, point-of-sale processing system in our restaurants, and various other processes and transactions. Our ability to effectively manage our business and coordinate the production, distribution and sale of our products depends significantly on the reliability and capacity of these systems. In addition, we must effectively respond to changing guest expectations and new technological developments. Disruptions, failures or other performance issues with these guest facing technology systems could impair the benefits that they provide to our business and negatively affect our relationship with our guests. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, a material network breach in the security of these systems as a result of such a cyber attack,change and may not be able to successfully compete against such competitors. If a virus is transmitted by human contact or respiratory transmission, our employees or guests could become infected, or could choose, or be advised, to avoid gathering in public places, any other failureof which could adversely affect our restaurant guest traffic and our ability to maintainadequately staff our restaurants, receive deliveries on a continuous and secure cyber networktimely basis or perform functions at the corporate level. We also could result in substantial harm or inconvenience to us or an individual. This could includebe adversely affected if the theft of our intellectual property or trade secrets, World Health Organization and/or the improper useCDC were to restrict travel to affected geographic areas where we source our products, thus possibly impacting the continuity of personal informationsupply. Additionally, jurisdictions in which we have restaurants may impose mandatory closures, seek voluntary closures or impose restrictions on operations. Even if such measures are not implemented and a virus or other “identity theft.” Eachdisease does not spread significantly, the perceived risk of these situationsinfection or data privacy breachessignificant health risk may cause delays in guest service, reduce efficiencyguests to choose other alternatives to dining out in our operations, require significant capital investments to remediate the problem, result in customer or advertiser dissatisfaction or otherwise result in negative publicity that could harmrestaurants which may adversely affect our reputation and we could be subjected to litigation, regulatory investigations or the imposition of penalties. As privacy and information security laws and regulations change and cyber risks evolve, we may incur additional costs to ensure we remain in compliance and protect guest, employee and Company information.business.
A failure to maintain food safety throughout the supply chain and food-borne illness concerns may have an adverse effect on our business.
Food safety is a top priority, and we dedicate substantial resources to ensuring that our guests enjoy safe, quality food products. Even with strong preventative interventions and controls, food safety issues could be caused at the source or by food suppliers or distributors and, as a result, be out of our control and require prompt action to mitigate impact. In addition, regardless of the source or cause, any report of food-borne illnesses such as E. coli, hepatitis A, norovirus or salmonella, andor other food safety issues including food tampering or contamination at one of our restaurants could adversely affect the reputation of our brands and have a negative impact on our sales. Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in negative publicity about the food service industry generally and adversely impact our sales. The occurrence of food-borne illnesses or food safety issues could also adversely affect the price and availability of affected ingredients, resulting in higher costs and lower margins.
Litigation, including allegationsRisks Related to Human Capital
The inability to hire, train, reward and retain restaurant team members and determine and maintain adequate staffing may impact our ability to achieve our operating, growth and financial objectives.
Our long-term growth depends substantially on our ability to recruit and retain high-quality team members to work in and manage our restaurants. Adequate staffing and retention of illegal, unfairqualified restaurant team members is a critical factor impacting our guests’ experience in our restaurants. Maintaining adequate staffing in our existing restaurants and hiring and training staff for our new restaurants requires precise workforce planning which has been complicated by the impacts of the COVID-19 pandemic on our business, the relevant labor market and on consumer preferences. The market for the most qualified talent continues to be competitive and we must provide competitive wages, benefits and workplace conditions to maintain our most qualified team members. Personal or inconsistent employment practices,public health concerns related to COVID-19 may adverselycontinue to make some existing team members or potential candidates reluctant to work in enclosed restaurant environments. We have experienced and may continue to experience challenges in recruiting and retaining team members in various locations. A shortage of quality candidates who meet all legal citizenship or work authorization requirements, failure to recruit and retain new team members in a timely manner or higher than expected turnover levels all could affect our ability to open new restaurants, grow sales at existing restaurants or meet our labor cost objectives. An inability to adequately monitor and proactively respond to team member dissatisfaction could lead to poor guest satisfaction, higher turnover, litigation and unionization which could jeopardize our ability to meet our growth targets.
A failure to recruit, develop and retain effective leaders or the loss or shortage of personnel with key capacities and skills could impact our strategic direction and jeopardize our ability to meet our business financial conditionperformance expectations and results of operations.growth targets.
Our future growth depends substantially on the contributions and abilities of key executives and other leadership team members. We must continue to recruit, retain and motivate management team members in order to achieve our current business isobjectives and support our projected growth. Changes in senior management could expose us to significant changes in strategic direction and initiatives. A failure to maintain appropriate organizational capacity and capability to support leadership excellence (adequate resources, innovative skill sets and expectations) and build adequate bench strength required for growth or a loss of key skill sets could jeopardize our ability to meet our business performance expectations and growth targets.
We may be subject to increased labor and insurance costs.
Our restaurant operations are subject to United States and Canadian federal, state and local laws governing such matters as minimum wages, working conditions, overtime and tip credits. As federal, state and local minimum wage rates increase, we may need to increase not only the riskwages of litigation byour minimum wage employees, guests, suppliers, shareholders, government agencies or others through private actions, class actions, administrative proceedings, regulatory actionsbut also the wages paid to employees at wage rates that are above minimum wage. Labor shortages, increased employee turnover and health care and other benefit mandates also have increased and may continue to increase our labor costs. This in turn could lead us to increase prices which could impact our sales. Conversely, if competitive pressures or other litigation. These actionsfactors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline. In addition, the current premiums that we pay for our insurance (including workers’ compensation, general liability, property, health, and proceedingsdirectors’ and officers’ liability) may involve allegationsincrease at any time, thereby further increasing our costs. The dollar amount of illegal, unfair or inconsistent employment practices, including wageclaims that we actually experience under our workers’ compensation and hour violationsgeneral liability insurance, for which we carry high per-claim deductibles, may also increase at any time, thereby further increasing our costs. Further, the decreased availability of property and employment discrimination; guest discrimination; food safety issues including poor food quality, food-borne illness, food tampering, food contamination, and adverse health effects from consumptionliability insurance has the potential to negatively impact the cost of various food products or high-calorie foods (including obesity); other personal injury; violation of “dram shop” laws (providing an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated party who then causes injury to himself or a third party); trademark infringement; violation of the federal securities laws; or other concerns. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of
very large or indeterminate amounts,premiums and the magnitude of the potential loss relatinguninsured losses.
Risks Relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend litigation may be significant. There may also be adverse publicity associated with litigation that could decrease guest acceptance of our brands, regardless of whether the allegations are valid or we ultimately are found liable. Litigation could impactInformation Technology and Privacy
We rely heavily on information technology in our operations, in other ways as well. Allegations of illegal, unfairand insufficient guest or inconsistent employment practices, for example, could adversely affect employee acquisition and retention. As a result, litigation may adversely affect our business, financial condition and results of operations.
Unfavorable publicity,facing technology or a failure to respond effectively to adverse publicity,maintain a continuous and secure cyber network, free from material failure, interruption or security breach, could harm our reputation and adversely impactability to effectively operate our guest counts and sales.business and/or result in the loss of respected relationships with our guests or employees.
The good reputationWe rely heavily on information systems across our operations, including for e-commerce, marketing programs, employee engagement, management of our restaurant brands issupply chain, the point-of-sale processing system in our restaurants, and various other processes and transactions. Our ability to effectively manage our business and coordinate the production, distribution and sale of our products depends significantly on the reliability, security and capacity of these systems. In addition, we must effectively respond to changing guest expectations and new technological developments. Disruptions, failures or other performance issues with guest facing technology systems could impair the benefits that they provide to our business and negatively affect our relationship with our guests. The failure of these systems to operate effectively, problems with transitioning to upgraded or replacement systems, a key factormaterial network breach in the successsecurity of these systems as a result of a cyber attack, phishing attack, ransomware attack or any other failure to maintain a continuous and secure cyber network could result in substantial harm or inconvenience to the Company, our team members or guests. This could include the theft of our business. Actualintellectual property, trade secrets or alleged incidents at anysensitive financial information. Some of these essential business processes that are dependent on technology are outsourced to third parties. While we make efforts to ensure that our restaurants couldproviders are observing proper standards and controls, we cannot guarantee that breaches or failures caused by these outsourced providers will not occur.
Any such failures or disruptions may cause delays in guest service, reduce efficiency in our operations, require significant capital investments to remediate the problem, result in customer, employee or advertiser dissatisfaction or otherwise result in negative publicity that could harm our brands. Even incidents occurring at restaurants operatedreputation. We could also be subjected to litigation, regulatory investigations or the imposition of penalties. As information security laws and regulations change and cyber risks evolve, we may incur additional costs to ensure we remain in compliance and protect guest, employee and Company information.
We may incur increased costs to comply with privacy and data protection laws and, if we fail to comply or our systems are compromised, we could be subject to government enforcement actions, private litigation and adverse publicity.
We receive and maintain certain personal, financial and other information about our customers, employees, vendors and suppliers. In addition, certain of our vendors receive and maintain certain personal, financial and other information about our employees and customers. The use and handling, including security, of this information is regulated by evolving and increasingly demanding data privacy laws and regulations in various jurisdictions, as well as by certain third-party contracts and industry standards. Complying with newly developed laws and regulations, which are subject to change and uncertain interpretations and may be inconsistent from jurisdiction to jurisdiction, may lead to a decline in guest engagement or cause us to incur substantial costs or modifications to our competitorsoperations or in the supply chain generallybusiness practices to comply. In addition, if our security and information systems are compromised as a result of data corruption or loss, cyber attack or a network security incident, or if our employees or vendors fail to comply with these laws and regulations or fail to meet industry standards and this information is obtained by unauthorized persons or used inappropriately, it could result in negative publicity thatliabilities and penalties and could harm the restaurant industry overalldamage our reputation, cause interruption of normal business performance, cause us to incur substantial costs and indirectly, our own brands. Negative publicity may result from allegationsin a loss of illegal, unfair or inconsistent employment practices, employee dissatisfaction, guest discrimination, illness, injury, or any of the other matters discussed above that could give rise to litigation. Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a limited number of our restaurants, or only to a single restaurant,customer confidence, which could adversely affect public perceptionour results of operations and financial condition. Additionally, we could be subject to litigation and government enforcement actions as a result of any such failure.
Risks Related to the entire brand. Negative publicity also may result from health concerns including food safety and flu outbreaks, publication of government or industry findings concerning food products, environmental disasters, crime incidents, data privacy breaches, scandals involving our employees, or operational problems at our restaurants, all of which could make our brands and menu offerings less appealing to our guests and negatively impact our guest counts and sales. Adverse publicity and its effect on overall consumer perceptions of our brands, or our failure to respond effectively to adverse publicity, could have a material adverse effect on our business.Restaurant Industry
We are subject to a number of risks relating to public policy changes and federal, state and local regulation of our business, including in the areas of health care reform, environmental matters, minimum wage, unionization, data privacy, menu labeling, immigration requirements and taxes, and an insufficient or ineffective response to legislation or government regulation may impact our cost structure, operational efficiencies and talent availability.
The restaurant industry is subject to extensive federal, state, local and international laws and regulations. The development and operation of restaurants depend to a significant extent on the selection and acquisition of suitable sites, which are subject to building, zoning, land use, environmental, traffic and other regulations and requirements. We are subject to licensing and regulation by state and local authorities relating to health, sanitation, safety and fire standards and the sale of alcoholic beverages. We are subject to laws and regulations relating to the preparation and sale of food, including regulations regarding product safety, nutritional content and menu labeling. We are subject to federal, state, and local laws governing employment practices and working conditions. These laws cover minimum wage rates, wage and hour practices, labor relations, paid and family leave, workplace safety, and immigration, among others. The myriad of laws and regulations being passed at the state and local level creates unique challenges for a multi-state employer as different standards apply to different locations, sometimes with conflicting requirements. We must continue to monitor and adapt our employment practices to comply with these various laws and regulations.
We also are subject to federal and state laws which prohibit discrimination and other laws regulating the design and operation of facilities, such as the ADA. Compliance with these laws and regulations can be costly and increase our exposure to litigation and governmental proceedings, and a failure or perceived failure to comply with these laws could result in negative publicity that could harm our reputation. New or changing laws and regulations relating to union organizing rights and activities may impact our operations at the restaurant level and increase our labor costs.
Provisions in the Affordable Care Act require restaurant companies such as ours to disclose calorie information on their menus and to make available more detailed nutrition information upon request; however, regulations implementing those statutory provisions have been delayed until May 2018. We do not expect to incur any material costs from compliance with these provisions, but cannot anticipate any changes to guest behavior resulting from the implementation of this portion of the law, which could have an adverse effect on our sales or results of operations.
We are subject to a variety of federal, state and local laws and regulations relating to the use, storage, discharge, emission and disposal of hazardous materials. There also has been increasing focus by United States and overseas governmental authorities on other environmental matters, such as climate change, the reduction of greenhouse gases and water consumption. This increased focus may lead to new initiatives directed at regulating a yet to be specified array of environmental matters, such as the emission of greenhouse gases, where “cap and trade” initiatives could effectively impose a tax on carbon emissions.matters. Legislative, regulatory or other efforts to combat climate change or other environmental concerns could result in future increases in the cost of raw materials, taxes, transportation and utilities, which could decrease our operating profits and necessitate future investments in facilities and equipment.
We are subject to laws relating to information security, privacy, cashless payments and consumer credit, protection and fraud. An increasing number of governments and industry groups worldwide have established data privacy laws and standards for the protection of personal information, including social security numbers, financial information (including credit card numbers), and health information. Compliance with these laws and regulations can be costly, and any failure or perceived failure to comply with thosethese laws or any breach of our systems could harm our reputation or lead to litigation, which could adversely affect our financial condition.
The impact of current laws and regulations, the effect of future changes in laws or regulations that impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or an insufficient or ineffective response to significant regulatory or public policy issues, could negatively impact our cost structure, operational efficiencies and talent availability, and therefore have an adverse effect on our results of operations. Failure to comply with the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.
We face intense competition, and if we have an insufficient focus on competition and the consumer landscape, our business, financial condition and results of operations could be adversely affected.
The full-service dining sector of the restaurant industry is intensely competitive with respect to pricing, service, location, personnel, take-out and delivery options and type and quality of food, and there are many well-established competitors. We compete within each market with national and regional restaurant chains and locally-owned restaurants. We also face growing competition as a result of the trend toward convergence in grocery, deli and restaurant services, particularly in the supermarket industry which offers “convenient meals” in the form of improved entrées, side dishes or meal preparation kits from the deli or prepared foods sections. We compete primarily on the quality, variety and value perception of menu items. The number and location of restaurants, type of brand, quality and efficiency of service, attractiveness of facilities and effectiveness of advertising and marketing programs are also important factors. We anticipate that intense competition will continue with respect to all of these factors. If we are unable to continue to compete effectively, our business, financial condition and results of operations could be adversely affected.
We are subject to changes in consumer preferences that may adversely affect demand for food at our restaurants.
Consumers have continually changing health and dietary preferences. As a result, our diverse portfolio of restaurant brands are continually challenged to evolve our menu offerings to appeal to these changing customer preferences, while maintaining our brand character and retaining popular menu items. In response to the COVID-19 pandemic, during periods of high public health risk, many consumers chose to order food To Go or for delivery rather than dining in at full-service restaurants. If COVID-19 cases increase or other future public health issues cause these preferences to increase, we may need to further adapt our offerings to respond to these additional changes. New information or changes in dietary, nutritional, allergen or health guidelines or environmental or sustainability concerns, whether issued by government agencies, academic studies, advocacy organizations or similar groups, may cause some groups of consumers to select foods other than those that are offered by our restaurants. If we fail to anticipate changing trends or other consumer preferences, our business, financial condition and results of operations could be adversely affected.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.
There has been a marked increase in the use of social media platforms and similar devices which allow individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects, or business. The harm may be immediate without affording us an opportunity for redress or correction. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy.
Many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with guests and brand relevance. As part of our marketing efforts, we rely on social media platforms and search engine marketing to attract and retain guests. We also continue to invest in other digital marketing initiatives that allow us to reach our guests across multiple digital channels and build their awareness of, engagement with, and loyalty to our brands. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues, increased employee engagement or brand recognition. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud, or out-of-date information. The inappropriate use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
A failure to identify and execute innovative marketing and guest relationship tactics, ineffective or improper use of other marketing initiatives, and increased advertising and marketing costs could adversely affect our results of operations.
If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses increase, if our advertising and promotions become less effective than those of our competitors, or if we do not adequately leverage technology and data analytic capabilities needed to generate concise competitive insight, we could experience a material adverse effect on our results of operations. A failure to sufficiently innovate, develop guest relationship initiatives, or maintain adequate and effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.
As part of our marketing efforts, we rely on social media platforms and search engine marketing to attract and retain guests. These initiatives may not be successful, and pose a variety of other risks, as discussed above under the heading: “Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.”
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 could compress our margins and adversely affect our sales and results of operations.
Our results of operations depend significantly on our ability to anticipate and react to changes in the price and availability of food, ingredients, labor, health care, utilities and other related costs over which we may have little control. Operating margins for our restaurants are subject to changes in the price and availability of food commodities, including beef, pork, chicken, seafood, cheese, butter and produce. The introduction of or changes to tariffs on imported food products, such as produce and seafood, could increase our costs and possibly impact the supply of those products. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices, menu offerings, and menu prices, and a failure to do so could adversely affect our operating results. We attempt to leverage our size to achieve economies of scale in purchasing, but there can be no assurances that we can always do so effectively. We are also subject to the general risks of inflation.
Increases in minimum wage, health care and other benefit costs may have a material adverse effect on our labor costs. We operate in many states and localities where the minimum wage is significantly higher than the federal minimum wage. Increases in minimum wage may also result in increases in the wage rates paid for non-minimum wage positions. Many states and localities are also passing laws regulating employment practices and working conditions which could have a material adverse effect on our labor costs in those areas.
Our restaurants’ operating margins are also affected by fluctuations in the price of utilities such as electricity and natural gas, whether as a result of inflation or otherwise, on which the restaurants depend for their energy supply. In addition, interruptions to the availability of gas, electric, water or other utilities, whether due to aging infrastructure, weather conditions,
fire, animal damage, trees, digging accidents or other reasons largely out of our control, may adversely affect our operations. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our sales and results of operations.
Certain economic and business factors specific to the restaurant industry and other general macroeconomic factors including unemployment, energy prices and interest rates that are largely beyond our control may adversely affect consumer behavior and our results of operations.
Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control. The full-service dining sector of the restaurant industry is affected by changes in international, national, regional and local economic conditions, seasonal fluctuation of sales volumes, consumer spending patterns and consumer preferences, including changes in consumer tastes and dietary habits, and the level of consumer acceptance of our restaurant brands. The performance of individual restaurants may also be adversely affected by factors such as demographic trends, severe weather including hurricanes, traffic patterns and the type, number and location of competing restaurants.
General economic conditions, including economic downturns related to the COVID-19 pandemic and uncertainty about the strength or pace of economic recovery, have also adversely affected our results of operations and may continue to do so. Economic recession, a protracted economic slowdown, a worsening economy, increased unemployment, increased energy prices, rising interest rates, a downgrade of the U.S. government’s long-term credit rating, imposition of retaliatory tariffs on important U.S. imports and exports or other industry-wide cost pressures have affected and can continue to affect consumer behavior and spending for restaurant dining occasions and lead to a decline in sales and earnings. Job losses, foreclosures, bankruptcies and falling home prices have caused and may continue to cause guests to make fewer discretionary purchases, and any significant decrease in our guest traffic or average profit per transaction will negatively impact our financial performance. In addition, if gasoline, natural gas, electricity and other energy costs increase, and credit card, home mortgage and other borrowing costs increase with rising interest rates, our guests may have lower disposable income and reduce the frequency of their dining occasions, may spend less on each dining occasion or may choose more inexpensive restaurants.
Furthermore, we cannot predict the effects that actual or threatened armed conflicts, terrorist attacks, efforts to combat terrorism, heightened security requirements, or a failure to protect information systems for critical infrastructure, such as the electrical grid and telecommunications systems, could have on our operations, the economy or consumer confidence generally. Any of these events could affect consumer spending patterns or result in increased costs for us due to security measures.
Unfavorable changes in the above factors or in other business and economic conditions affecting our guests could increase our costs, reduce traffic in some or all of our restaurants or impose practical limits on pricing, any of which could lower our profit margins and have a material adverse effect on our sales, financial condition and results of operations.
Climate change, adverse weather conditions and natural disasters could adversely affect our restaurant sales or results of operations.
Climatologists predict that the long-term effects of climate change and global warming will result in more severe, volatile weather or extended droughts, which could increase the frequency and duration of weather impacts on our operations. Adverse weather conditions have in the past and may continue to impact guest traffic at our restaurants, cause the temporary underutilization of outdoor patio seating and, in more severe cases such as hurricanes, tornadoes, wildfires or other natural disasters, cause temporary closures, sometimes for prolonged periods, which negatively impact our restaurant sales. Climate change and government regulation relating to climate change could result in construction delays and increased costs, interruptions to the availability or increases in the cost of utilities, and shortages or interruptions in the supply or increases to the costs of food items and other supplies.
Risks Relating to Our Business Model and Strategy
A majority of our restaurants are operated in leased properties and as a result, we are committed to long-term and non-cancelable leaseslease obligations that we may not be able to cancel if we want to cancel,close a restaurant location and we may be unable to renew the leases that we may want to extend at the end of their terms.
As of May 28, 2017, 1,60630, 2021, 1,761 of our 1,6951,834 restaurants operating in the United States and Canada operate in leased locations.locations and the leases are generally non-cancellable for some period of time. If we close a restaurant in a leased location, we may remain committed to perform our obligations under the applicable lease, which would include, among other things, payment of the base rent for the balance of the lease term. Additionally, the potential losses associated with our inability to cancel leases may result in our keeping open restaurant locations that are performing significantly below targeted levels. As a result, ongoing lease obligations at closed or underperforming restaurant locations could impair our results of operations. In addition, at the end of the lease term and expiration of all renewal periods, we may be unable to renew the lease without substantial additional cost, if at all.
As a result, we may be required to close or relocate a restaurant, which could subject us to construction and other costs and risks, and may have an adverse effect on our operating performance.
We may be subject to increased labor and insurance costs.
Our restaurant operations are subject to United States and Canadian federal, state and local laws governing such matters as minimum wages, working conditions, overtime and tip credits. As federal and state minimum wage rates increase, we may need to increase not only the wages of our minimum wage employees, but also the wages paid to employees at wage rates that are above minimum wage. Labor shortages, increased employee turnover and health care mandates could also increase our labor costs. This in turn could lead us to increase prices which could impact our sales. Conversely, if competitive pressures or other factors prevent us from offsetting increased labor costs by increases in prices, our profitability may decline. In addition, the current premiums that we pay for our insurance (including workers’ compensation, general liability, property, health, and directors’ and officers’ liability) may increase at any time, thereby further increasing our costs. The dollar amount of claims that we actually experience under our workers’ compensation and general liability insurance, for which we carry high per-claim deductibles, may also increase at any time, thereby further increasing our costs. Further, the decreased availability of property and liability insurance has the potential to negatively impact the cost of premiums and the magnitude of uninsured losses.
Our inability or failure to execute on a comprehensive business continuity plan following a major natural disaster such as a hurricane or manmade disaster, including terrorism, at our corporate facility could have a materially adverse impact on our business.
Many of our corporate systems and processes and corporate support for our restaurant operations are centralized at one Florida location.We have disaster recovery procedures and business continuity plans in place to address most events of a crisis nature, including hurricanes and other natural or manmade disasters, and back up and off-site locations for recovery of electronic and other forms of data and information. However, if we are unable to fully implement our disaster recovery plans, we may experience delays in recovery of data, inability to perform vital corporate functions, tardiness in required reporting and compliance, failures to adequately support field operations and other breakdowns in normal communication and operating procedures that could have a material adverse effect on our financial condition, results of operation and exposure to administrative and other legal claims.
Health concerns arisingWe may lose sales or incur increased costs if our restaurants experience shortages, delays or interruptions in the delivery of food and other products from food-related pandemics, outbreaksour third party vendors and suppliers.
We have a limited number of flu virusessuppliers and distributors for certain of our products and services. Shortages, delays or interruptions in the supply of food items and other supplies to our restaurants may be caused by severe weather; natural disasters such as hurricanes, tornadoes, floods, droughts, wildfires and earthquakes; labor issues or other diseases may have an adverse effect onoperational disruptions at our business.
The United States and other countries have experienced, or may experience in the future, outbreaks of viruses, such as norovirus, avian flu or “SARS,” H1N1 or “swine flu,”suppliers, vendors or other diseases. Toservice providers; the extent that a virusinability of our vendors or disease is food-borne,service providers to manage adverse business conditions, obtain credit or perceived to be food-borne, future outbreaks mayremain solvent; or other conditions beyond our control. Such shortages, delays or interruptions could adversely affect the priceavailability, quality and cost of the items we buy and the operations of our restaurants. Supply chain risk could increase our costs and limit the availability of certain food products and cause our guests to eat less of a product, or could reduce public confidence in food handling and/or public assembly. For example, public concern over avian flu may cause fear about the consumption of chicken, eggs and other products derived from poultry. The
inability to serve poultry-based products would restrict our ability to provide a variety of menu itemsthat are critical to our guests.restaurant operations. If we change a restaurant menu in response to such concerns, we may lose guests who do not prefer the new menu, and we may not be able to attract a sufficient new guest base to produce the sales needed to make the restaurant profitable. We also may have different or additional competitors for our intended guestsraise prices as a result of suchincreased food costs or shortages, it may negatively impact our sales. If we temporarily close a change andrestaurant or remove popular items from a restaurant’s menu, that restaurant may not be able to successfully compete against such competitors. Ifexperience a virus is transmittedsignificant reduction in sales during the time affected by human contact, our employeesthe shortage or guests could become infected, or could choose, or be advised, to avoid gathering in public places, any of which could adversely affect our restaurant guest traffic, and our ability to adequately staff our restaurants, receive deliveries on a timely basis or perform functions at the corporate level. We also could be adversely affected if the World Health Organization and/or the Centers for Disease Control were to restrict travel to affected geographic areas where we source our products, thus possibly impacting the continuity of supply. Additionally, jurisdictions in which we have restaurants may impose mandatory closures, seek voluntary closures or impose restrictions on operations. Even if such measures are not implemented and a virus or other disease does not spread significantly, the perceived risk of infection or significant health risk may adversely affect our business.
We face intense competition, and if we have an insufficient focus on competition and the consumer landscape, our business, financial condition and results of operations would be adversely affected.
The full-service dining sector of the restaurant industry is intensely competitive with respect to pricing, service, location, personnel, take-out and delivery options and type and quality of food, and there are many well-established competitors. We compete within each market with national and regional restaurant chains and locally-owned restaurants. We also face growing competitionthereafter as a result of the trend toward convergence in grocery, deli and restaurant services, particularly in the supermarket industry which offers “convenient meals” in the form of improved entrées and side dishes from the deli section. We compete primarily on the quality, variety and value perception of menu items. The number and location of restaurants, type of brand, quality and efficiency of service, attractiveness of facilities and effectiveness of advertising and marketing programs are also important factors. We anticipate that intense competition will continue with respect to all of these factors. If we are unable to continue to compete effectively, our business, financial condition and results of operations would be adversely affected.guests changing their dining habits
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 developingacquiring new diningrestaurant brands could result in poor financial performance.
As part of our business strategy, we intend to drive profitable sales growth by increasing same-restaurant sales at existing restaurants, continuing to expand our current portfolio of restaurant brands, and developingacquiring additional brands that can be expanded profitably. This strategy involves numerous risks, and we may not be able to achieve our growth objectives.
At existing brands, we may not be able to maintain brand relevance and restaurant operating excellence to achieve sustainable same-restaurant sales growth and warrant new unit growth. Existing brand short-term sales growth could be impacted if we are unable to drive near term guest count and sales growth, and long-term sales growth could be impacted if we fail to extend our existing brands in ways that are relevant to our guests. A failure to innovate and extend our existing brands in ways that are relevant to guests and occasions in order to generate sustainable same-restaurant traffic growth and produce non-traditional sales and earnings growth opportunities, insufficient focus on our competition, or failure to adequately address declines in the casual dining industry, could have an adverse effect on our results of operations. In addition, we may not be able to support sustained new unit growth or open all of our planned new restaurants, and the new restaurants that we open may not be profitable or as profitable as our existing restaurants. New restaurants typically experience an adjustment period before sales levels and operating margins normalize, and even sales at successful newly-opened restaurants generally do not make a significant contribution to profitability in their initial months of operation. The opening of new restaurants can also have an adverse effect on guest counts and sales levels at existing restaurants.
The ability to open and profitably operate restaurants is subject to various risks, such as the identification and availability of suitable and economically viable locations, the negotiation of acceptable lease or purchase terms for new locations, the need to obtain all required governmental permits (including zoning approvals and liquor licenses) on a timely basis, the need to comply with other regulatory requirements, the availability of necessary contractors and subcontractors, the ability to meet construction schedules and budgets, the ability to manage union activities such as picketing or hand billing which could delay construction, increases in labor and building material costs, supply chain disruptions, the availability of financing at acceptable rates and terms, changes in patterns or severity of weather or other acts of God that could result in construction delays and adversely affect the results of one or more restaurants for an indeterminate amount of time, our ability to hire and train qualified management personnel and general economic and business conditions. At each potential location, we compete with other restaurants and retail businesses for desirable development sites, construction contractors, management personnel, hourly employees and other
resources. If we are unable to successfully manage these risks, we could face increased costs and lower than anticipated sales and earnings in future periods.
We also may not be able to identify and successfully acquire and integrate additional brands or develop new business opportunities that are as profitable as our existing restaurants.
restaurants or that provide potential for further growth.
A lack of availability of suitable locations for new restaurants or a decline in the quality of the locations of our current restaurants may adversely affect our sales and results of operations.
The success of our restaurants depends in large part on their locations. As demographic and economic patterns change, current locations may not continue to be attractive or profitable. Possible declines in neighborhoods where our restaurants are located or adverse economic conditions in areas surrounding those neighborhoods could result in reduced sales in those locations. In addition, desirable locations for new restaurant openings or for the relocation of existing restaurants may not be available at an acceptable cost when we identify a particular opportunity for a new restaurant or relocation. The occurrence of one or more of these events could have a significant adverse effect on our sales and results of operations.
We may experience higher-than-anticipated costs associated with the opening of new restaurants or with the closing, relocating and remodeling of existing restaurants, which may adversely affect our results of operations.
Our sales and expenses can be impacted significantly by the number and timing of the opening of new restaurants and the closing, relocating and remodeling of existing restaurants. We incur substantial pre-opening expenses each time we open a new restaurant and other expenses when we close, relocate or remodel existing restaurants. The expenses of opening, closing, relocating or remodeling any of our restaurants may be higher than anticipated. An increase in such expenses could have an adverse effect on our results of operations.
Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.
There has been a marked increase in the use of social media platforms and similar devices which allow individuals access to a broad audience of consumers and other interested persons. Many social media platforms immediately publish the content their subscribers and participants post, often without filters or checks on accuracy of the content posted. Information posted on such platforms at any time may be adverse to our interests or may be inaccurate, each of which may harm our performance, prospects, or business. The harm may be immediate without affording us an opportunity for redress or correction. The dissemination of information online could harm our business, prospects, financial condition, and results of operations, regardless of the information’s accuracy.
Many of our competitors are expanding their use of social media and new social media platforms are rapidly being developed, potentially making more traditional social media platforms obsolete. As a result, we need to continuously innovate and develop our social media strategies in order to maintain broad appeal with guests and brand relevance. As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain guests. We also continue to invest in other digital marketing initiatives that allow us to reach our guests across multiple digital channels and build their awareness of, engagement with, and loyalty to our brands. These initiatives may not be successful, resulting in expenses incurred without the benefit of higher revenues, increased employee engagement or brand recognition. In addition, a variety of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about us, exposure of personally identifiable information, fraud, or out-of-date information. The inappropriate use of social media vehicles by our guests or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
A failure to identify and execute innovative marketing and guest relationship tactics, ineffective or improper use of other marketing initiatives, and increased advertising and marketing costs, could adversely affect our results of operations.
If our competitors increase their spending on advertising and promotions, if our advertising, media or marketing expenses increase, or if our advertising and promotions become less effective than those of our competitors, or if we do not adequately leverage technology and data analytic capabilities needed to generate concise competitive insight, we could experience a material adverse effect on our results of operations. A failure to sufficiently innovate, develop guest relationship initiatives, or maintain adequate and effective advertising could inhibit our ability to maintain brand relevance and drive increased sales.
As part of our marketing efforts, we rely on search engine marketing and social media platforms to attract and retain guests. These initiatives may not be successful, and pose a variety of other risks, as discussed below under the heading: “Our inability or failure to recognize, respond to and effectively manage the accelerated impact of social media could have a material adverse impact on our business.”
A failure to recruit, develop and retain effective leaders, the loss or shortage of personnel with key capacities and skills, or an inability to adequately monitor and proactively respond to employee dissatisfaction could impact our strategic direction and jeopardize our ability to meet our growth targets.
Our future growth depends substantially on the contributions and abilities of key executives and other employees. Our future growth also depends substantially on our ability to recruit and retain high-quality employees to work in and manage our restaurants. We must continue to recruit, retain and motivate management and other employees in order to maintain our current business and support our projected growth. Changes in senior management could expose us to significant changes in strategic direction and initiatives. A failure to maintain appropriate organizational capacity and capability to support leadership excellence (adequate resources, innovative skill sets and expectations) and build adequate bench strength required for growth, a loss of key employees or a significant shortage of high-quality restaurant employees, and an inability to adequately monitor and proactively respond to employee dissatisfaction could lead to poor guest satisfaction, higher turnover, litigation and unionization which could jeopardize our ability to meet our growth targets.
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, could compress our margins and adversely affect our sales and results of operations.
Our results of operations depend significantly on our ability to anticipate and react to changes in the price and availability of food, ingredients, labor, health care, utilities and other related costs over which we may have little control. Operating margins for our restaurants are subject to changes in the price and availability of food commodities, including shrimp, lobster, crab and other seafood, as well as beef, pork, chicken, cheese and produce. The introduction of or changes to tariffs on imported food products, such as shrimp, could increase our costs and possibly impact the supply of those products. We cannot predict whether we will be able to anticipate and react to changing food costs by adjusting our purchasing practices and menu prices, and a failure to do so could adversely affect our operating results. We attempt to leverage our size to achieve economies of scale in purchasing, but there can be no assurances that we can always do so effectively. We are subject to the general risks of inflation.
Increases in minimum wage, health care and other benefit costs may have a material adverse effect on our labor costs. We operate in many states and localities where the minimum wage is significantly higher than the federal minimum wage. Increases in minimum wage may also result in increases in the wage rates paid for non-minimum wage positions
Our restaurants’ operating margins are also affected by fluctuations in the price of utilities such as electricity and natural gas, whether as a result of inflation or otherwise, on which the restaurants depend for their energy supply. In addition, interruptions to the availability of gas, electric, water or other utilities, whether due to aging infrastructure, weather conditions, fire, animal damage, trees, digging accidents or other reasons largely out of our control, may adversely affect our operations. Our inability to anticipate and respond effectively to an adverse change in any of these factors could have a significant adverse effect on our sales and results of operations.
We may lose sales or incur increased costs if our restaurants experience shortages or interruptions in the delivery of food and other products from our third party vendors and suppliers.
Shortages or interruptions in the supply of food items and other supplies to our restaurants may be caused by inclement weather; natural disasters such as hurricanes, tornadoes, floods, droughts and earthquakes; the inability of our vendors to obtain credit in a tightened credit market or remain solvent given disruptions in the financial markets; or other conditions beyond our control. Such shortages or interruptions could adversely affect the availability, quality and cost of the items we buy and the operations of our restaurants. We may have a limited number of suppliers for certain of our products. Supply chain risk could increase our costs and limit the availability of products that are critical to our restaurant operations. If we raise prices as a result of increased food costs or shortages, it may negatively impact our sales. If we temporarily close a restaurant or remove popular items from a restaurant’s menu, that restaurant may experience a significant reduction in sales during the time affected by the shortage or thereafter as a result of our guests changing their dining habits.
Adverse weather conditions and natural disasters could adversely affect our restaurant sales.
Adverse weather conditions can impact guest traffic at our restaurants, cause the temporary underutilization of outdoor patio seating and, in more severe cases such as hurricanes, tornadoes or other natural disasters, cause temporary closures, sometimes for prolonged periods, which would negatively impact our restaurant sales. Changes in weather could result in construction delays, interruptions to the availability of utilities, and shortages or interruptions in the supply of food items and other supplies, which could increase our costs. Some climatologists predict that the long-term effects of climate change and global warming may result in more severe, volatile weather or extended droughts, which could increase the frequency and duration of weather impacts on our operations.
Volatility in the market value of derivatives we may use to hedge exposures to fluctuations in commodity and broader market prices may cause volatility in our gross margins and net earnings.
We use or may use derivatives to hedge price risk for some of our principal ingredient, labor and energy costs, including but not limited to coffee, butter, wheat, soybean oil, pork, beef, diesel fuel, gasoline and natural gas. Changes in the values of these derivatives may be recorded in earnings currently, resulting in volatility in both gross margin and net earnings. These gains and losses are reported as a component of cost of sales in our Consolidated Statements of Earnings included in our consolidated financial statements.
Certain economic and business factors specific to the restaurant industry and other general macroeconomic factors including unemployment, energy prices and interest rates that are largely beyond our control may adversely affect consumer behavior and our results of operations.
Our business results depend on a number of industry-specific and general economic factors, many of which are beyond our control. The full-service dining sector of the restaurant industry is affected by changes in international, national, regional and local economic conditions, seasonal fluctuation of sales volumes, consumer spending patterns and consumer preferences, including changes in consumer tastes and dietary habits, and the level of consumer acceptance of our restaurant brands. The performance of individual restaurants may also be adversely affected by factors such as demographic trends, severe weather including hurricanes, traffic patterns and the type, number and location of competing restaurants.
General economic conditions may also adversely affect our results of operations. Recessionary economic cycles, a protracted economic slowdown, a worsening economy, increased unemployment, increased energy prices, rising interest rates, a downgrade of the U.S. government’s long-term credit rating, the European debt crisis, or other industry-wide cost pressures could affect consumer behavior and spending for restaurant dining occasions and lead to a decline in sales and earnings. Job losses, foreclosures, bankruptcies and falling home prices could cause guests to make fewer discretionary purchases, and any significant decrease in our guest traffic or average profit per transaction will negatively impact our financial performance. In addition, if gasoline, natural gas, electricity and other energy costs increase, and credit card, home mortgage and other borrowing costs increase with rising interest rates, our guests may have lower disposable income and reduce the frequency with which they dine out, may spend less on each dining out occasion or may choose more inexpensive restaurants.
Furthermore, we cannot predict the effects that actual or threatened armed conflicts, terrorist attacks, efforts to combat terrorism, heightened security requirements, or a failure to protect information systems for critical infrastructure, such as the electrical grid and telecommunications systems, could have on our operations, the economy or consumer confidence generally. Any of these events could affect consumer spending patterns or result in increased costs for us due to security measures.
Unfavorable changes in the above factors or in other business and economic conditions affecting our guests could increase our costs, reduce traffic in some or all of our restaurants or impose practical limits on pricing, any of which could lower our profit margins and have a material adverse effect on our sales, financial condition and results of operations.
Disruptions in the financial and credit markets may adversely impact consumer spending patterns, affect the availability and cost of credit and increase pension plan expenses.
Our ability to make scheduled payments or to refinance our debt and to obtain financing for acquisitions or other general corporate and commercial purposes will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business and other factors beyond our control. Turmoil in global credit markets could adversely impact the availability of credit already arranged, and the availability and cost of credit in the future. There can be no assurances that we will be able to arrange credit on terms we believe are acceptable or that permit us to finance our business with historical margins. A lack of credit could have an adverse impact on certain of our suppliers, landlords and other tenants in retail centers in which we are located. If these issues occur, they could negatively affect our financial results. Any new disruptions in the financial markets may also adversely affect the U.S. and world economy, which could negatively impact consumer spending patterns. Changes in the capital markets could also have significant effects on our pension plan. Our pension income or expense is affected by factors including the market performance of the assets in the master pension trust maintained for the pension plan for some of our employees, the weighted average asset allocation and long-term rate of return of our pension plan assets and the discount rate used to determine the interest cost component of our net periodic pension cost. If our pension plan assets do not achieve positive rates of return, or if our estimates and assumed rates are not accurate, our earnings may decrease because net periodic pension costs would rise and we could be required to provide additional funds to cover our obligations to employees under the pension plan.
We face a variety of risks associated with doing business with franchisees and licensees.
Certain of our domestic and all of our international locations other than in Canada are operated by franchisees or licensees. We believe that we have selected high-caliber operating partners and franchisees with significant experience in restaurant operations, and are providing them with training and support. However, the probability of opening, ultimate success and quality of any franchise or licensed restaurant rests principally with the franchisee or licensee. If the franchisee or licensee does not successfully open and operate its restaurants in a manner consistent with our standards, or guests have negative experiences due to issues with food quality or operational execution, our brand values could suffer, which could have an adverse effect on our business.
We face a variety of risks associated with doing business with business partners and vendors in foreign markets.
We are making efforts to expand our brands overseas through licensing and franchising relationships. There is no assurance that international operations will be profitable or that international growth will continue. Our international operations are subject to all of the same risks associated with our domestic operations, as well as a number of additional risks. These include, among other things, international economic and political conditions, foreign currency fluctuations, and differing cultures and consumer preferences. In addition, expansion into international markets could create risks to our brands and reputation.
We also are subject to governmental regulations throughout the world that impact the way we do business with our international franchisees and vendors. These include antitrust and tax requirements, anti-boycott regulations, import/export/customs regulations and other international trade regulations, the USA Patriot Act, the Foreign Corrupt Practices Act, and applicable local law. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions, which could harm our business, results of operations and financial condition.
Volatility in the market value of derivatives we may use to hedge exposures to fluctuations in commodity and broader market prices may cause volatility in our gross margins and net earnings.
We use or may use derivatives to hedge price risk for some of our principal ingredient, labor and energy costs, including but not limited to coffee, butter, wheat, soybean oil, pork, beef, diesel fuel, gasoline and natural gas. Changes in the values of these derivatives may be recorded in earnings currently, resulting in volatility in both gross margin and net earnings. These gains and losses are reported as a component of cost of sales in our Consolidated Statements of Earnings included in our consolidated financial statements.
Volatility in the United States equity markets affects our ability to efficiently hedge exposures to our market risk related to equity-based compensation awards.
The equity markets in the U.S. were extremely volatile due to the COVID-19 pandemic and due to the unpredictability of the recovery of the United States economy as a result of the pandemic and due to government and other responses thereto. Market volatility has contributed to and may continue to contribute to fluctuations in the Company’s stock price. We have equity hedges in place to protect the Company from exposure to market risk related to future payout of equity-based compensation awards. However, because these hedges also net settle on a cash basis quarterly, we have been and may in the future be required to make cash payments at those quarterly settlement dates and the amounts of those payments are difficult to during periods of extreme volatility in the equity markets. These cash payments may ultimately be offset by payments to us from the hedge counterparties or reductions in expected payouts to employees when those equity hedges finally fully settle and the related equity awards pay out.
Failure to protect our service marks or other intellectual property could harm our business.
We regard our Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Yard HouseThe Capital Burger ®, Seasons 52®, Bahama Breeze®, Seasons 52®, Eddie V’s Prime Seafood®, Wildfish Seafood Grille®,Darden® and Darden Restaurants®service marks, and other service marks and trademarks related to our restaurant businesses, as having significant value and being important to our marketing efforts. We rely on a combination of protections provided by contracts, copyrights, patents, trademarks, service marks and other common law rights, such as trade secret and unfair competition laws, to protect our restaurants and services from infringement. We have registered certain trademarks and service marks in the United States and foreign jurisdictions. However, we are aware of names and marks identical or similar to our service marks being used from time to time by other persons. Although our policy is to oppose any such infringement, further or unknown unauthorized uses or other misappropriation of our trademarks or service marks could diminish the value of our brands and adversely affect our business. In addition, effective intellectual property protection may not be available in every country in which we have or intend to open or franchise a restaurant. Although we believe we have taken appropriate measures to protect our intellectual property, there can be no assurance that these protections will be adequate, and defending or enforcing our service marks and other intellectual property could result in the expenditure of significant resources.
General Risks
Litigation, including allegations of illegal, unfair or inconsistent employment practices, may adversely affect our business, financial condition and results of operations.
Our business is subject to the risk of litigation by employees, guests, suppliers, business partners, shareholders, government agencies or others through private actions, class actions, administrative proceedings, regulatory actions or other litigation. These actions and proceedings may involve allegations of illegal, unfair or inconsistent employment practices, including wage and hour violations and employment discrimination; guest discrimination; food safety issues including poor food quality, food-borne illness, food tampering, food contamination, and adverse health effects from consumption of various food products or high-calorie foods (including obesity); other personal injury, including claims related to COVID-19; violation of “dram shop” laws (providing an injured party with recourse against an establishment that serves alcoholic beverages to an intoxicated party who then causes injury to himself or a third party); trademark infringement; violation of the federal securities laws; or other concerns. The outcome of litigation, particularly class action lawsuits and regulatory actions, is difficult to assess or quantify. Plaintiffs in these types of lawsuits may seek recovery of very large or indeterminate amounts, and the magnitude of the potential loss relating to such lawsuits may remain unknown for substantial periods of time. The cost to defend litigation may be significant. There may also be adverse publicity associated with litigation that could decrease guest acceptance of our brands, regardless of whether the allegations are valid or we ultimately are found liable. Litigation could impact our operations in other ways as well. Allegations of illegal, unfair or inconsistent employment practices, for example, could adversely affect employee acquisition and retention. As a result, litigation may adversely affect our business, financial condition and results of operations.
Unfavorable publicity, or a failure to respond effectively to adverse publicity, could harm our reputation and adversely impact our guest counts and sales.
The good reputation of our restaurant brands is a key factor in the success of our business. Actual or alleged incidents at any of our restaurants could result in negative publicity that could harm our brands. Even incidents occurring at restaurants operated by our competitors or in the supply chain generally could result in negative publicity that could harm the restaurant industry overall and, indirectly, our own brands. Negative publicity may result from allegations of illegal, unfair or inconsistent employment practices, employee dissatisfaction, guest discrimination, illness, injury, or any of the other matters discussed above that could give rise to litigation. Regardless of whether the allegations or complaints are valid, unfavorable publicity relating to a limited number of our restaurants, or to only a single restaurant, could adversely affect public perception of the entire brand. Negative publicity also may result from health concerns including food safety and flu or virus outbreaks, publication of government or industry findings concerning food products, environmental disasters, crime incidents, data security breaches, scandals involving our employees, or operational problems at our restaurants, all of which could make our brands and menu
offerings less appealing to our guests and negatively impact our guest counts and sales. Adverse publicity and its effect on overall consumer perceptions of our brands, or our failure to respond effectively to adverse publicity, could have a material adverse effect on our business.
Disruptions in the financial and credit markets may adversely impact consumer spending patterns and affect the availability and cost of credit.
Our ability to make scheduled payments or to refinance our debt and to obtain financing for acquisitions or other general corporate and commercial purposes will depend on our operating and financial performance, which in turn is subject to prevailing economic conditions and to financial, business and other factors beyond our control. Turmoil in global credit markets could adversely impact the availability of credit already arranged, and the availability and cost of credit in the future. There can be no assurances that we will be able to arrange credit on terms we believe are acceptable or that permit us to finance our business with historical margins. A lack of credit could have an adverse impact on certain of our suppliers, landlords and other tenants in retail centers in which we are located. If these issues occur, they could negatively affect our financial results. Any new disruptions in the financial markets may also adversely affect the U.S. and world economy, which could negatively impact consumer spending patterns.
Impairment of the carrying value of our goodwill or other intangible assets could adversely affect our financial condition and consolidated results of operations.
Goodwill represents the difference between the purchase price of acquired companies and the related fair values of net assets acquired. A significant amount of judgment is involved in determining if an indication of impairment of goodwill exists. Factors may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors wouldcould have a significant impact on the recoverability of these assets and negatively affect our financial condition and consolidated results of operations. We compute the amount of impairment by comparing the implied fair value of the reporting unit goodwill with the carrying amount of that goodwill.reporting unit. We are required to record a non-cash impairment charge if the testing performed indicates that goodwill has been impaired.
We evaluate the useful lives of our other intangible assets, primarily the LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®,The Capital Grille®, Yard House® and Eddie V’s Prime Seafood® trademarks, to determine if they are definite or indefinite-lived. Reaching a determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment, and expected changes in distribution channels), the level of required maintenance expenditures, and the expected lives of other related groups of assets.
As with goodwill, we test our indefinite-lived intangible assets (primarily trademarks) for impairment annually and whenever events or changes in circumstances indicate that their carrying value may not be recoverable. We cannot accurately
predict the amount and timing of any impairmentimpairments of these or other assets. Should the value of goodwill or other intangible assets become impaired, there could be an adverse effect on our financial condition and consolidated results of operations.
Changes in tax laws and unanticipated tax liabilities could adversely affect our financial results.
We are primarily subject to income and other taxes in the United States. Our effective income tax rate and other taxes in the future could be adversely affected by a number of factors, including changes in the valuation of deferred tax assets and liabilities, changes in tax laws or other legislative changes and the outcome of income tax audits. Although we believe our tax estimates are reasonable, the final determination of tax audits could be materially different from our historical income tax provisions and accruals. The results of a tax audit could have a material effect on our results of operations or cash flows in the period or periods for which that determination is made. In addition, our effective income tax rate and our results may be impacted by our ability to realize deferred tax benefits and by any increases or decreases of our valuation allowances applied to our existing deferred tax assets.
Failure of our internal controls over financial reporting and future changes in accounting standards may cause adverse unexpected operating results, affect our reported results of operations or otherwise harm our business and financial results.
Our management is responsible for establishing and maintaining effective internal control over financial reporting. Internal control over financial reporting is a process to provide reasonable assurance regarding the reliability of financial reporting for external purposes in accordance with accounting principles generally accepted in the United States. Because of its inherent limitations, internal control over financial reporting is not intended to provide absolute assurance that we would prevent or detect
a misstatement of our financial statements or fraud. Our growth and acquisition of other restaurant companies with procedures not identical to our own could place significant additional pressure on our system of internal control over financial reporting. Any failure to maintain an effective system of internal control over financial reporting could limit our ability to report our financial results accurately and timely or to detect and prevent fraud. A significant financial reporting failure or material weakness in internal control over financial reporting could cause a loss of investor confidence and decline in the market price of our common stock, increase our costs, lead to litigation or result in negative publicity that could damage our reputation.
A change in accounting standards can have a significant effect on our reported results and may affect our reporting of transactions before the change is effective. New pronouncements and varying interpretations of pronouncements have occurred and may occur in the future. Changes to existing accounting rules or the questioningapplication of current accounting practices may adversely affect our reported financial results. Additionally, our assumptions, estimates and judgments related to complex accounting matters could significantly affect our financial results. Generally accepted accounting principles and related accounting pronouncements, implementation guidelines and interpretations with regard to a wide range of matters that are relevant to our business, including but not limited to, revenue recognition, fair value of investments, impairment of long-lived assets, leases and related economic transactions, derivatives, pension and post-retirement benefits, intangibles, self-insurance, income taxes, property and equipment, unclaimed property laws and litigation, and stock-based compensation are highly complex and involve many subjective assumptions, estimates and judgments by us. Changes in these rules or their interpretation or changes in underlying assumptions, estimates or judgments by us could significantly change our reported or expected financial performance.
Item 1B. UNRESOLVED STAFF COMMENTS
None.
Item 2.PROPERTIES
Restaurant Properties – Continuing Operations
As of May 28, 2017,30, 2021, we operated 1,6951,834 restaurants. Our company-owned restaurants are located in all 50 of the United States, Washington D.C. and Canada (consisting of 846 Olive Garden, 490 LongHorn Steakhouse, 140 Cheddar’s Scratch Kitchen, 67 Yard House, 56 The Capital Grille, 37 Bahama Breeze, 41 Seasons 52, and 18 Eddie V’s), in the following locations:
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| | | | | | |
Alabama (31) | | Illinois (53) | | Montana (2) | | Rhode Island (3) |
Alaska (2) | | Indiana (45) | | Nebraska (8) | | South Carolina (31) |
Arkansas (15) | | Iowa (14) | | Nevada (15) | | South Dakota (3) |
Arizona (42) | | Kansas (22) | | New Hampshire (9) | | Tennessee (62) |
California (99) | | Kentucky (30) | | New Jersey (49) | | Texas (175) |
Colorado (23) | | Louisiana (19) | | New Mexico (9) | | Utah (15) |
Connecticut (15) | | Maine (8) | | New York (52) | | Vermont (2) |
Delaware (6) | | Maryland (32) | | North Carolina (63) | | Virginia (51) |
District of Columbia (1) | | Massachusetts (40) | | North Dakota (7) | | Washington (21) |
Florida (192) | | Michigan (34) | | Ohio (78) | | West Virginia (13) |
Georgia (99) | | Minnesota (15) | | Oklahoma (16) | | Wisconsin (19) |
Hawaii (1) | | Mississippi (14) | | Oregon (10) | | Wyoming (2) |
Idaho (5) | | Missouri (40) | | Pennsylvania (77) | | Canada (6) |
Canada. Of these 1,6951,834 company-owned restaurants, open on May 28, 2017, 8973 were located on owned sites and 1,6061,761 were located on leased sites. The leases are classified as follows:
|
| | | | |
Land-Only Leases (we own buildings and equipment) | 778893 |
|
Ground and Building Leases | 608659 |
|
Space/In-Line/Other Leases | 220209 |
|
Total | 1,6061,761 |
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Properties – General
We purchased several adjacent parcels of vacant land in Orange County, Florida, and relocatedalso lease our restaurant support center to this site during fiscal 2010. The site includes a main headquarters building, data center and parking deck. In fiscal 2016, we completed a sale-leaseback of our restaurant support center buildings.which is located in Orlando, Florida.
Except in limited instances, our present restaurant sites and other facilities are not subject to mortgages or encumbrances securing money borrowed by us from outside sources. In our opinion, our current buildings and equipment generally are in good condition, suitable for their purposes and adequate for our current needs. See also Note 5 and Note 11 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).
Item 3.LEGAL PROCEEDINGS
See the discussion of legal proceedings contained in the third paragraph of Note 1615 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).
Item 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II
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Item 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
The principal United States market on which our common shares are traded is the New York Stock Exchange, where our shares are traded under the symbol DRI. As of June 30, 2017,2021, there were approximately 10,8158,918 holders of record of our common shares. The number of registered holders does not include holders who are beneficial owners, but whose shares are held in street name by brokers and other nominees. The information concerning the dividends and high and low intraday sales prices for our common shares traded on the New York Stock Exchange for each full quarterly period during fiscal 2017 and 2016 is contained in Note 18 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).
We have not sold any equity securities during the last fiscal year that were not registered under the Securities Act of 1933, as amended.
Since commencing our common share repurchase program in December 1995, we have repurchased a total of 188.6196.6 million shares through May 28, 201730, 2021 under authorizations from our Board of Directors. The table below provides information concerning our repurchase of shares of our common stock during the quarter ended May 28, 2017.30, 2021:
| | | | | | | | | | | | | | |
(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) |
March 1, 2021 through April 4, 2021 | 40,975 | $ | 142.17 | | 40,975 | $ | 495.8 | |
April 5, 2021 through May 2, 2021 | 69,288 | $ | 144.32 | | 69,288 | $ | 485.8 | |
May 3, 2021 through May 30, 2021 | 160,191 | $ | 139.19 | | 160,191 | $ | 463.5 | |
Total | 270,454 | $ | 140.95 | | 270,454 | $ | 463.5 | |
(1)All of the shares purchased during the quarter ended May 30, 2021 were purchased as part of our repurchase program. On March 23, 2021, our Board of Directors authorized a share repurchase program under which the Company may repurchase up to $500.0 million of its outstanding common stock. This repurchase program, which was announced publicly in a press release issued on March 25, 2021, does not have an expiration and replaced the previously 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 additional shares.
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| | | | | | | | |
(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) |
February 27, 2017 through April 2, 2017 | — | $ | — |
| — | $ | 485.1 |
|
April 3, 2017 through April 30, 2017 | 3,821 | $ | 85.18 |
| 3,821 | $ | 484.8 |
|
May 1, 2017 through May 28, 2017 | 172,238 | $ | 87.09 |
| 172,238 | $ | 469.8 |
|
Total | 176,059 | $ | 87.05 |
| 176,059 | $ | 469.8 |
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| |
(1) | All of the shares purchased during the quarter ended May 28, 2017 were purchased as part of our repurchase program. On September 29, 2016, our Board of Directors authorized a new share repurchase program under which the Company may repurchase up to $500.0 million of its outstanding common stock. This repurchase program, which was announced publicly in a press release issued on October 4, 2016, does not have an expiration and replaces the previously existing share repurchase authorizations. |
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(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. |
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(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 additional shares. |
Comparison of Five-Year Total Return
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Indexed Returns |
Company/Index | | May 2016 | | May 2017 | | May 2018 | | May 2019 | | May 2020 | | May 2021 |
Darden Restaurants, Inc. | | $ | 100.00 | | | $ | 134.64 | | | $ | 138.42 | | | $ | 194.43 | | | $ | 127.24 | | | $ | 239.95 | |
S&P 500 Stock Index | | $ | 100.00 | | | $ | 117.52 | | | $ | 134.98 | | | $ | 143.01 | | | $ | 157.20 | | | $ | 220.58 | |
S&P Composite 1500 Restaurant Sub-Index | | $ | 100.00 | | | $ | 123.31 | | | $ | 128.75 | | | $ | 162.53 | | | $ | 162.35 | | | $ | 227.43 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Indexed Returns |
Company/Index | | May 2012 | | May 2013 | | May 2014 | | May 2015 | | May 2016 | | May 2017 |
Darden Restaurants, Inc. | | $ | 100.00 |
| | $ | 103.61 |
| | $ | 101.55 |
| | $ | 139.83 |
| | $ | 165.94 |
| | $ | 223.43 |
|
S&P 500 Stock Index | | $ | 100.00 |
| | $ | 128.04 |
| | $ | 150.63 |
| | $ | 170.49 |
| | $ | 173.57 |
| | $ | 203.96 |
|
S&P Composite 1500 Restaurant Sub-Index | | $ | 100.00 |
| | $ | 112.56 |
| | $ | 125.00 |
| | $ | 148.65 |
| | $ | 163.66 |
| | $ | 201.81 |
|
The annual changes for the five-year period shown in the graph on this page are based on the assumption that $100 had been invested in Darden Restaurants, Inc. common stock, the S&P 500 Stock Index and the S&P Composite 1500 Restaurant Sub IndexSub-Index on May 27, 2012,2016, and that all dividends were reinvested. The cumulative dollar returns shown on the graph represent the value that such investments would have had for each period indicated. On November 9, 2015 we completed the spin-off of Four Corners Property Trust, Inc. (FCPT) with the pro rata distribution of one share of FCPT common stock for every three shares of Darden common stock to Darden shareholders. We reflect the effect of the spin-off of FCPT in the cumulative total return of our common stock as a reinvested dividend.
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Item 6. | SELECTED FINANCIAL DATA |
Item 6.SELECTED FINANCIAL DATA
Not applicable.
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| | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
(Dollars in millions, except per share data) | May 28, 2017 | | May 29, 2016 | | May 31, 2015 (2) | | May 25, 2014 | | May 26, 2013 |
Operating Results (1) Sales | $ | 7,170.2 |
| | $ | 6,933.5 |
| | $ | 6,764.0 |
| | $ | 6,285.6 |
| | $ | 5,921.0 |
|
Costs and expenses: | | | | | | | | | |
Food and beverage | 2,070.3 |
| | 2,039.7 |
| | 2,085.1 |
| | 1,892.2 |
| | 1,743.6 |
|
Restaurant labor | 2,265.3 |
| | 2,189.2 |
| | 2,135.6 |
| | 2,017.6 |
| | 1,892.6 |
|
Restaurant expenses | 1,265.2 |
| | 1,163.5 |
| | 1,120.8 |
| | 1,080.7 |
| | 980.4 |
|
Marketing expenses | 239.7 |
| | 238.0 |
| | 243.3 |
| | 252.3 |
| | 241.1 |
|
General and administrative | 387.7 |
| | 384.9 |
| | 430.2 |
| | 413.1 |
| | 384.1 |
|
Depreciation and amortization | 272.9 |
| | 290.2 |
| | 319.3 |
| | 304.4 |
| | 278.3 |
|
Impairments and disposal of assets, net | (8.4 | ) | | 5.8 |
| | 62.1 |
| | 16.4 |
| | 0.9 |
|
Total operating costs and expenses | $ | 6,492.7 |
| | $ | 6,311.3 |
| | $ | 6,396.4 |
| | $ | 5,976.7 |
| | $ | 5,521.0 |
|
Operating income | 677.5 |
| | 622.2 |
| | 367.6 |
| | 308.9 |
| | 400.0 |
|
Interest, net | 40.2 |
| | 172.5 |
| | 192.3 |
| | 134.3 |
| | 126.0 |
|
Earnings before income taxes | 637.3 |
| | 449.7 |
| | 175.3 |
| | 174.6 |
| | 274.0 |
|
Income tax expense (benefit) | 154.8 |
| | 90.0 |
| | (21.1 | ) | | (8.6 | ) | | 36.7 |
|
Earnings from continuing operations | $ | 482.5 |
| | $ | 359.7 |
| | $ | 196.4 |
| | $ | 183.2 |
| | $ | 237.3 |
|
Earnings (loss) from discontinued operations, net of tax expense (benefit) of $(4.2), $3.4, $344.8, $32.3 and $72.7 | (3.4 | ) | | 15.3 |
| | 513.1 |
| | 103.0 |
| | 174.6 |
|
Net earnings | $ | 479.1 |
| | $ | 375.0 |
| | $ | 709.5 |
| | $ | 286.2 |
| | $ | 411.9 |
|
Basic net earnings per share: | | | | | | | | | |
Earnings from continuing operations | $ | 3.88 |
| | $ | 2.82 |
| | $ | 1.54 |
| | $ | 1.40 |
| | $ | 1.84 |
|
Earnings (loss) from discontinued operations | $ | (0.03 | ) | | $ | 0.12 |
| | $ | 4.02 |
| | $ | 0.78 |
| | $ | 1.35 |
|
Net earnings | $ | 3.85 |
| | $ | 2.94 |
| | $ | 5.56 |
| | $ | 2.18 |
| | $ | 3.19 |
|
Diluted net earnings per share: | | | | | | | | | |
Earnings from continuing operations | $ | 3.83 |
| | $ | 2.78 |
| | $ | 1.51 |
| | $ | 1.38 |
| | $ | 1.80 |
|
Earnings (loss) from discontinued operations | $ | (0.03 | ) | | $ | 0.12 |
| | $ | 3.96 |
| | $ | 0.77 |
| | $ | 1.33 |
|
Net earnings | $ | 3.80 |
| | $ | 2.90 |
| | $ | 5.47 |
| | $ | 2.15 |
| | $ | 3.13 |
|
Average number of common shares outstanding: | | | | | | | | | |
Basic | 124.3 |
| | 127.4 |
| | 127.7 |
| | 131.0 |
| | 129.0 |
|
Diluted | 126.0 |
| | 129.3 |
| | 129.7 |
| | 133.2 |
| | 131.6 |
|
Financial Position | | | | | | | | | |
Total assets | $ | 5,504.2 |
| | $ | 4,582.6 |
| | $ | 5,994.7 |
| | $ | 7,082.7 |
| | $ | 6,917.3 |
|
Land, buildings and equipment, net | $ | 2,272.3 |
| | $ | 2,041.6 |
| | $ | 3,215.8 |
| | $ | 3,381.0 |
| | $ | 4,391.1 |
|
Working capital (deficit) | $ | (489.4 | ) | | $ | (366.8 | ) | | $ | (140.3 | ) | | $ | 357.3 |
| | $ | (652.0 | ) |
Long-term debt, less current portion | $ | 936.6 |
| | $ | 440.0 |
| | $ | 1,452.3 |
| | $ | 2,463.4 |
| | $ | 2,476.6 |
|
Stockholders’ equity | $ | 2,101.7 |
| | $ | 1,952.0 |
| | $ | 2,333.5 |
| | $ | 2,156.9 |
| | $ | 2,059.5 |
|
Stockholders’ equity per outstanding share | $ | 16.76 |
| | $ | 15.47 |
| | $ | 18.42 |
| | $ | 16.30 |
| | $ | 15.81 |
|
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Item 6. | SELECTED FINANCIAL DATA (continued) |
|
| | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended |
(Dollars in millions, except per share data) | May 28, 2017 | | May 29, 2016 | | May 31, 2015 (2) | | May 25, 2014 | | May 26, 2013 |
Other Statistics | | | | | | | | | |
Cash flows from operations (1) | $ | 918.2 |
| | $ | 820.4 |
| | $ | 874.3 |
| | $ | 555.4 |
| | $ | 594.4 |
|
Capital expenditures (1) | $ | 293.0 |
| | $ | 228.3 |
| | $ | 296.5 |
| | $ | 414.8 |
| | $ | 510.1 |
|
Dividends paid | $ | 279.1 |
| | $ | 268.2 |
| | $ | 278.9 |
| | $ | 288.3 |
| | $ | 258.2 |
|
Dividends paid per share | $ | 2.24 |
| | $ | 2.10 |
| | $ | 2.20 |
| | $ | 2.20 |
| | $ | 2.00 |
|
Advertising expense (1) | $ | 239.7 |
| | $ | 238.0 |
| | $ | 243.3 |
| | $ | 252.3 |
| | $ | 241.1 |
|
Stock price: | | | | | | | | | |
High | $ | 89.14 |
| | $ | 75.60 |
| | $ | 70.38 |
| | $ | 55.25 |
| | $ | 57.93 |
|
Low | $ | 59.50 |
| | $ | 53.38 |
| | $ | 43.56 |
| | $ | 44.78 |
| | $ | 44.11 |
|
Close | $ | 87.95 |
| | $ | 67.48 |
| | $ | 65.54 |
| | $ | 49.55 |
| | $ | 52.83 |
|
Number of employees | 178,729 |
| | 150,942 |
| | 148,892 |
| | 206,489 |
| | 206,578 |
|
Number of restaurants (1) | 1,695 |
| | 1,536 |
| | 1,534 |
| | 1,501 |
| | 1,431 |
|
| |
(1) | Consistent with our consolidated financial statements, information has been presented on a continuing operations basis. Accordingly, all discontinued operations, including the activities related to Red Lobster, have been excluded. |
| |
(2) | Fiscal year 2015 consisted of 53 weeks, while all other fiscal years consisted of 52 weeks. |
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Item 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This discussion and analysis below for Darden Restaurants, Inc. (Darden, the Company, we, us or our) should be read in conjunction with our consolidated financial statements and related financial statement notes included in Part II of this report under the caption “Item 8 - Financial Statements and Supplementary Data.” We operate on a 52/53-week fiscal year, which ends on the last Sunday in May. Fiscal 2017,2021, which ended May 28, 2017, consisted of 52 weeks. Fiscal 2016, which ended May 29, 2016,30, 2021, consisted of 52 weeks and fiscal 2015,2020, which ended May 31, 2015,2020, consisted of 53 weeks.
OVERVIEW OF OPERATIONS
Our business operates in the full-service dining segment of the restaurant industry. At May 28, 2017,30, 2021, we operated 1,6951,834 restaurants through subsidiaries in the United States and Canada under the Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Yard HouseSeasons 52®, Bahama Breeze®, Seasons 52®, and Eddie V’s Prime Seafood®and Wildfish Seafood Grille® (collectively, Eddie V’s) trademarks. We own and operate all of our restaurants in the United States and Canada, except for 92 joint venture restaurants managed by us and 4533 franchised restaurants. We also have 3324 franchised restaurants in operation located in Latin America, the Middle East and Malaysia.America. All intercompany balances and transactions have been eliminated in consolidation.
OnCOVID-19 Pandemic
For much of fiscal 2021, the COVID-19 pandemic resulted in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as public health officials encouraged social distancing and required personal protective equipment and state and local governments mandated restrictions including suspension of dine-in operations, reduced restaurant seating capacity, table spacing requirements, bar closures and additional physical barriers. Beginning in late March 2020, we operated with all of our dining rooms closed and served our guests in a To Go only or To Go and delivery format. In late April 24, 2017,2020, state and local governments began to allow us to open dining rooms at limited capacities, along with other operating restrictions.
As a result, we completedbegan fiscal 2021 with significant limitations on our operations, which over the acquisitioncourse of Cheddar’s Scratch Kitchen for $799.0 millionthe fiscal year varied widely from time to time, state to state and city to city. During November 2020, rising case rates resulted in total consideration. The acquired operationscertain jurisdictions implementing restrictions that again reduced dining room capacity or mandated the re-closure of Cheddar’s Scratch Kitchen included 140 company-owned restaurantsdining rooms. Once COVID-19 vaccines were approved and 25 franchised restaurants. The resultsmoved into wider distribution in the United States in early 2021, public health conditions improved and almost all of operations, financial position and cash flows of Cheddar’s Scratch Kitchen are included in our consolidated financial statements asthe COVID-19 restrictions on businesses have eased. As of the date of acquisition. See Note 2 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for further details.
We believe that capable operators of strong, multi-unit brands have the opportunity to increase their share of the restaurant industry’s full-service segment. Generally, the restaurant industry is considered to be comprised of three segments: quick service, fast casual, and full service. Allreport, all of our restaurants fall within the full-service segment, which is highly fragmentedwere able to open their dining rooms to some extent and includes many independent operators and small chains. We believe we have strong brands and that the breadth and depth of our experience and expertise sets us apartfew capacity restrictions or other COVID-19 restrictions remained in place in the full-service segment ofUnited States. However, it is possible additional outbreaks could require us to again reduce our capacity or limit or suspend our in-restaurant dining operations.
As we navigated through the restaurant industry. This collective capability is the product of investments over many years in areas that are criticalpandemic, we took significant steps to successadapt our business model to allow us to continue to serve guests and support our team members, including investing in our business, includingteam members through enhanced pay and benefits, streamlining our restaurant operations excellence, brand management excellence, supply chain, talent managementprocesses, simplifying our menus, and informationaccelerating the rollout of technology among other things.
With a focus on growing same-restaurant sales, we’ve implemented a “Back-to-Basics” approach rooted in strong operating fundamentals. We’re focused on improving culinary innovation and execution inside eachto all of our brands delivering attentive service to eachenhance the off-premise and every one ofin-restaurant guest experience. As our dining rooms have returned to full or close-to-full capacity, we are focused on continuing to provide a safe environment for our team members and guests, and creating an inviting and engaging atmosphere inside our restaurants. We support these priorities with smart and relevant integrated marketing programs that resonate with our guests. By delivering on these operational and brand-building imperatives, we expect to increase our market share through new restaurant and same-restaurant sales growth and deliver best-in-class profitability.
The Darden support structure enables our brands to achieve their ultimate potential by: (1) driving advantages in supply chain and general and administrative support; (2) applying insights collected from our significant guest and transactional databases to enhance guest relationships and identify new opportunities to drive sales growth; and (3) relentlessly drivingmaintaining many of the operating efficiencies and continuous improvement, operating with a sense of urgency and inspiring a performance-driven culture.
We seek to increase profits by leveraging our fixed and semi-fixed costs with sales from new restaurants and increased guest traffic and sales at existing restaurants. To evaluate our operations and assess our financial performance, we monitor a number of operating measures, with a special focus on two key factors:
Same-restaurant sales – which is a year-over-year 52-week comparison of each period’s sales volumes for restaurants open at least 16 months, including recently acquired restaurants, regardless of when the restaurants were acquired; and
Segment profit – which is restaurant sales, less food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (sometimes referred to as restaurant-level earnings).
Increasing same-restaurant sales can improve segment profit because these incremental sales provide better leverage of our fixed and semi-fixed restaurant-level costs. A restaurant brand can generate same-restaurant sales increases through increases in guest traffic, increases in the average guest check, or a combination of the two. The average guest check can be impacted by menu price changes and by the mix of menu items sold. For each restaurant brand, we gather daily sales data and regularly analyze the guest traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies. We focus on balancing our pricing and product offerings with other initiatives to produce sustainable same-restaurant sales growth. We compute same-restaurant sales using restaurants open at least 16 months because this period is generally
required for new restaurant sales levels to normalize. Sales at newly opened restaurants generally do not make a significant contribution to profitability in their initial months of operation due to operating inefficiencies. Our sales and expenses can be impacted significantly by the number and timing of new restaurant openings and closings, and relocations and remodeling of existing restaurants. Pre-opening expenses each period reflect the costs associated with opening new restaurants in current and future periods.established during fiscal 2021.
Fiscal 20172021 Financial Highlights
Our sales from continuing operations were $7.17$7.20 billion in fiscal 20172021 compared to $6.93$7.81 billion in fiscal 2016.2020. The 3.47.8 percent increasedecrease in sales from continuing operations was primarily driven by anegative combined Darden same-restaurant sales increase of 1.87.8 percent excluding Cheddar’s Scratch Kitchen, and one less week of operations in fiscal 2021, partially offset by revenue from the addition of 1930 net new company-owned restaurants plusrestaurants. The decrease in same-restaurant sales was driven by the additionimpact of 140 Cheddar’s Scratch Kitchen purchased restaurants.COVID-19.
Net earnings from continuing operations for fiscal 2017 were $482.52021 was $632.4 million ($3.834.80 per diluted share) compared with a net earningsloss from continuing operations for fiscal 20162020 of $359.7$49.2 million ($2.780.40 per diluted share). Net earningsOur results from continuing operations for fiscal 20172021 increased 34.1 percent and diluted net earnings per share from continuing operations increased 37.8 percent compared withto fiscal 2016.2020 primarily due to the economic impacts of COVID-19 which had a material adverse effect specifically on the fourth quarter of fiscal 2020, including $390.0 million of impairments.
Our net loss from discontinued operations was $3.4$3.1 million ($0.03 per diluted share) for fiscal 2017,2021, compared with a net earningsloss from discontinued operations of $15.3$3.2 million ($0.120.03 per diluted share) for fiscal 2016.2020. When combined with results from
continuing operations, our diluted net earnings per share were $3.80 and $2.90was $4.77 for fiscal 20172021 and 2016, respectively.diluted net loss per share was $0.43 for fiscal 2020.
Outlook
We expect combined Darden same-restaurant sales to increase in fiscal 2018 between 1.0 percent and 2.0 percent, and we expect fiscal 20182022 sales from continuing operations to increase between 11.528 percent and 32 percent, driven by Darden same-restaurant sales growth of 25 percent to 29 percent and approximately 35-40 new restaurants. In fiscal 2022, we expect our annual effective tax rate to be between 13.0 percent including Cheddar’s Scratch Kitchen. In fiscal 2018, we expect to open approximately 35 to 40 new restaurants, including Cheddar’s Scratch Kitchen,and 14.0 percent and we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and technology initiatives to be between $400.0$375.0 million and $450.0$425.0 million.
In June 2017, we announced a quarterly dividend of $0.63 per share, payable on August 1, 2017. Based on the $0.63 quarterly dividend declaration, our expected annual dividend is $2.52 per share, which reflects an increase of 12.5 percent compared to our fiscal 2017 annual dividend. Dividends are subject to the approval of our Board of Directors and, accordingly, the timing and amount of our dividends are subject to change.
There are significant risks and challenges that could impact our operations and ability to increase sales and earnings. The restaurant industry is intensely competitive and sensitive to economic cycles and other business factors, including changes in consumer tastes and dietary habits. Other risks and uncertainties are discussed in Part I, Item 1A of this report.
RESULTS OF OPERATIONS FOR FISCAL 2017, 20162021 AND 20152020
To facilitate review of our results of operations, the following table sets forth our financial results for the periods indicated. All information is derived from the consolidated statements of earnings for the fiscal years ended May 28, 2017, May 29, 201630, 2021 and May 31, 2015. 2020:
| | | | | | | | | | | | | | | | | | | |
| Fiscal Year Ended | | Percent Change | | |
(in millions) | May 30, 2021 | | May 31, 2020 | | 2021 vs 2020 | | |
Sales | $ | 7,196.1 | | | $ | 7,806.9 | | | (7.8) | % | | |
Costs and expenses: | | | | | | | |
Food and beverage | 2,072.1 | | | 2,240.8 | | | (7.5) | % | | |
Restaurant labor | 2,286.3 | | | 2,682.6 | | | (14.8) | % | | |
Restaurant expenses | 1,344.2 | | | 1,475.1 | | | (8.9) | % | | |
Marketing expenses | 91.1 | | | 238.0 | | | (61.7) | % | | |
General and administrative expenses | 396.2 | | | 376.4 | | | 5.3 | % | | |
Depreciation and amortization | 350.9 | | | 355.9 | | | (1.4) | % | | |
Impairments and disposal of assets, net | 6.6 | | | 221.0 | | | (97.0) | % | | |
Goodwill impairment | — | | | 169.2 | | | (100.0) | % | | |
Total operating costs and expenses | $ | 6,547.4 | | | $ | 7,759.0 | | | (15.6) | % | | |
Operating income | 648.7 | | | 47.9 | | | NM | | |
Interest, net | 63.5 | | | 57.3 | | | 10.8 | % | | |
Other (income) expense, net | 8.7 | | | 151.6 | | | (94.3) | % | | |
Earnings (loss) before income taxes | 576.5 | | | (161.0) | | | NM | | |
Income tax expense (benefit) (1) | (55.9) | | | (111.8) | | | (50.0) | % | | |
Earnings (loss) from continuing operations | $ | 632.4 | | | $ | (49.2) | | | NM | | |
Losses from discontinued operations, net of tax | (3.1) | | | (3.2) | | | (3.1) | % | | |
Net earnings (loss) | $ | 629.3 | | | $ | (52.4) | | | NM | | |
| | | | | | | |
(1) Effective tax rate | (9.7) | % | | 69.4 | % | | | | |
NM- Percentage change not considered meaningful. | | |
|
| | | | | | | | | | | | | | | | | |
| | | | | | | Percent Change |
(in millions) | May 28, 2017 | | May 29, 2016 | | May 31, 2015 | | 2017 vs 2016 | | 2016 vs 2015 |
Sales | $ | 7,170.2 |
| | $ | 6,933.5 |
| | $ | 6,764.0 |
| | 3.4 | % | | 2.5 | % |
Costs and expenses: | | | | | | | | | |
Food and beverage | 2,070.3 |
| | 2,039.7 |
| | 2,085.1 |
| | 1.5 | % | | (2.2 | )% |
Restaurant labor | 2,265.3 |
| | 2,189.2 |
| | 2,135.6 |
| | 3.5 | % | | 2.5 | % |
Restaurant expenses | 1,265.2 |
| | 1,163.5 |
| | 1,120.8 |
| | 8.7 | % | | 3.8 | % |
Marketing expenses | 239.7 |
| | 238.0 |
| | 243.3 |
| | 0.7 | % | | (2.2 | )% |
General and administrative expenses | 387.7 |
| | 384.9 |
| | 430.2 |
| | 0.7 | % | | (10.5 | )% |
Depreciation and amortization | 272.9 |
| | 290.2 |
| | 319.3 |
| | (6.0 | )% | | (9.1 | )% |
Impairments and disposal of assets, net | (8.4 | ) | | 5.8 |
| | 62.1 |
| | NM |
| | (90.7 | )% |
Total operating costs and expenses | $ | 6,492.7 |
| | $ | 6,311.3 |
| | $ | 6,396.4 |
| | 2.9 | % | | (1.3 | )% |
Operating income | 677.5 |
| | 622.2 |
| | 367.6 |
| | 8.9 | % | | 69.3 | % |
Interest, net | 40.2 |
| | 172.5 |
| | 192.3 |
| | (76.7 | )% | | (10.3 | )% |
Earnings before income taxes | 637.3 |
| | 449.7 |
| | 175.3 |
| | 41.7 | % | | 156.5 | % |
Income tax expense (benefit) (1) | 154.8 |
| | 90.0 |
| | (21.1 | ) | | 72.0 | % | | NM |
|
Earnings from continuing operations | $ | 482.5 |
| | $ | 359.7 |
| | $ | 196.4 |
| | 34.1 | % | | 83.1 | % |
Earnings (loss) from discontinued operations, net of tax | (3.4 | ) | | 15.3 |
| | 513.1 |
| | NM |
| | (97.0 | )% |
Net earnings | $ | 479.1 |
| | $ | 375.0 |
| | $ | 709.5 |
| | 27.8 | % | | (47.1 | )% |
| | | | | | | | | |
(1) Effective tax rate | 24.3 | % | | 20.0 | % | | (12.0 | )% | | | | |
NM = not meaningful | | | | | | | | | |
The following table details the number of company-owned restaurants currently reported in continuing operations, compared with the number open at the end of fiscal 20162020:
| | | | | | | | | | | | | | |
| | May 30, 2021 | | May 31, 2020 |
Olive Garden | | 875 | | | 868 | |
LongHorn Steakhouse | | 533 | | | 522 | |
Cheddar’s Scratch Kitchen | | 170 | | | 165 | |
Yard House | | 81 | | | 81 | |
The Capital Grille (1) | | 63 | | | 60 | |
Seasons 52 | | 44 | | | 44 | |
Bahama Breeze | | 42 | | | 41 | |
Eddie V’s | | 26 | | | 23 | |
Total | | 1,834 | | | 1,804 | |
(1)Includes three The Capital Burger restaurants in fiscal 2021 and the end oftwo in fiscal 2015. |
| | | | | | | | | |
| | May 28, 2017 | | May 29, 2016 | | May 31, 2015 |
Olive Garden (1) | | 846 |
| | 843 |
| | 846 |
|
LongHorn Steakhouse | | 490 |
| | 481 |
| | 480 |
|
Cheddar’s Scratch Kitchen (2) | | 140 |
| | — |
| | — |
|
Yard House | | 67 |
| | 65 |
| | 59 |
|
The Capital Grille | | 56 |
| | 54 |
| | 54 |
|
Bahama Breeze | | 37 |
| | 37 |
| | 36 |
|
Seasons 52 | | 41 |
| | 40 |
| | 43 |
|
Eddie V’s | | 18 |
| | 16 |
| | 16 |
|
Total | | 1,695 |
| | 1,536 |
| | 1,534 |
|
| |
(1) | Includes six locations in Canada for all periods presented. |
| |
(2) | Includes the 140 Cheddar’s Scratch Kitchen restaurants acquired on April 24, 2017. |
2020.
SALES
The following table presents our company-owned restaurant sales, and U.S. same-restaurant sales (SRS) by brand for the periods indicated.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal Years | | Percent Change | | SRS (1) |
(in millions) | 2017 | | 2016 | | 2015 | | 2017 vs 2016 | | 2016 vs 2015 | | 2017 vs 2016 | | 2016 vs 2015 |
Olive Garden | $ | 3,938.6 |
| | $ | 3,838.6 |
| | $ | 3,789.6 |
| | 2.6 | % | | 1.3 | % | | 2.6 | % | | 3.1 | % |
LongHorn Steakhouse | $ | 1,622.2 |
| | $ | 1,587.7 |
| | $ | 1,544.7 |
| | 2.2 | % | | 2.8 | % | | 1.2 | % | | 3.5 | % |
Cheddar’s Scratch Kitchen (2) | $ | 63.0 |
| | $ | — |
| | $ | — |
| | NM |
| | NM |
| | NA |
| | NA |
|
Yard House | $ | 530.7 |
| | $ | 507.0 |
| | $ | 469.9 |
| | 4.7 | % | | 7.9 | % | | (0.2 | )% | | 2.3 | % |
The Capital Grille | $ | 421.3 |
| | $ | 408.3 |
| | $ | 403.3 |
| | 3.2 | % | | 1.2 | % | | 0.4 | % | | 3.9 | % |
Bahama Breeze | $ | 217.8 |
| | $ | 217.9 |
| | $ | 209.2 |
| | — | % | | 4.2 | % | | 2.2 | % | | 4.8 | % |
Seasons 52 | $ | 245.0 |
| | $ | 253.8 |
| | $ | 238.6 |
| | (3.5 | )% | | 6.4 | % | | —% |
| | 4.7 | % |
Eddie V’s | $ | 114.3 |
| | $ | 105.8 |
| | $ | 96.9 |
| | 8.0 | % | | 9.2 | % | | 1.5 | % | | 1.8 | % |
| |
(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 open at least 16 months. |
| |
(2) | Cheddar’s Scratch Kitchen sales from company-owned restaurants are reflected for the period April 24, 2017 through May 28, 2017. |
The following table presents our average annual sales per restaurant by brandsegment for the periods indicated. indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Sales | | | | | | Average Annual Sales per Restaurant (2) |
| Fiscal Year Ended | | Percent Change | | | | Fiscal Year Ended |
(in millions) | May 30, 2021 | | May 31, 2020 | | SRS (1) | | May 30, 2021 | | May 31, 2020 |
Olive Garden | $ | 3,593.4 | | | $ | 4,013.8 | | | (10.5) | % | | (9.9) | % | | $ | 4.1 | | | $ | 4.5 | |
LongHorn Steakhouse | $ | 1,810.4 | | | $ | 1,701.1 | | | 6.4 | % | | 5.5 | % | | $ | 3.4 | | | $ | 3.2 | |
Fine Dining | $ | 446.9 | | | $ | 541.1 | | | (17.4) | % | | (19.2) | % | | $ | 5.3 | | | $ | 6.5 | |
Other Business | $ | 1,345.4 | | | $ | 1,550.9 | | | (13.3) | % | | (13.5) | % | | $ | 4.0 | | | $ | 4.5 | |
| $ | 7,196.1 | | | $ | 7,806.9 | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
(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 open at least 16 months.
(2)Average annual sales are calculated as net sales divided by total restaurant operating weeks multiplied by 52 weeks.weeks; excludes franchise locations.
|
| | | | | | | | | | | | |
| | Average Annual Sales per Restaurant (1) |
(in millions) | | May 28, 2017 |
| | May 29, 2016 |
| | May 31, 2015 |
|
Olive Garden | | $ | 4.7 |
| | $ | 4.5 |
| | $ | 4.4 |
|
LongHorn Steakhouse | | $ | 3.3 |
| | $ | 3.3 |
| | $ | 3.2 |
|
Yard House | | $ | 8.1 |
| | $ | 8.2 |
| | $ | 8.3 |
|
The Capital Grille | | $ | 7.6 |
| | $ | 7.6 |
| | $ | 7.2 |
|
Bahama Breeze | | $ | 6.0 |
| | $ | 5.9 |
| | $ | 5.7 |
|
Seasons 52 | | $ | 6.1 |
| | $ | 6.0 |
| | $ | 5.7 |
|
Eddie V’s | | $ | 6.8 |
| | $ | 6.6 |
| | $ | 6.3 |
|
| |
(1) | Excludes Cheddar’s Scratch Kitchen due to the proximity of the acquisition to our fiscal 2017 year end. |
Olive Garden’s sales increasedecrease for fiscal 20172021 was primarily driven by a U.S. same-restaurant sales increase.decrease and one less week of operations, partially offset by revenue from new restaurants. The increasedecrease in U.S. same-restaurant sales in fiscal 20172021 was driven by the impact of COVID-19 and resulted from a 2.412.8 percent decrease in same-restaurant guest counts offset by a 2.9 percent increase in average check combined with a 0.2 percent increase in same-restaurant guest counts. Olive Garden’s sales increase for fiscal 2016 was driven by a U.S. same-restaurant sales increase partially offset by the impact of the 53rd week in fiscal 2015. The increase in U.S. same-restaurant sales in fiscal 2016 resulted from a 2.0 percent increase in average check combined with a 1.1 percent increase in same-restaurant guest counts.check.
LongHorn Steakhouse’s sales increase for fiscal 2017 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2017 resulted from a 1.6 percent increase in average check partially offset by a 0.4 percent decrease in same-restaurant guest counts. LongHorn Steakhouse’s sales increase for fiscal 20162021 was driven by a same-restaurant sales increase combined with revenue from new restaurants, partially offset by the impactone less week of the 53rd week in fiscal 2015.operations. The increase in same-restaurant sales in fiscal 20162021 resulted from a 3.0 percent increase in average check combined with a 0.53.3 percent increase in same-restaurant guest counts.counts combined with a 2.2 percent increase in average check.
In total, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V’s, Yard House and Cheddar’s Scratch Kitchen generatedFine Dining’s sales in fiscal 2017 and 2016 that were 6.7 percent and 5.3 percent above fiscal 2016 and fiscal 2015, respectively. The sales increasedecrease for fiscal 20172021 was primarily driven by the Cheddar’s Scratch Kitchen acquisition and the incremental sales from new Yard House restaurants. Sales growth also reflected same-restaurant sales increases at The Capital Grille, Bahama Breeze and Eddie V’s in fiscal 2017, partially offset by a same-restaurant sales decrease at Yard House. The sales increase for fiscal 2016 was
primarily drivenand one less week of operations, partially offset by incremental salesrevenue from new Yard House restaurants andrestaurants. The decrease in same-restaurant sales increases at all five brands partially offsetin fiscal 2021 was driven by the impact of the 53rdCOVID-19 and resulted from a 20.7 percent decrease in same-restaurant guest counts offset by a 1.5 percent increase in average check.
Other Business’s sales decrease for fiscal 2021 was driven by a same-restaurant sales decrease and one less week of operations, partially offset by revenue from new restaurants. The decrease in same-restaurant sales in fiscal 2015.2021 was driven by the impact of COVID-19 and resulted from a 15.5 percent decrease in same-restaurant guest counts offset by a 2.0 percent increase in average check.
COSTS AND EXPENSES
The following table sets forth selected operating data as a percent of sales from continuing operations for the periods indicated. This information is derived from the consolidated statements of earnings for the fiscal years ended May 28, 2017, May 29, 201630, 2021 and May 31, 2015.2020. | | | Fiscal Years | | Fiscal Year Ended |
| 2017 | | 2016 | | 2015 | | May 30, 2021 | | May 31, 2020 |
Sales | 100.0 | % | | 100.0 | % | | 100.0 | % | Sales | 100.0 | % | | 100.0 | % |
Costs and expenses: | | | | | | Costs and expenses: | |
Food and beverage | 28.9 |
| | 29.4 |
| | 30.8 |
| Food and beverage | 28.8 | | | 28.7 | |
Restaurant labor | 31.6 |
| | 31.6 |
| | 31.6 |
| Restaurant labor | 31.8 | | | 34.4 | |
Restaurant expenses | 17.6 |
| | 16.8 |
| | 16.6 |
| Restaurant expenses | 18.7 | | | 18.9 | |
Marketing expenses | 3.3 |
| | 3.4 |
| | 3.6 |
| Marketing expenses | 1.3 | | | 3.0 | |
General and administrative expenses | 5.4 |
| | 5.5 |
| | 6.4 |
| General and administrative expenses | 5.5 | | | 4.8 | |
Depreciation and amortization | 3.8 |
| | 4.2 |
| | 4.7 |
| Depreciation and amortization | 4.9 | | | 4.6 | |
Impairments and disposal of assets, net | (0.1 | ) | | 0.1 |
| | 0.9 |
| Impairments and disposal of assets, net | 0.1 | | | 2.8 | |
Goodwill impairment | | Goodwill impairment | — | | | 2.2 | |
Total operating costs and expenses | 90.6 | % | | 91.0 | % | | 94.6 | % | Total operating costs and expenses | 91.0 | % | | 99.4 | % |
Operating income | 9.4 |
| | 9.0 |
| | 5.4 |
| Operating income | 9.0 | % | | 0.6 | % |
Interest, net | 0.6 |
| | 2.5 |
| | 2.8 |
| Interest, net | 0.9 | | | 0.7 | |
Earnings before income taxes | 8.9 |
| | 6.5 |
| | 2.6 |
| |
Other (income) expense, net | | Other (income) expense, net | 0.1 | | | 1.9 | |
Earnings (loss) before income taxes | | Earnings (loss) before income taxes | 8.0 | % | | (2.1) | % |
Income tax expense (benefit) | 2.2 |
| | 1.3 |
| | (0.3 | ) | Income tax expense (benefit) | (0.8) | | | (1.4) | |
Earnings from continuing operations | 6.7 |
| | 5.2 |
| | 2.9 |
| |
Earnings from discontinued operations, net of taxes | — |
| | 0.2 |
| | 7.6 |
| |
Net earnings | 6.7 | % | | 5.4 | % | | 10.5 | % | |
Earnings (loss) from continuing operations | | Earnings (loss) from continuing operations | 8.8 | % | | (0.6) | % |
|
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Yard House,Seasons 52, Bahama Breeze Seasons 52 and Eddie V’s in North Americathe U.S. and Canada 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 65 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for further details.