DARDEN RESTAURANTS, INC.
FORM 10-K
FISCAL YEAR ENDED MAY 28, 20172023
TABLE OF CONTENTS
| PART I | Page | |||||||
| Item 1. | ||||||||
| Item 1A. | ||||||||
| Item 1B. | ||||||||
| Item 2. | ||||||||
| Item 3. | ||||||||
| Item 4. | ||||||||
| PART | ||||||||
| Item | ||||||||
| Item 6. | ||||||||
| Item 7. | ||||||||
| Item 7A. | ||||||||
| Item 8. | ||||||||
| Item 9. | ||||||||
| Item 9A. | ||||||||
| Item 9B. | ||||||||
| PART III | ||||||||
| Item 10. | ||||||||
| Item 11. | ||||||||
| Item 12. | ||||||||
| Item 13. | ||||||||
| Item 14. | ||||||||
| PART IV | ||||||||
| Item 15. | ||||||||
Cautionary Statement Regarding Forward-Looking Statements
Statements set forth in or incorporated into this report regarding the expected net increase in sales from continuing operations, same-restaurant sales, the number of our restaurants, U.S. same-restaurant sales, total sales growth, diluted net earnings per share growth,our annual effective tax rate and capital expenditures in fiscal 2018,2024, and all other statements that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan,” “outlook” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. In addition to the risks and uncertainties of ordinary business obligations, and those described in information incorporated into this report, the forward-looking statements contained in this report are subject to the risks and uncertainties described in Item 1A below under the heading “Risk Factors.”
PART I
Item 1. BUSINESS
Introduction
Darden Restaurants, Inc. is a full-service restaurant company, and as of May 28, 2017,2023, we owned and operated 1,6951,914 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 House®, Seasons 52®, Bahama Breeze®, and Eddie V’s Prime Seafood®, and Wildfish Seafood GrilleThe Capital Burger®(collectively, Eddie V’s) trademarks. We served over 334 million meals in fiscal 2017. As of May 28, 2017,2023, we also had 7869 restaurants operated by independent third parties pursuant to area development and franchise agreements. The following table details the number of Darden ownedcompany-owned and operated restaurants, as well as those operated under franchise agreements, as of May 28, 2017.2023:
| Number of restaurants | Olive Garden | LongHorn Steakhouse | Cheddar’s Scratch Kitchen | Yard House (1) | The Capital Grille | Seasons 52 | Bahama Breeze | Eddie V’s | The Capital Burger | Total | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Owned and operated: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States | 897 | 562 | 180 | 86 | 62 | 44 | 42 | 29 | 4 | 1,906 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Canada | 8 | — | — | — | — | — | — | — | — | 8 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 905 | 562 | 180 | 86 | 62 | 44 | 42 | 29 | 4 | 1,914 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Franchised: | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| United States (2) | 11 | 18 | 4 | — | — | — | 1 | — | — | 34 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Latin America | 29 | — | — | — | 2 | — | — | — | — | 31 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asia | 2 | — | — | — | — | — | — | — | — | 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Middle East | 1 | — | — | — | — | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| The Caribbean | 1 | — | — | — | — | — | — | — | — | 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Total | 44 | 18 | 4 | — | 2 | — | 1 | — | — | 69 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| Number of restaurants | Olive Garden | LongHorn Steakhouse | Cheddar’s Scratch Kitchen | Yard House | The Capital Grille | Bahama Breeze | Seasons 52 | Eddie V’s (2) | Total | |||||||||
| Owned and operated: | ||||||||||||||||||
| United States (1) | 840 | 490 | 140 | 67 | 56 | 37 | 41 | 18 | 1,689 | |||||||||
| Canada | 6 | — | — | — | — | — | — | — | 6 | |||||||||
| Total | 846 | 490 | 140 | 67 | 56 | 37 | 41 | 18 | 1,695 | |||||||||
| Franchised: | ||||||||||||||||||
| United States (3) | 5 | 15 | 25 | — | — | — | — | — | 45 | |||||||||
| Middle East | 4 | 2 | — | — | — | — | — | — | 6 | |||||||||
| Central and South America | 20 | 2 | — | — | 1 | — | — | — | 23 | |||||||||
| Malaysia | 2 | 2 | — | — | — | — | — | — | 4 | |||||||||
| Total | 31 | 21 | 25 | — | 1 | — | — | — | 78 | |||||||||
(1)Includes two restaurants that are owned jointly by us and third parties, and managed by us.
(2)Includes Puerto Rico and Guam.
Darden Restaurants, Inc. is a Florida corporation incorporated in March 1995, and is the parent company of GMRI, Inc., also a Florida corporation. GMRI, Inc. and certain other of our subsidiaries own and operate our restaurants. GMRI, Inc. was originally incorporated in March 1968 as Red Lobster Inns of America, Inc. We were acquired by General Mills, Inc. in 1970 and became a separate publicly held company in 1995 when General Mills distributed all of our outstanding stock to the stockholders of General Mills. Our principal executive offices and restaurant support center are located at 1000 Darden Center Drive, Orlando, Florida 32837, telephone (407) 245-4000. Our corporate website address is www.darden.com. We make our reports on Forms 10-K, 10-Q and 8-K, and Section 16 reports on Forms 3, 4 and 5, and all amendments to those reports available free of charge on our website the same day as the reports are filed with or furnished to the Securities and Exchange Commission. Information on our website is not deemed to be incorporated by reference into this Form 10-K. Unless the context indicates otherwise, all references to “Darden,” “the Company,” “we,” “our” or “us” include Darden Restaurants, Inc., GMRI, Inc. and our respective subsidiaries.
On April 24, 2017,June 14, 2023, we completed our acquisition of Ruth’s Hospitality Group, Inc., a Delaware corporation (Ruth’s), for $21.50 per share in cash. Ruth’s is the owner, operator and franchisor of restaurants under the Ruth’s Chris Steak House® trademark. As the acquisition of Cheddar’s Scratch Kitchen for $799.0 million in total consideration. The acquired operations of Cheddar’s Scratch Kitchen included 140 company-owned restaurants and 25 franchised restaurants. The results of operations, financial position and cash flows of Cheddar’s Scratch Kitchen are included inwas subsequent to our fiscal year ended on May 28, 2023, there was no impact to our consolidated financial statements asor operations. As of the dateclosing, Ruth’s Chris Steak House had 155 locations around the globe, including 81 company-owned or company-operated restaurants and 74 franchised restaurants. Because our acquisition of acquisition. For additional information, see Note 2Ruth’s was completed during the first quarter of fiscal 2024, the description of the Notes to Consolidated Financial Statements (Part II,business throughout this Item 81 does not include a description of this report).Ruth’s Chris Steak House unless specifically referenced herein.
We have a 52/53 week fiscal year ending the last Sunday in May. Our fiscal year 20172023 ended May 28, 20172023 and consisted of 52 weeks, fiscal 20162022 ended May 29, 20162022 and consisted of 52 weeks, and fiscal 20152021 ended May 31, 201530, 2021 and consisted of 5352 weeks.
The following description of our business should be read in conjunction with the information in Part II of this report under the caption “Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Item 8 - Financial Statements and Supplementary Data.”
1
COVID-19 Pandemic and Other Impacts to our Operating Environment
During fiscal 2022, increases in the number of cases of COVID-19 throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, subjected some of our restaurants to other COVID-19-related restrictions such as mask and/or vaccine requirements for team members, guests or both.Along with COVID-19, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and other cost of goods sold; these events further impacted the availability of team members needed to staff our restaurants and caused additional disruptions in our product supply chain. During fiscal 2023, these events have continued to impact our operating results as wage and cost inflation continue to exceed recent norms.
The ongoing efforts to recover from the effects of the COVID-19 pandemic and its variants, along with other geopolitical and macroeconomic events could impact our restaurants through wage inflation, staffing challenges, product cost inflation and disruptions in the supply chain that impact our restaurants’ ability to obtain the products needed to support their operations.
Segment Information
We manage our restaurant brands in North America as operating segments. The brands operate principally in the U.S. within full-service dining. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. We have four reportable segments: 1) Olive Garden, 2) LongHorn Steakhouse, 3) Fine Dining (which, as of the end of fiscal 2023, includes The Capital Grille and Eddie V’s) and 4) Other Business (which includes Cheddar’s Scratch Kitchen, Yard House, Bahama Breeze, Seasons 52, Bahama Breeze, consumer-packaged goodsThe Capital Burger and results from our franchise revenues)operations). External sales are derived principally from food and beverage sales, we do not rely on any major customers as a source of sales and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments. Additional information about our segments, including financial information, is included in Note 6 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).
Restaurant Brands
Olive Garden
Olive Garden is an internally-developed brand and is the largest full-service dining Italian restaurant operator in the United States. Olive Gardenoffers a variety of Italian foods featuring fresh ingredients presented simply with a focus on flavor and quality, and a broad selection of imported Italian wines. In 1982, Olive Garden opened its first restaurant in Orlando, Florida.
Most dinner menu entrée prices range from $9.00$11.00 to $23.00,$21.00, and most lunch menu entrée prices range from $7.00$9.00 to $13.00.$11.00. The price of each entrée includes as much fresh salad or soup and breadsticks as a guest desires. During fiscal 2017,2023, the average check per person (defined as total sales divided by number of entrées sold) was approximately $18.00,$22.50, with alcoholic beverages accounting for 6.65.3 percent of Olive Garden’s sales. Olive Garden maintains different menus for dinner and lunch and different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a smaller portioned, lower-priced children’s menu.
LongHorn Steakhouse
LongHorn Steakhouse is a full-service steakhouse restaurant brand with locations primarily in the eastern United States, operating in an atmosphere inspired by the American West. LongHorn Steakhouse opened its first restaurant in 1981 and we acquired LongHorn Steakhouse in October 2007 as part of theRARE Hospitality International, Inc. (RARE) acquisition.LongHorn Steakhouse restaurants feature a variety of menu items including signature fresh steaks and chicken, as well as salmon, shrimp, ribs, pork chops burgers and prime rib.burgers.
Most dinner menu entrée prices range from $12.00$13.50 to $25.00,$38.00, and most lunch menu entrée prices range from $8.00$9.00 to $15.50.$12.00. The price of most entrées includes a side and/or salad and as much freshly baked bread as a guest desires. During fiscal 2017,2023, the average check per person was approximately $21.00,$25.50, with alcoholic beverages accounting for 9.68.9 percent of LongHorn Steakhouse’s sales. LongHorn Steakhouse maintains different menus for dinner and lunch and different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a smaller portioned, lower-priced children’s menu.
Cheddar’s Scratch Kitchen
Cheddar’s Scratch Kitchen is a full servicefull-service restaurant brand operating primarily in Texas and throughout the southern, midwesternmid-western and mid-Atlantic regions of the United States. The casual dining menu features modern classics and American favorites cooked from scratch. Cheddar’s Scratch Kitchen opened its first restaurant in 1979 and we acquired Cheddar’s Scratch Kitchen in April 2017.
2
Most lunch and dinner menu entrée prices atrange from $8.00 to $23.00. During fiscal 2023, the average check per person was approximately $18.00, with alcoholic beverages accounting for 7.9 percent of Cheddar’s Scratch Kitchen range from $5.99 to $19.99.Kitchen’s sales. Cheddar’s Scratch Kitchen features different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a smaller portioned, lower-priced children’s menu.
Yard House
Yard House is a full-service restaurant brand operating in metropolitan areas across the United States and is known for great food, classic rock and over 100 draft beer offerings. The American menu includes more than 100 chef driven items with a wide range of appetizers, snacks, burgers and steaks, street tacos, salads, sandwiches fresh fish and a generous selection of vegetarian dishes. Yard House opened its first restaurant in 1996 and we acquired Yard House in August 2012.
Yard House design elements create a contemporary, yet casual, “come as you are” environment. Most lunch and dinner menu entrée prices at Yard House range from $9.00$10.00 to $33.00.$48.00. During fiscal 2017,2023, the average check per person was approximately $32.00,$34.50, with alcoholic beverages accounting for 36.632.6 percent of Yard House’s sales. Yard House maintains different menus and selections of craft beers across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a smaller portioned, lower-priced children’s menu.
The Capital Grille
The Capital Grille is a fine dining restaurant brand with locations primarily in major metropolitan cities in the United States featuring relaxed elegance and style. The Capital Grille opened its first restaurant in 1990 and we acquired The Capital Grille in October 2007 as part of the RARE acquisition.Nationally acclaimed for dry aging steaks on the premises, The Capital Grille is also known for fresh seafood flown in daily and culinary specials created by its chefs. Thethe restaurants feature an award-winning wine list offering over 350 selections, personalized service, a comfortable club-like atmosphere, and premiere private dining rooms.
Most dinner menu entrée prices range from $18.00$35.00 to $62.00$95.00 and most lunch menu entrée prices range from $18.00$20.00 to $39.00.$49.00. During fiscal 2017,2023, the average check per person was approximately $79.50,$97.00, with alcoholic beverages accounting for 28.8 26.9 percentof The Capital Grille’s sales. The Capital Grille offers different menus for dinner and lunch and varies its wine list to reflect geographic differences in consumer preferences, prices and selections.
Seasons 52
Seasons 52 is an internally-developed full-service restaurant brand with a casually sophisticated, fresh grill and wine bar that offers a seasonally changing menu with all items under 595 calories. The menu includes an international collection of wines, featuring 52 wines available by the glass, along with exceptional signature handcrafted cocktails. In 2003, Seasons 52 opened its first restaurant in Orlando, Florida.
Most lunch and dinner menu entrée prices range from $13.00 to $49.50. During fiscal 2023, the average check per person was approximately $49.50, with alcoholic beverages accounting for 23.8 percent of Seasons 52’s sales. Seasons 52 maintains an all-day menu in addition to different seasonal offerings, a pared-down lunch menu and a happy-hour menu.
Bahama Breeze
Bahama Breeze is an internally-developed full-service restaurant brand operating primarily in the eastern United States that offers guests the feeling of a Caribbean escape, with food, drinks and atmosphere found in the islands. The menu features distinctive, Caribbean-inspired fresh seafood, chicken and steaks as well as handcrafted tropical cocktails.In 1996, Bahama Breeze opened its first restaurant in Orlando, Florida.
Most lunch and dinner menu entrée prices at Bahama Breeze range from $7.50$9.00 to $30.00.$25.00. During fiscal 2017,2023, the average check per person was approximately $28.50,$32.50, with alcoholic beverages accounting for 23.821.8 percent of Bahama Breeze’s sales. Bahama Breeze maintains different menus across its trade areas to reflect geographic differences in consumer preferences, prices and selections, as well as a smaller portioned, lower-priced children’s menu.
Eddie V’s
Eddie V’s is a fine dining restaurant brand with locations in major metropolitan cities in the United States, with a sophisticated and contemporary ambiance, featuring live music trios nightly music in the V-Lounge. The menu is inspired by the great classic restaurantsV Lounge. Dishes are artistically prepared and feature an ever-changing array of New Orleans, San Franciscoseasonal seafood, along with critically acclaimed prime steaks, hand cut and Boston, with an emphasis on prime seafood creations, USDA prime beef and chops, and fresh oyster bar selections.broiled to perfection. The atmosphere provides a comfortablean alluring dining experience “where your pleasure is our sole intention.” Wildfish Seafood Grille isreminiscent of a full-service restaurant providing a diningmodern day Gatsby, infusing an indulgent experience focused on comfort and excitement with fresh seafood daily and high quality USDA steaks.an irresistible vibe. Eddie V’s opened its first restaurant in 2000 and we acquired eight Eddie V’s Prime Seafood restaurants and three Wildfish Seafood Grille restaurants in November 2011.
3
Most dinner menu entrée prices at Eddie V’s range from $20.00$38.00 to $61.00.$107.00. During fiscal 2017,2023, the average check per person was approximately $93.00,$114.50, with alcoholic beverages accounting for 30.729.1 percent of Eddie V’s sales. Eddie V’s maintains different menus for dinner and varies its wine list to reflect geographic differences in consumer preferences, prices and selections.
The Capital Burger
The Capital Burger is an internally created, development-stage full-service restaurant concept with locations primarily in major metropolitan cities in the United States that offers guests a luxe burger experience. The Capital Burger opened its first restaurant in 2018. The menu features burgers made with a proprietary beef blend, sandwiches and appetizers. It is a bar-centric concept offering local craft beers, a unique wine list and spiked shakes. Multiple items take from the parentage of The Capital Grille, like the signature Stoli Doli, a pineapple-infused martini.
Most lunch and dinner menu entrée prices range from $17.00 to $39.00. During fiscal 2023, the average check per person was approximately $34.00, with alcoholic beverages accounting for 30.5 percent of The Capital Burger’s sales. The Capital Burger maintains an all-day menu in addition to a happy hour menu.
The following table shows our restaurant growth over the last five years and lists the number of restaurants owned and operated by each of our brands and concept as of the end of the fiscal years indicated.indicated and excludes Ruth’s Chris Steak House since the information provided below is as of May 28, 2023. The table excludes our restaurants operated by independent third parties pursuant to area development and franchise agreements. The final column in the table lists our total sales from continuing operations for the fiscal years indicated.
Fiscal Year | Olive Garden | LongHorn Steakhouse | Cheddar’s Scratch Kitchen | Yard House | The Capital Grille | Bahama Breeze | Seasons 52 | Eddie V’s | Total Restaurants (1)(2) | Total Sales (in millions) | ||||||||||
| 1998 | 466 | 3 | 469 | $1,386.9 | ||||||||||||||||
| 1999 | 464 | 6 | 470 | $1,490.2 | ||||||||||||||||
| 2000 | 469 | 11 | 480 | $1,615.7 | ||||||||||||||||
| 2001 | 477 | 16 | 493 | $1,780.0 | ||||||||||||||||
| 2002 | 496 | 22 | 518 | $1,966.1 | ||||||||||||||||
| 2003 | 524 | 25 | 1 | 550 | $2,097.5 | |||||||||||||||
| 2004 | 543 | 23 | 1 | 567 | $2,359.3 | |||||||||||||||
| 2005 | 563 | 23 | 3 | 589 | $2,542.4 | |||||||||||||||
| 2006 | 582 | 23 | 5 | 610 | $2,775.8 | |||||||||||||||
| 2007 | 614 | 23 | 7 | 644 | $2,965.2 | |||||||||||||||
| 2008 | 653 | 305 | 32 | 23 | 7 | 1,020 | $3,997.5 | |||||||||||||
| 2009 | 691 | 321 | 37 | 24 | 8 | 1,081 | $4,593.1 | |||||||||||||
| 2010 | 723 | 331 | 40 | 25 | 11 | 1,130 | $4,626.8 | |||||||||||||
| 2011 | 754 | 354 | 44 | 26 | 17 | 1,196 | $4,980.3 | |||||||||||||
| 2012 | 792 | 386 | 46 | 30 | 23 | 11 | 1,289 | $5,327.1 | ||||||||||||
| 2013 | 828 | 430 | 44 | 49 | 33 | 31 | 12 | 1,431 | $5,921.0 | |||||||||||
| 2014 | 837 | 464 | 52 | 54 | 37 | 38 | 15 | 1,501 | $6,285.6 | |||||||||||
| 2015 | 846 | 480 | 59 | 54 | 36 | 43 | 16 | 1,534 | $6,764.0 | |||||||||||
| 2016 | 843 | 481 | 65 | 54 | 37 | 40 | 16 | 1,536 | $6,933.5 | |||||||||||
| 2017 | 846 | 490 | 140 | 67 | 56 | 37 | 41 | 18 | 1,695 | $7,170.2 | ||||||||||
| Fiscal Year | Olive Garden | LongHorn Steakhouse | Cheddar’s Scratch Kitchen | Yard House | The Capital Grille | Seasons 52 | Bahama Breeze | Eddie V’s | The Capital Burger | Total Restaurants | Total Sales (in millions) (1) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2019 | 866 | 514 | 161 | 79 | 57 | 44 | 42 | 21 | 1 | 1,785 | $8,510.4 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2020 | 868 | 522 | 165 | 81 | 58 | 44 | 41 | 23 | 2 | 1,804 | $7,806.9 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 875 | 533 | 170 | 81 | 60 | 44 | 42 | 26 | 3 | 1,834 | $7,196.1 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 884 | 546 | 172 | 85 | 62 | 45 | 42 | 28 | 3 | 1,867 | $9,630.0 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 905 | 562 | 180 | 86 | 62 | 44 | 42 | 29 | 4 | 1,914 | $10,487.8 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(1) During fiscal 2020 and 2021, many of our locations experienced restrictions on operations, including the ability to have dine-in operations and were subject to vaccine and/or mask mandates as a result of the COVID-19 pandemic.
Strategy
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.full-service. All of our restaurants fall within the full-service segment, which is highly fragmented 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 apart in the full-service restaurant industry. This collective capability is the product of investments over many years in areas that are critical to success in our business, including restaurant operations excellence, brand management excellence, supply chain, talent management and information technology, among other things.
Recent and Planned Restaurant Growth
During fiscal 2017,2023, we added 15947 net new company-owned restaurants in the United States, including the Cheddar’s Scratch Kitchen company-owned restaurants acquired in April 2017.States. Our fiscal 20172023 actual restaurant openings and closings, fiscal 20182024 projected openings, and approximate capital investment, square footage and dining capacity, by brand (4), are shown below.below:
| Actual - Fiscal 2023 | Projected - Fiscal 2024 (4) | Pro-Forma New Restaurants (4) | |||||||||||||||||||||||||||||||||||||||||||||
| Restaurant Openings | Restaurant Closings | New Restaurant Openings | Capital Investment Range (1) (in millions) | Approximate Square Feet (2) | Approximate Dining Seats (3) | ||||||||||||||||||||||||||||||||||||||||||
| Olive Garden | 22 | 1 | 18-22 | $4.0 | - | $5.8 | 7,700 | 250 | |||||||||||||||||||||||||||||||||||||||
| LongHorn Steakhouse | 18 | 2 | 15-18 | $3.3 | - | $4.6 | 5,700 | 180 | |||||||||||||||||||||||||||||||||||||||
| Cheddar’s Scratch Kitchen | 10 | 2 | 4-5 | $4.0 | - | $5.3 | 6,000 | 210 | |||||||||||||||||||||||||||||||||||||||
| Yard House | 2 | 1 | 2-3 | $7.0 | - | $9.2 | 11,000 | 360 | |||||||||||||||||||||||||||||||||||||||
| The Capital Grille | 2 | 2 | 2-4 | $8.5 | - | $10.0 | 10,000 | 320 | |||||||||||||||||||||||||||||||||||||||
| Seasons 52 | 1 | 2 | 0-1 | $6.0 | - | $7.2 | 9,000 | 250 | |||||||||||||||||||||||||||||||||||||||
| Bahama Breeze | — | — | 1-2 | $5.6 | - | $7.0 | 9,000 | 350 | |||||||||||||||||||||||||||||||||||||||
| Eddie V’s | 1 | — | 2-3 | $8.5 | - | $10.0 | 10,000 | 320 | |||||||||||||||||||||||||||||||||||||||
| Totals | 56 | 10 | 46-53 | ||||||||||||||||||||||||||||||||||||||||||||
| Actual - Fiscal 2017 | Projected - Fiscal 2018 | Pro-Forma New Restaurants | |||||||||||||
| Restaurant Openings | Acquired (1) | Restaurant Closings | New Restaurant Openings | Capital Investment Range (2) (in millions) | Square Feet (3) | Dining Seats (4) | |||||||||
| Olive Garden | 7 | — | 4 | 10 - 12 | $3.5 | - | $4.5 | 7,700 | 240 | ||||||
| LongHorn Steakhouse | 10 | — | 1 | 10 - 13 | $2.5 | - | $3.5 | 5,600 | 190 | ||||||
| Cheddar’s Scratch Kitchen | — | 140 | — | 4 - 5 | $3.0 | - | $4.0 | 8,000 | 280 | ||||||
| Yard House | 3 | — | 1 | 2 - 4 | $6.0 | - | $7.0 | 11,500 | 380 | ||||||
| The Capital Grille | 2 | — | — | 1 - 2 | $5.0 | - | $6.0 | 9,500 | 250 | ||||||
| Bahama Breeze | 1 | — | 1 | 1 - 2 | $4.5 | - | $5.5 | 10,700 | 360 | ||||||
| Seasons 52 | 1 | — | — | 1 - 2 | $5.0 | - | $6.0 | 9,000 | 300 | ||||||
| Eddie V’s | 2 | — | — | 1 - 2 | $5.5 | - | $6.5 | 9,000 | 180 | ||||||
| Totals | 26 | 140 | 7 | 35 - 40 | |||||||||||
(1)Includes cash investments for building, equipment, furniture and other construction costs; excludes internal capitalized overhead, pre-opening expenses, tenant allowance and future lease obligations. Olive Garden, LongHorn Steakhouse and Cheddar’s Scratch Kitchen capital investments are based on costs associated with land-only leases; Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s capital investments are based on ground and building leases. Actual costs can vary significantly depending on the specific location.
(2)Includes all space under the roof, including the coolers and freezers; based on primary prototypes.
(3)Includes bar dining seats and patio seating, but excludes bar stools.
(4)The Capital Burger is a development-stage concept with limited pro-forma information, and as such, it is excluded from this table. We project opening approximately 3-4 Ruth’s Chris Steak House restaurants during fiscal 2024 which is captured in the total projected new restaurant openings above.
While our objective is to continue to expand all of our restaurant brands, the actual number of openings for each of our brands for fiscal 20182024 will depend on many factors, including our ability to recruit and train restaurant management and hourly personnel, locate appropriate sites, negotiate acceptable purchase or lease terms, obtain necessary local governmental permits, and complete construction, and recruit and train restaurant management and hourly personnel. Our objective is to continue to expand all of our restaurant brands.construction.
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 180250 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.
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 2023. Since the recovery from the COVID-19 pandemic, the staffing levels at many of our restaurants have returned to pre-pandemic levels.
Each Olive Garden restaurant is led by a general manager,General Manager, and each LongHorn Steakhouse and Cheddar’s Scratch Kitchen restaurant is led by a managing partner.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 managersGeneral Managers or managing partnersManaging Partners report to a directorDirector of operationsOperations who is responsible for approximately sevenfive to teneleven restaurants. Each directorDirector of operations of Olive Garden and LongHorn SteakhouseOperations 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 KitchenYard House and Bahama Breeze restaurant is led by a general manager or managing partner.General Manager, and each The Capital Grille, Seasons 52, Eddie V’s and The Capital Burger restaurant is led by a Managing Partner. Each also has twothree to six managersten additional managers. Each Yard House, The Capital Grille, Seasons 52 and Eddie V’s restaurant has one executive chef and one to two sous chefs. The Capital Burger restaurant has one sous chef and each Bahama Breeze restaurant has one to three culinary managers. In addition, each restaurant typically employs an average of 65between 60 to 150200 hourly team members, most of whom work part-time. The general managerGeneral Manager or managing partnerManaging Partner of each restaurant reports directly to an area director,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 inclusive 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.
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
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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.
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.
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. We actively engage with and monitor our suppliers, both in person and remotely, including hosting virtual visits and audits. 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 52Eddie V’s and Eddie V’sThe Capital Burger do not use television advertising, but rely on local and digital marketing.Our restaurants appeal to a broad spectrum of consumers and we use advertising and marketing 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 2017,2023, 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. payment systems across all of our 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
We prioritize 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 team members to perform in today’s environment and develop the frequencyskills to meet tomorrow’s needs;
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•Reward - Invest in compelling programs that recognize team members when goals are achieved and further motivate our culture of visitswinning; and offer
•Retain - Keep team 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 on each of these imperatives.
Hire. We are committed to attracting, engaging, developing and retaining a workforce that mirrors the diversity of our guests flexibility when making dining decisions. Asand the communities in which we implement new platforms, we are integrating them into all guest touch points including restaurant operating systemsoperate. We track a variety of workforce statistics to enable compelling personalized guest experiences.
| Total team members (hourly and salaried) | 187,384 | ||||
| Total number of hourly team members | 177,164 | ||||
| Percent of hourly team members – female | 58% | ||||
| Percent of hourly team members – members of racial or ethnic minority groups | 55% | ||||
| Total number of new hires of hourly team members during fiscal 2023 | 182,882 | ||||
| Percent of hourly new hires – female | 57% | ||||
| Percent of hourly new hires – members of racial or ethnic minority groups | 57% | ||||
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 regularly invest in our team members’ careers 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.In fiscal 2023, 81% of the participants in our restaurant support center facilities in Orlando, Florida, Irvine, CaliforniaManager In Training program 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 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 employee assistance program for team members and their families.
We regularly review our pay and benefits programs to identify and implement enhancements to the ways we reward our team members.In January 2022, we announced that each hourly restaurant team member company-wide would earn a minimum hourly wage of at least $12 per hour, inclusive of tip income. Also in January 2022, we began a new "First Rewards” program to provide a phantom stock grant worth $10,000 to newly promoted General Managers and Managing Partners, numbering approximately 300 annually, to reward these high-performing leaders and provide immediate alignment between their compensation and shareholder value creation.Further, in fiscal 2023, the Darden Restaurants Foundation introduced the Next Course Scholarship program for children and dependents of our team members and in its inaugural year, the program awarded scholarships worth $3,000 each to nearly 100 children or dependents of Darden team members.In January 2023, we introduced a new benefit for restaurant team members called Fast Fluency – which offers Spanish-speaking team members the chance to learn English for free.
None of our team members are covered by a collective bargaining agreement.We consider our employeeteam member relations to be good.good, with our employee engagement levels nearly double the United States average, as recently surveyed by Gallup, Inc.
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
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donate as little as 10 cents from each paycheck to the Darden Dimes fund, which raisesraised and grants moregranted over $2.0 million in fiscal 2023.
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 strive to hire the best individuals and retain them by fostering an environment of respect and inclusion, 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.
Darden’s consolidated turnover rate for hourly team members during fiscal 2023 was 93%, one of the lowest rates in the restaurant industry. Each of our brands experienced a turnover rate during fiscal 2023 that was lower than $1.5 million annually.the most recent relevant casual dining or fine dining turnover rate for their segment of the industry as reported in The People ReportTM by Black Box IntelligenceTM.Darden’s consolidated restaurant management turnover rate of 19% was also significantly lower than the broader restaurant industry benchmark. Our executive leadership (vice president and above) has an average of over 17 years of experience with Darden, while our restaurant General Managers and Managing Partners have an average of 14 years of experience 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. We leverage public cloud computing where appropriate to enhance our capabilities and to leverage scale. 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 facilityannually and providing on-site power backup. We periodically engage third parties to perform cybersecurity audits utilizing the National Institute of Standards and Technology framework. We also engage third parties to conduct 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 of our restaurants.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 casual dining brands and for most of our specialty restaurant brands. We successfully leverage these digital capabilities to address evolving 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 these risks on a periodic basis. We also perform annual and ongoing cybersecurity awareness training for our restaurant 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 capabilites
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capabilities 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” in the form of improved entrées and side dishes from the deli section. In addition, improvingexpanding product offerings at fast casual restaurants and quick-service restaurants and expansionthe convenience of home delivery services, together with negative economic conditions, could cause consumers to choose less expensive alternatives.alternatives or reduce the frequency of their restaurant visits. 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 HouseSeasons 52®, Bahama Breeze®, Seasons 52®, Eddie V’s Prime Seafood®, The Capital Burger®, Ruth’s Chris Steak House®, 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, 2017,2023, we operated 1,6951,914 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 28, 2023, franchisees operated 4534 franchised restaurants in the United States and Canada.
•Mexico,
•Central and South America (Brazil, Colombia, Costa Rica, Dominican Republic, Ecuador, El Salvador Guatemala, Honduras, Nicaragua and Panama),
•Philippines,
•Aruba, and
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, 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 fiscal quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
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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.
During fiscal 2017, 12.62023, 11.2 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 the 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.
tip compliance to ensure that we are taking the appropriate steps to continue to meet our TRAC obligations.In 2023, the IRS issued a proposed revenue procedure that would establish the Service Industry Tip Compliance Agreement (SITCA) program and eliminate TRAC. We are working closely with the IRS as it finalizes its guidance.
We are subject to federal and state environmental regulations, but these rules have not had a material effect on our operations. During fiscal 2017,2023, 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 continueare subject to monitor the status of thefederal and state regulations relating to employer-provided health care reform law enacted by Congress in March of 2010 (Affordable Care Act) and relatedinsurance, but these rules and regulations.have not had a material effect on our operations.
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.
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Sustainability
The 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 us fromDuring fiscal 2023, we remained focused on our competitors,climate strategy, restaurant sustainability metrics and a contributorDarden’s Animal Welfare Council. We will continue to adapt our business success. Oursustainability approach is bothwith 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 to lower
Darden manages energy and water conservation within our operating costs over time, insulaterestaurant operations and engages with our supply chain partners on sustainability topics including climate, deforestation and help us attractanimal welfare. In fiscal 2023, Darden expanded its assessment and retaindisclosure of environmental metrics in our operations and extended value chain. Additional environmental indicators, including energy and water consumption, waste generation and diversion, as well as Scope 3 greenhouse gas emissions, are reported on our website at www.darden.com/our-impact/communities/sustainability.
Greenhouse Gas (GHG) Emissions(1) | ||||||||||||||||||||
| Fiscal Year Ended | ||||||||||||||||||||
| (in metric tons CO2e) | May 29, 2022 | May 30, 2021 | May 31, 2020 | |||||||||||||||||
Average Per Restaurant (2) | 412 | 373(3) | 424 | |||||||||||||||||
| Total - Scope 1 and 2 | 769,811(4) | 683,294 | 774,200 | |||||||||||||||||
(1)GHG reporting is for the most qualified employees - all increasingfiscal year preceding the successyear of this report and is not available for the current financial reporting period. Above emissions are for owned and operated restaurants only.Franchises are accounted for in our Scope 3 inventory.
(2)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.
(3)Fiscal 2021 emissions reductions resulted from business impacts of the COVID-19 pandemic during fiscal 2021.
(4)APEX Companies, LLC. provided a statement of third-party verification to a limited assurance level for the above stated values for fiscal year 2022 in accordance with ISO Standard 14064-3 Second edition 2019-4 on greenhouse gases- Part 3: Specification with guidance for the verification and validation of GHG statements.
We shared Darden’s Food Principles in 2016 to outline our 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 continue to work with our supplier partners to make progress toward these commitments and we provide annual updates on our efforts in the Sustainability section of our business.website, www.darden.com.
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.
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 our 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, we2023, the Foundation awarded approximately $3.8$4.2 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
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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 Foundation continued to invest in mobile food pantry programs through its long-standing partnership with Feeding America.In 2003, we beganfiscal 2023, the Foundation awarded a $2.0 million grant to help fund 10 additional refrigerated box trucks to help Feeding America 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.The most recent donation marks a total of $16.3 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 most of our restaurants we collect surplus, wholesome food that is not served to guests and, rather than discarding the food, wethey prepare it for donation to local nonprofit feeding partners. In fiscal 2017,2023, Darden contributed over 7approximately 5.3 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 4.4 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, makingyear.
In fiscal 2023, as part of Darden’s continued commitment to inclusion and diversity, the Darden HarvestFoundation donated an additional $500,000 to Boys & Girls Clubs of America to support the development and implementation of programming that will help youth embrace diversity and combat racial discrimination. The 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 key partnational 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 2023 contribution of $250,000 also supports the 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’ Annual Disaster Giving 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 2023, the Foundation provided $500,000 to the American Red Cross for the program. In addition to financial support, our restaurants donate meals to feed first responders and victims of natural disasters. The Foundation also provided $250,000 to nonprofit organizations such as Volunteer Florida Foundation to support Hurricane Ian relief and recovery efforts.
In fiscal 2023, the Foundation launched the Next Course Scholarship program to help the children or dependents of Darden team members reach their educational goals. The Foundation has partnered with Scholarship America to administer the initiative, which provided scholarships for post-secondary education to children or dependents of eligible full-time and part-time Darden team members for the 2023-24 academic year. As a result, nearly 100 children or dependents of Darden team members were awarded scholarships worth $3,000 each. These team members represent more than 80 different restaurants across seven of our goal to one day send zero waste to landfills. brands and 32 states.
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.
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.
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Risks Relating to Inflation and Macroeconomic Disruption
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, fuel and other related costs over which we may have little control. We have experienced and continue to experience inflationary conditions with respect to most or all of these costs during fiscal 2023. 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 continue to 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. The market for labor in the United States is competitive and has resulted in pressure on wages and may continue to do so in the future. Increases in minimum wage and market pressure 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, geopolitical impacts 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 and their impacts on 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 slow global recovery from the economic downturns related to the COVID-19 pandemic, geopolitical conditions 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. Economic uncertainty has 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 remain at the current elevated levels or increase further, 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, including the ongoing armed conflict in the Ukraine, 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.
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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.
Risks Related to Human Capital
The inability to successfully integrate Cheddar’s Scratch Kitchen into our business could harmhire, train, reward and retain restaurant team members and determine and maintain adequate staffing may impact our ability to achieve the cost savingsour operating, growth and other benefits we expect to be able to realize in the Cheddar’s Scratch Kitchen operations.financial objectives.
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 performance expectations and 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 objectives and support our projected growth. Unplanned 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 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 and other benefit or working condition regulations also have increased and may continue to increase our labor costs. These increased costs could, in turn, lead us to increase our menu prices which could impact our sales. Conversely, if competitive pressures or other factors prevent us from offsetting increased labor costs by increases in menu 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.
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. As
The United States and other countries have experienced, or may experience in the future, outbreaks of viruses, such as the novel coronavirus that caused COVID-19, 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 serve poultry-based products would restrict our ability to provide 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 new menu, and 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.
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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 continuoustimely basis or perform functions at the corporate level. We also could be adversely affected if the World Health Organization and/or The United States 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 secure cyber network could result in substantial harm or inconvenience to us or an individual. This could include the theft of our intellectual property or trade secrets, or the improper use of personal informationa 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.
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
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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 Relating to the Acquisition of Ruth’s
The inability to successfully integrate Ruth’s Chris Steak House into our business could harm our ability to achieve the sales growth, cost savings and other benefits we expect to be able to realize in the Ruth’s Chris Steak House operations.
On June 14, 2023, we completed our acquisition of Ruth’s, owner, operator and franchisor of Ruth’s Chris Steak House restaurants. Our integration of the entire brand. Negative publicity alsoRuth’s Chris Steak House 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 Ruth’s Chris Steak House with our operations may include, among others: retaining and integrating management and other key employees and franchisees; integrating information, communications and other systems; and managing the growth of the combined company.
Even if we successfully integrate the business of Ruth’s Chris Steak House into our operations, there can be no assurance that we will realize the anticipated benefits. We acquired Ruth’s Chris Steak House 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 health concerns including food safetyincreased efficiency in purchasing, distribution and flu outbreaks, publication of government other restaurant and corporate support. Increased competition and/or industry findings concerning food products, environmental disasters, crime incidents, data privacy breaches, scandals involvingdeterioration in business conditions may limit our employees, or operational problems at our restaurants, all of which could make our brandsability to expand this business. As such, we may not be able to realize the synergies, goodwill, business opportunities and menu offerings less appealinggrowth prospects anticipated in connection with the acquisition.
Risks Related 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.the 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, employee benefit regulations, 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 dependdepends 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.
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.condition or results of operations.
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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 are 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. During periods of high public health risk such as the COVID-19 pandemic, many consumers choose to order food To Go or for delivery rather than dining in at full-service restaurants. If 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.
The proliferation and utilization of existing and innovative social media platforms allows individuals and businesses 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.
Our competitors are constantly 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.
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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.”
Climate change, adverse weather conditions and natural disasters could adversely affect our restaurant sales or results of operations.
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 property damage and temporary closures, sometimes for prolonged periods, which could negatively impact our restaurant sales or costs. Climate change and government regulation relating to climate change, including regulation of greenhouse gas emissions, 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, 1,6062023, 1,839 of our 1,6951,914 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 andthat may have an adverse effect on our operating performance.
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 operationoperations and exposure to administrative and other legal claims.
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; macroeconomic conditions resulting in disruptions to the shipping and transportation industries; labor issues such as increased costs or worker shortages or other diseases may have an adverse effect onoperational disruptions
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at our business.
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 or delays 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
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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. Increases in the time to procure or shortages of construction labor and materials and capital equipment, or permitting delays, may impact the time it takes to open new restaurants. An increase in such expenses or delays in the timeline to complete construction could have an adverse effect on our results of operations.
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 we 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 United States have experienced recent periods of volatility due to the impacts of the COVID-19 pandemic, macroeconomic conditions, geopolitical concerns and the unpredictability of the recovery of the United States economy as a result of these factors. 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 predict 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 HouseSeasons 52®, Bahama Breeze®, Seasons 52®, Eddie V’s Prime Seafood®, Wildfish Seafood GrilleRuth’s Chris Steak House®, The Capital Burger ®, 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
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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; 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.
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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
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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, 2017,2023, we operated 1,6951,914 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:
Canada. Of these 1,6951,914 company-owned restaurants, open on May 28, 2017, 8975 were located on owned sites and 1,6061,839 were located on leased sites. The leases are classified as follows:
| Land-Only Leases (we own buildings and equipment) | |||||
| Ground and Building Leases | |||||
| Space/In-Line/Other Leases | |||||
| Total | |||||
We purchased several adjacent parcels of vacant landalso lease our Restaurant Support Center which is located in Orange County, Florida, and relocated 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.Orlando, Florida.
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.
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PART II
Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Market [and Dividend] Information
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, 2017,2023, there were approximately 10,8158,213 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.
We have a history of paying cash dividends. Any future dividend payments remain subject to the discretion of our Board of Directors.
Share Repurchases
Since commencing our common share repurchase program in December 1995, we have repurchased a total of 188.6207.7 million shares through May 28, 20172023 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, 2017.2023:
| (Dollars in millions, except per share data) | Total Number of Shares Purchased (1) (2) | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs | Maximum Dollar Value of Shares That May Yet Be Purchased Under the Plans or Programs (3) | ||||||||||
| February 27, 2023 through April 2, 2023 | 237,715 | $147.23 | 237,715 | $652.2 | ||||||||||
| April 3, 2023 through Apri1 30, 2023 | 2,004 | $151.93 | 2,004 | $651.9 | ||||||||||
| May 1, 2023 through May 28, 2023 | — | — | — | $651.9 | ||||||||||
| Quarter-to-Date | 239,719 | $147.27 | 239,719 | $651.9 | ||||||||||
(1)All of the shares purchased during the quarter ended May 28, 2023 were purchased as part of our repurchase program. On June 22, 2022, our Board of Directors authorized a new share repurchase program under which we may repurchase up to $1.0 billion of our outstanding common stock. This repurchase program, which was announced publicly in a press release issued on June 23, 2022, does not have an expiration and replaces the existing share repurchase authorization.
(2)The number of shares purchased includes shares withheld for taxes on vesting of restricted stock, shares delivered or deemed to be delivered to us on tender of stock in payment for the exercise price of options, and shares reacquired pursuant to tax withholding on option exercises. These shares are included as part of our repurchase program and deplete the repurchase authority granted by our Board. The number of shares repurchased excludes shares we reacquired pursuant to forfeiture of restricted stock.
(3)Repurchases are subject to prevailing market prices, may be made in open market or private transactions, and may occur or be discontinued at any time. There can be no assurance that we will repurchase any 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 | ||
Comparison of Five-Year Total Return
| Indexed Returns | ||||||||||||||||||||||||||||||||||||||
| Company/Index | May 2018 | May 2019 | May 2020 | May 2021 | May 2022 | May 2023 | ||||||||||||||||||||||||||||||||
| Darden Restaurants, Inc. | $ | 100.00 | $ | 140.46 | $ | 91.92 | $ | 173.35 | $ | 157.33 | $ | 208.64 | ||||||||||||||||||||||||||
| S&P 500 Stock Index | $ | 100.00 | $ | 105.95 | $ | 116.47 | $ | 163.42 | $ | 163.95 | $ | 168.68 | ||||||||||||||||||||||||||
| S&P Composite 1500 Restaurant Sub-Index | $ | 100.00 | $ | 126.24 | $ | 126.09 | $ | 176.64 | $ | 160.94 | $ | 197.37 | ||||||||||||||||||||||||||
| 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, 2012,2018, 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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| 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 | |||||||||
| 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 | ||||||||||||||
Item 6.RESERVED
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 2017,2023, which ended May 28, 2017,2023, and fiscal 2022, which ended May 29, 2022, each consisted of 52 weeks. Fiscal 2016, which ended May 29, 2016, consisted of 52 weeks and fiscal 2015, which ended May 31, 2015, consisted of 53 weeks.
OVERVIEW OF OPERATIONS
Our business operates in the full-service dining segment of the restaurant industry. At May 28, 2017,2023, we operated 1,6951,914 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 The Capital Burger® 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 4534 franchised restaurants. We also have 3335 franchised restaurants in operation located in Latin America, Asia, the Middle East and Malaysia.the Caribbean. All intercompany balances and transactions have been eliminated in consolidation.
During fiscal 2022, increases in the acquisitionnumber of Cheddar’s Scratch Kitchen for $799.0 millioncases of COVID-19 throughout the United States including the Omicron variant which significantly impacted our restaurants in total consideration. The acquired operations of Cheddar’s Scratch Kitchen included 140 company-owned restaurants and 25 franchised restaurants. The results of operations, financial position and cash flows of Cheddar’s Scratch Kitchen are included in our consolidated financial statements 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.
The ongoing efforts to recover from the effects of the COVID-19 pandemic and small chains. We believe we have strong brandsits variants, along with other geopolitical and that the breadthmacroeconomic events, could impact our restaurants through wage inflation, staffing challenges, product cost inflation and depth of our experience and expertise sets us apartdisruptions in the full-service segment of the restaurant industry. This collective capability is the product of investments over many years in areas that are critical to success in our business, including restaurant operations excellence, brand management excellence, supply chain talent management and information technology, among other things.
Fiscal 20172023 Financial Highlights
•Net earnings from continuing operations increased to $983.5 million in fiscal 2016.2023 from $954.7 million in fiscal 2022, a 3.0 percent increase.
Outlook
On June 14, 2023, we completed our acquisition of Ruth’s, a Delaware corporation, for $21.50 per share in cash. Ruth’s is the owner, operator and franchisor of Ruth’s Chris Steak House restaurants.
We expect combined Darden same-restaurant sales to increase in fiscal 2018 between 1.0 percent and 2.0 percent, and we expect fiscal 20182024 sales from continuing operations to increase between 11.59.5 percent and 13.010.5 percent, including Cheddar’s Scratch Kitchen.driven by the addition of the Ruth’s Chris Steak House restaurants to our portfolio, Darden same-restaurant sales growth of 2.5 percent to 3.5 percent, and sales from approximately 50 new restaurant openings. In fiscal 2018,2024, we expect our annual effective tax rate to open approximately 35be 12 percent to 40 new restaurants, including Cheddar’s Scratch Kitchen,12.5 percent and we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and technology initiatives to be between $400.0$550 million and $450.0$600 million.
RESULTS OF OPERATIONS FOR FISCAL 2017, 20162023 AND 20152022
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, 2017,2023 and May 29, 2016 and May 31, 2015. 2022:
| Fiscal Year Ended | Percent Change | ||||||||||||||||||||||
| (in millions) | May 28, 2023 | May 29, 2022 | 2023 v. 2022 | ||||||||||||||||||||
| Sales | $ | 10,487.8 | $ | 9,630.0 | 8.9% | ||||||||||||||||||
| Costs and expenses: | |||||||||||||||||||||||
| Food and beverage | 3,355.9 | 2,943.6 | 14.0% | ||||||||||||||||||||
| Restaurant labor | 3,346.3 | 3,108.8 | 7.6% | ||||||||||||||||||||
| Restaurant expenses | 1,702.2 | 1,582.6 | 7.6% | ||||||||||||||||||||
| Marketing expenses | 118.3 | 93.2 | 26.9% | ||||||||||||||||||||
| General and administrative expenses | 386.1 | 373.2 | 3.5% | ||||||||||||||||||||
| Depreciation and amortization | 387.8 | 368.4 | 5.3% | ||||||||||||||||||||
| Impairments and disposal of assets, net | (10.6) | (2.0) | NM | ||||||||||||||||||||
| Total operating costs and expenses | $ | 9,286.0 | $ | 8,467.8 | 9.7% | ||||||||||||||||||
| Operating income | $ | 1,201.8 | $ | 1,162.2 | 3.4% | ||||||||||||||||||
| Interest, net | 81.3 | 68.7 | 18.3% | ||||||||||||||||||||
| Earnings before income taxes | $ | 1,120.5 | $ | 1,093.5 | 2.5% | ||||||||||||||||||
| Income tax expense (1) | 137.0 | 138.8 | (1.3)% | ||||||||||||||||||||
| Earnings from continuing operations | $ | 983.5 | $ | 954.7 | 3.0% | ||||||||||||||||||
| Losses from discontinued operations, net of tax | (1.6) | (1.9) | (15.8)% | ||||||||||||||||||||
| Net earnings | $ | 981.9 | $ | 952.8 | 3.1% | ||||||||||||||||||
| (1) Effective tax rate | 12.2 | % | 12.7 | % | |||||||||||||||||||
| NM- Percentage change not considered meaningful. | |||||||||||||||||||||||
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| 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 2016 and the end of fiscal 2015.2022:
| 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 | ||||||
| May 28, 2023 | May 29, 2022 | |||||||||||||
| Olive Garden | 905 | 884 | ||||||||||||
| LongHorn Steakhouse | 562 | 546 | ||||||||||||
| Cheddar’s Scratch Kitchen | 180 | 172 | ||||||||||||
| Yard House | 86 | 85 | ||||||||||||
| The Capital Grille | 62 | 62 | ||||||||||||
| Seasons 52 | 44 | 45 | ||||||||||||
| Bahama Breeze | 42 | 42 | ||||||||||||
Eddie V’s | 29 | 28 | ||||||||||||
| The Capital Burger | 4 | 3 | ||||||||||||
| Total | 1,914 | 1,867 | ||||||||||||
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 | % | |||||||||
| Sales | Average Annual Sales per Restaurant (2) | ||||||||||||||||||||||||||||||||||
| Fiscal Year Ended | Percent Change | Fiscal Year Ended | |||||||||||||||||||||||||||||||||
| (in millions) | May 28, 2023 | May 29, 2022 | SRS (1) | May 28, 2023 | May 29, 2022 | ||||||||||||||||||||||||||||||
| Olive Garden | $ | 4,877.8 | $ | 4,503.9 | 8.3 | % | 6.7 | % | $ | 5.5 | $ | 5.1 | |||||||||||||||||||||||
| LongHorn Steakhouse | $ | 2,612.3 | $ | 2,374.3 | 10.0 | % | 7.4 | % | $ | 4.7 | $ | 4.4 | |||||||||||||||||||||||
| Fine Dining | $ | 830.8 | $ | 776.2 | 7.0 | % | 5.7 | % | $ | 9.2 | $ | 8.8 | |||||||||||||||||||||||
| Other Business | $ | 2,166.9 | $ | 1,975.6 | 9.7 | % | 7.0 | % | $ | 6.0 | $ | 5.7 | |||||||||||||||||||||||
| $ | 10,487.8 | $ | 9,630.0 | ||||||||||||||||||||||||||||||||
(1)Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants that have been open, and operated by Darden, for at least 16 months.
(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 | ||||||
Olive Garden’s sales increase for fiscal 20172023 was primarily driven by a U.S. same-restaurant sales increase.increase combined with revenue from new restaurants. The increase in U.S. same-restaurant sales in fiscal 20172023 resulted from a 2.4an 8.4 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 2.01.6 percent increase in average check combined with a 1.1 percent increasedecrease in same-restaurant guest counts.
LongHorn Steakhouse’s sales increase for fiscal 20172023 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 20172023 resulted from a 1.61.2 percent increase in same-restaurant guest counts combined with a 6.1 percent increase in average check partially offset by a 0.4 percent decrease in same-restaurant guest counts. LongHorn Steakhouse’scheck.
Fine Dining’s sales increase for fiscal 20162023 was driven by a same-restaurant sales increase combined with revenue from new restaurants, partially offset by the impact of the 53rd week in fiscal 2015.restaurants. The increase in same-restaurant sales in fiscal 20162023 resulted from a 3.0 percent increase in average check combined with a 0.5 percent increase in same-restaurant guest counts.counts combined with a 5.1 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, 2017,2023 and May 29, 2016 and May 31, 2015.2022.
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| Fiscal Years | Fiscal Year Ended | ||||||||||||||||||
| 2017 | 2016 | 2015 | May 28, 2023 | May 29, 2022 | |||||||||||||||
| 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 | 32.0 | 30.6 | |||||||||||||
| Restaurant labor | 31.6 | 31.6 | 31.6 | Restaurant labor | 31.9 | 32.3 | |||||||||||||
| Restaurant expenses | 17.6 | 16.8 | 16.6 | Restaurant expenses | 16.2 | 16.4 | |||||||||||||
| Marketing expenses | 3.3 | 3.4 | 3.6 | Marketing expenses | 1.1 | 1.0 | |||||||||||||
| General and administrative expenses | 5.4 | 5.5 | 6.4 | General and administrative expenses | 3.7 | 3.9 | |||||||||||||
| Depreciation and amortization | 3.8 | 4.2 | 4.7 | Depreciation and amortization | 3.7 | 3.8 | |||||||||||||
| Impairments and disposal of assets, net | (0.1 | ) | 0.1 | 0.9 | Impairments and disposal of assets, net | (0.1) | — | ||||||||||||
| Total operating costs and expenses | 90.6 | % | 91.0 | % | 94.6 | % | Total operating costs and expenses | 88.5 | % | 87.9 | % | ||||||||
| Operating income | 9.4 | 9.0 | 5.4 | Operating income | 11.5 | % | 12.1 | % | |||||||||||
| Interest, net | 0.6 | 2.5 | 2.8 | Interest, net | 0.8 | 0.7 | |||||||||||||
| Earnings before income taxes | 8.9 | 6.5 | 2.6 | Earnings before income taxes | 10.7 | % | 11.4 | % | |||||||||||
| Income tax expense (benefit) | 2.2 | 1.3 | (0.3 | ) | Income tax expense (benefit) | 1.3 | 1.4 | ||||||||||||
| Earnings from continuing operations | 6.7 | 5.2 | 2.9 | Earnings from continuing operations | 9.4 | % | 9.9 | % | |||||||||||
| Earnings from discontinued operations, net of taxes | — | 0.2 | 7.6 | ||||||||||||||||
| Net earnings | 6.7 | % | 5.4 | % | 10.5 | % | |||||||||||||
Total operating costs and expenses from continuing operations were $6.49$9.29 billion in fiscal 2017, $6.312023 and $8.47 billion in fiscal 2016 and $6.40 billion in fiscal 2015. As a percent of sales, total costs and expenses from continuing operations were 90.6 percent in fiscal 2017, 91.0 percent in fiscal 2016 and 94.6 percent in fiscal 2015.2022.
Fiscal 20172023 Compared to Fiscal 2016:2022:
•Food and beverage costs decreased as a percent of sales as a result of pricing, cost savings initiatives and food cost deflation, primarily beef.
•Restaurant labor costs decreased as a percent of sales leverage.primarily due to a 1.5% impact from sales leverage and a 1.2% impact from increased productivity, partially offset by a 2.3% impact from inflation.
•Marketing expenses increased as a percent of sales primarily due to increased marketing and media.
•General and administrative expenses decreased as a percent of sales primarily due to expenses incurred in fiscal 2016 related to the real estate plan implementation partially offset by a pension settlement charge and expenses incurred in fiscal 2017 related to the acquisition and integration of Cheddar’s Scratch Kitchen.0.3% impact from sales leverage.
•Depreciation and amortization expense decreased as a percent of sales primarily from the impact of the real estate transactions.
•Impairments and disposal of assets, net decreased as a percent of sales primarily due to higher restaurant-related impairments in fiscal 2015.
INCOME TAXES
The effective income tax rates for fiscal 2017, 20162023 and 20152022 for continuing operations were 24.3 percent, 20.012.2 percent and (12.0)12.7 percent, respectively. The increase in our effectiveDuring fiscal 2023, we had income tax rate for fiscal 2017 compared to fiscal 2016 and for fiscal 2016 compared to fiscal 2015 was primarily due to higherexpense of $137.0 million on earnings before income taxes. Our effective tax rate from continuing operations was negative in fiscal 2015 primarily dueof $1.12 billion compared to the impactincome tax expense of certain tax credits$138.8 million on lower earnings before income taxes of $1.09 billion in fiscal 2022. This change was primarily driven primarily by costs incurred relatedthe impact of federal tax credits.
The Inflation Reduction Act (IRA) was enacted on August 16, 2022. The IRA includes provisions imposing a 1 percent excise tax on share repurchases that occur after December 31, 2022 and introduces a 15 percent corporate alternative minimum tax (CAMT) on adjusted financial statement income. The IRA excise tax and the CAMT are immaterial to our strategic action plan.financial statements.
NET EARNINGS AND NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS
Net earnings from continuing operations for fiscal 20172023 were $482.5$983.5 million ($3.838.00 per diluted share) compared with net earnings from continuing operations for fiscal 20162022 of $359.7$954.7 million ($2.787.40 per diluted share) and net earnings from continuing operations for fiscal 2015 of $196.4 million ($1.51 per diluted share).
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Net earnings from continuing operations for fiscal 20172023 increased 34.13.0 percent and diluted net earnings per share from continuing operations increased 37.88.1 percent compared with fiscal 2016, primarily due to increased sales, lower food and beverage costs, marketing expenses, general and administrative expenses, depreciation and amortization expenses and impairments and disposal of assets, net as a percent of sales, partially offset by higher restaurant expenses as a percent of sales and a higher effective income tax rate. Our diluted net earnings per share from continuing operations for fiscal 2017 were adversely impacted by approximately $0.10 due to a non-cash pension settlement charge and approximately $0.09 related to the acquisition and integration of Cheddar’s Scratch Kitchen.2022.
On an after-tax basis, results from discontinued operations for fiscal 20172023 were a net loss of $3.4$1.6 million ($0.030.01 per diluted share) compared with earnings from discontinued operationsa net loss for fiscal 20162022 of $15.3$1.9 million ($0.12 per diluted share) and fiscal 2015 of $513.1 million ($3.960.01 per diluted share). Earnings from discontinued operations reflects pre-tax gains of $17.9 million recorded in fiscal 2016 and $837.0 million in fiscal 2015, related to the sale of Red Lobster.
SEGMENT RESULTS
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 and The Capital Burger 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.
Our management uses segment profit as the measure for assessing performance of our segments. The following table presents segment profit margin for the periods indicated.indicated:
| Fiscal Years | Change | Fiscal Year Ended | Change | ||||||||||||||||||||||||||||||||
| Segment | 2017 | 2016 | 2015 | 2017 vs 2016 | 2016 vs 2015 | Segment | May 28, 2023 | May 29, 2022 | 2023 vs 2022 | ||||||||||||||||||||||||||
| Olive Garden | 19.3% | 19.8% | 18.5% | (50 | ) | BP | 130 | BP | Olive Garden | 21.0% | 22.1% | (110) | BP | ||||||||||||||||||||||
| LongHorn Steakhouse | 17.3% | 17.3% | 15.5% | — | BP | 180 | BP | LongHorn Steakhouse | 16.5% | 17.6% | (110) | BP | |||||||||||||||||||||||
| Fine Dining | 19.6% | 19.5% | 19.0% | 10 | BP | 50 | BP | Fine Dining | 19.1% | 21.3% | (220) | BP | |||||||||||||||||||||||
| Other Business | 16.9% | 16.9% | 15.5% | — | BP | 140 | BP | Other Business | 13.9% | 15.2% | (130) | BP | |||||||||||||||||||||||
The decrease in the Olive Garden’sGarden segment profit margin for fiscal 20172023 was driven primarily by additional rent expense resulting fromhigher food and beverage and marketing costs, offset by lower restaurant expenses, restaurant labor, and positive same-restaurant sales. The decrease in the real estate transactions. The growth in Olive Garden’sLongHorn Steakhouse segment profit margin for fiscal 20162023 was driven primarily by leveraging positive same-restaurant sales,higher food and beverage cost favorability and cost reduction initiatives,costs, partially offset by additional rent expense resulting from real estate transactions. LongHorn’slower restaurant labor and positive same-restaurant sales. The decrease in the Fine Dining segment profit marginsmargin for fiscal 2017 were flat as additional rent expense resulting from the real estate transactions was offset by food cost deflation. The growth in LongHorn’s segment profit margins for fiscal 20162023 was driven primarily by leveraging positive same-restaurant sales as well as improved cost of saleshigher food and lower marketing expense,beverage costs, restaurant labor, and restaurant expenses, partially offset by additional rent expense resulting from real estate transactions.positive same-restaurant sales. The growthdecrease in Fine Dining’sthe Other Business segment profit marginsmargin for fiscal 20172023 was driven primarily by higher food cost deflation, primarily beef,and beverage costs and restaurant labor, partially offset by higher restaurant expenses. The growth in Fine Dining’s segment profit margins for fiscal 2016 was driven primarily by improved food and beverage costs. The Other Business segment profit margins for fiscal 2017 were flat as food cost deflation was offset by higher labor costs. The growth for fiscal 2016 was driven by positive same-restaurant sales leveragesales.
RESULTS OF OPERATIONS FOR FISCAL 2022 COMPARED TO FISCAL 2021
For a comparison of our results of operations for the fiscal years ended May 29, 2022 and lower foodMay 30, 2021, see “Part II, Item 7. Management’s Discussion and beverage costs.Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended May 29, 2022, filed with the SEC on July 22, 2022.
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, 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 fiscal quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
IMPACT OF INFLATION
We attempt to minimize the annual effects of inflation through appropriate planning, operating practices and menu price increases. We do not believe inflation hadare currently operating in a significant overall effect on our annual resultsperiod of operations during fiscal 2017 or fiscal 2016. We experienced higher than normal inflationaryusual inflation, led by food and beverage cost and labor inflation. Food and beverage inflation is principally due to increased costs incurred by our vendors related to higher labor, transportation, packaging, and raw materials costs. Some of the impacts of the inflation have been offset by menu price increases and other adjustments made during fiscal 2015 and werethe year. Whether we are able and/or choose to partially reducecontinue to offset the annual impact utilizing these strategies.
effects of inflation will determine to what extent, if any, inflation affects our restaurant profitability in future periods.
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CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Our significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report). Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.
Leases
We evaluate our leases at their inception to estimate their expected term, which commences on the date when we have the right to control the use of the leased property and includes the non-cancelable base term plus all option periods we are reasonably assuredcertain to exercise. Our judgment in determining the appropriate expected term and discount rate for each lease affects our evaluation of:
•The classification and accounting for leases as capitaloperating versus operating;finance;
•The rent holidays and escalation in payments that are included in the calculation of straight-line rent;the lease liability and related right-of-use asset; and
•The term over which leasehold improvements for each restaurant facility are amortized.
These judgments may produce materially different amounts of lease liabilities and right-of-use assets recognized on our consolidated balance sheets, as well as depreciation, amortization, interest and rent expense than would be reportedrecognized in our consolidated statements of earnings if different discount rates and expected lease terms were used.
Valuation of Long-Lived Assets
Land, buildings and equipment, operating lease right-of-use assets and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. The judgments we make related to theA significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful lives of long-lived assets, definitions of lease terms and our ability to realize undiscounted cash flows in excess of the carrying amounts of these assets are affected by factors such as thelife; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in economic conditions, changes inthe usage or operating performance, desirability of the restaurant sites and other factors, such as our ability to sell our assets held for sale. As we assess the ongoing expected cash flows and carrying amounts of our long-lived assets, significantperformance. Any adverse changeschange in these factors could cause us to realize an impairment loss.have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. Based on a review of operating results for each of our restaurants, given the current operating environment, the amount of net book value associated with lower performing restaurants that would be deemed at risk for impairment is not material to our consolidated financial statements.
Valuation and Recoverability of Goodwill and Trademarks
We have nine reporting units, six of which have goodwill and seven of which have trademarks. Goodwill and trademarks are not subject to amortization and havegoodwill has been assigned to reporting units for purposes of impairment testing. The reporting units are our restaurant brands. At May 28, 2017, we had the following amounts recorded as goodwill and trademarks at our brands:
| (in millions) | Goodwill | Trademarks | |||||
| Olive Garden | $ | 30.2 | $ | 0.6 | |||
| LongHorn Steakhouse | 49.3 | 307.8 | |||||
| Cheddar’s Scratch Kitchen (1) | 329.4 | 375.0 | |||||
| The Capital Grille | 401.6 | 147.0 | |||||
| Yard House | 369.2 | 109.3 | |||||
| Eddie V’s | 22.0 | 10.5 | |||||
| Total | $ | 1,201.7 | $ | 950.2 | |||
A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators 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 could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. We review our goodwill and trademarks for impairment annually, as of the first day of our fourth fiscal quarter, or more frequently if indicators of impairment exist.
We estimate the fair value of each reporting unit using the best information available, including market information (also referred to as the market approach) and discounted cash flow projections (also referred to as the income approach). A market approach estimates fair value by applying sales or cash flow multiples to the reporting unit’s operating performance. The multiples are derived from observable market data of comparable publicly traded companies with similar operating and investment characteristics of the reporting units. The income approach uses a reporting unit’s projection of estimated operating cash flows which are based on a combination of historical and current trends, organic growth expectations, and residual growth rate assumptions. These cash flows are discounted using a weighted-average cost of capital (WACC) that reflects current market conditions. We recognize a goodwill impairment loss when the fair value of the reporting unit is less than its carrying value.
We estimate the fair value of trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from the reporting unit’s projection of estimated operating cash flows; assumed royalty rates that could be payable
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if we did not own the trademarks; and a discount rate based on an adjusted estimated WACC for each business unit. We recognize an impairment loss when the estimated fair value of the trademark is less than its carrying value.
We performed our annual impairment test of our goodwill and trademarks as of February 27, 2023 which was the first day of our fiscal 2023 fourth quarter using a qualitative assessment. In considering the qualitative approach, we evaluated factors including, but not limited to, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, resultsquarter. As of prior impairment tests, operational stability and the overall financial performance of the reporting units. Based on the results of our qualitative assessment,February 27, 2023, no impairment of goodwill or trademarks was indicated. Changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management’s judgments and assumptions made in assessing the fair value ofindicated based on our goodwill and trademarks, could result in an impairment loss of a portion or all of our goodwill or trademarks. Due to the proximity of the acquisition to our fiscal 2017 year end, the preliminary estimates for goodwill and trademark related to Cheddar’s Scratch Kitchen were not included in our qualitative assessment.testing.
If our annual testassessment resulted in an impairment of our assets, including goodwill or trademarks, our financial position and results of operations would be adversely affected and our leverage ratio for purposes of our revolving credit agreement (Revolving Credit Agreement) would increase. A leverage ratio exceeding the maximum permitted under our credit agreementRevolving Credit Agreement would be a default under our credit agreement.Revolving Credit Agreement. At May 28, 2017, a write-down2023, additional write-downs of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $1.08$1.01 billion would have been required to cause our leverage ratio to exceed the permitted maximum. As our leverage ratio is determined on a quarterly basis, and due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.
Unearned Revenues
Unearned revenues primarily represent our liability for gift cards that have been sold but not yet redeemed. The estimated value of gift cards expected to remain unused is recognized over the expected period of redemption as the remaining gift card values are redeemed, generally over a period of 1012 years. Utilizing this method, we estimate both the amount of breakage and the time period of redemption. If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded. We update our estimates of our redemption period and our breakage rate periodically and apply that rate to gift card redemptions.redemptions on a prospective basis. Changing our breakage-rate assumption on unredeemed gift cardsestimates by 2550 basis points would resulthave resulted in an adjustment in our unearned revenuesbreakage income of approximately $21.0 million.$3.3 million for fiscal 2023.
Income Taxes
We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available.
Assessment of uncertain tax positions requires judgments relating to the amounts, timing and likelihood of resolution. As described in Note 1312 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report), the $16.4$23.0 million balance of unrecognized tax benefits at May 28, 2017,2023, includes $0.7$7.8 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. The $0.7Of the $7.8 million, $5.7 million relates to items that would impact our effective income tax rate.
LIQUIDITY AND CAPITAL RESOURCES
We currently manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable costs. Currently, ourOur publicly issued long-term debt currently carries “Baa3” (Moody’sthe following ratings:
•Moody’s Investors Service),Service “Baa2”;
•Standard & Poor’s “BBB” (Standard & Poor’s); and
•Fitch “BBB” (Fitch) ratings. .
Our commercial paper has ratings of “P-3” (Moody’sof:
•Moody’s Investors Service),Service “P-2”;
•Standard & Poor’s “A-2” (Standard & Poor’s); and
•Fitch “F-2” (Fitch).
These ratings are as of the date of the filing of this report and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.
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On AprilSeptember 10, 2017,2021, we issued $500.0 million aggregate principal amount of unsecured 3.850 percent senior notes due May 2027 underentered into a registration statement filed with the Securities and Exchange Commission on October 6, 2016. Discount and issuance costs, which totaled $4.4 million, are being amortized over the term of the notes using the straight-line method, the results of which approximate the effective interest method. Interest on the notes is payable semi-annually in arrears on May 1 and November 1 of each year commencing November 1, 2017. We may redeem the notes at any time in whole or from time to time in part, at the principal amount plus a make-whole premium. If we experience a change in control triggering event, unless we have previously exercised our right to redeem the notes, we may be required to purchase the notes from the holders at a purchase price equal to 101 percent of their principal amount plus accrued and unpaid interest.
The Revolving Credit Agreement matures on October 24, 2018,September 10, 2026, and the proceeds may be used for commercial paper back-up, working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. LoansDuring fiscal 2023, loans under the Revolving Credit Agreement bearbore interest at a rate of LIBOR plus a margin determined by reference to a ratings-based pricing grid (Applicable Margin), or the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the EurocurrencyEurodollar Rate plus 1.00 percent) plus the Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement will be 1.100would have been 1.000 percent for LIBOR loans and 0.1000.000 percent for base rate loans.
Effective May 31, 2023, we entered into an amendment to the Revolving Credit Agreement (the “Amendment”.) Pursuant to the terms of the Amendment, the Company, the administrative agent and the lenders have agreed to replace the LIBOR-based interest rate applicable to borrowings under the Credit Agreement with a Term SOFR-based interest rate in advance of the cessation of LIBOR, and make certain other conforming changes. All other material terms and conditions of the Credit Agreement were unchanged. Effective May 31, 2023, loans under the Revolving Credit Agreement bear interest at a rate of (a) Term SOFR (which is defined, for the applicable interest period, as the Term SOFR Screen Rate two U.S. Government Securities Business Days prior to the commencement of such interest period with a term equivalent to such interest period) plus a Term SOFR adjustment of 0.10 percent plus the relevant margin determined by reference to a ratings-based pricing grid (Applicable Margin), or (b) the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the Term SOFR plus 1.00 percent) plus the relevant Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement will be 1.00 percent for Term SOFR loans and 0.00 percent for base rate loans.
Also on May 31, 2023, the Company entered into a senior unsecured $600 million 3-year Term Loan Credit Agreement (Term Loan Agreement) with Bank of America, N.A., as administrative agent, the lenders and other agents party thereto, the material terms of which are consistent with the Credit Agreement, as amended. The Term Loan Agreement provided for a single borrowing on any business day up to 90 days after May 31, 2023, and matures on the third anniversary of the funding date thereunder, June 14, 2023.
On June 14, 2023, we completed the acquisition of Ruth’s. We borrowed $600 million under the Term Loan Agreement to fund a portion of the approximately $715 million in consideration paid in connection with our acquisition of Ruth’s.
As of May 28, 2017, we had no2023, our outstanding balances under the Revolving Credit Agreement.
•$500.0 million of unsecured 3.850 percent senior notes due in May 2027;
•$150.096.3 million of unsecured 6.000 percent senior notes due in August 2035; and
•$300.042.8 million of unsecured 6.800 percent senior notes due in October 2037.2037; and
•$300.0 million of unsecured 4.550 percent senior notes due in February 2048.
The interest rate on our $300.0$42.8 million 6.800 percent senior notes due October 2037 is subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of May 28, 2017,2023, no such adjustments are made to this rate.
Through our shelf registration statement on file with the SEC, depending on conditions prevailing in the public capital markets, we may issue unsecured debt securities from time to time issue equity securities or unsecured debt securities in one or more series, which may consist of notes, debentures or other evidences of indebtedness in one or more offerings.
From time to time, we or our affiliates, may repurchase our outstanding debt in privately negotiated transactions.transactions, open-market transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.
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From time to time, we enter into interest rate derivative instruments to manage interest rate risk inherent in our operations. See Note 87 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).
A summary of our contractual obligations and commercial commitments at May 28, 2017,2023, is as follows:
| (in millions) | Payments Due by Period | |||||||||||||||||||||||||||||||
| Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||||||||||||||
| Long-term debt (1) | $ | 1,471.7 | $ | 41.6 | $ | 83.2 | $ | 563.9 | $ | 783.0 | ||||||||||||||||||||||
| Leases (2) | 3,039.1 | 441.3 | 836.6 | 720.6 | 1,040.6 | |||||||||||||||||||||||||||
| Purchase obligations (3) | 697.7 | 654.7 | 41.1 | 1.9 | — | |||||||||||||||||||||||||||
| Benefit obligations (4) | 383.7 | 32.5 | 68.3 | 73.2 | 209.7 | |||||||||||||||||||||||||||
| Unrecognized income tax benefits (5) | 25.6 | 9.6 | 3.6 | 12.4 | — | |||||||||||||||||||||||||||
| Total contractual obligations | $ | 5,617.8 | $ | 1,179.7 | $ | 1,032.8 | $ | 1,372.0 | $ | 2,033.3 | ||||||||||||||||||||||
| (in millions) | Amount of Commitment Expiration per Period | |||||||||||||||||||||||||||||||
| Other Commercial Commitments | Total Amounts Committed | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||||||||||||||
| Standby letters of credit (6) | $ | 100.6 | $ | 100.6 | $ | — | $ | — | $ | — | ||||||||||||||||||||||
| Guarantees (7) | 82.0 | 28.5 | 35.9 | 13.3 | 4.3 | |||||||||||||||||||||||||||
| Total commercial commitments | $ | 182.6 | $ | 129.1 | $ | 35.9 | $ | 13.3 | $ | 4.3 | ||||||||||||||||||||||
(1)Includes interest payments associated with existing long-term debt. Excludes discount and issuance costs of $8.8 million.
(2)Includes non-cancelable future operating lease and finance lease commitments.
(3)Includes commitments for food and beverage items and supplies, capital projects, information technology and other miscellaneous items.
(4)Includes expected contributions associated with our supplemental defined benefit pension plan and payments associated with our postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2033.
(5)Includes interest on unrecognized income tax benefits of $2.7 million, $1.8 million of which relates to contingencies expected to be resolved within one year.
(6)Includes letters of credit for $85.3 million of workers’ compensation and general liabilities accrued in our consolidated financial statements and letters of credit for $15.2 million of surety bonds related to other payments.
(7)Consists solely of guarantees associated with leased properties that have been assigned to third parties and are primarily related to the disposition of Red Lobster in fiscal 2015.
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| (in millions) | Payments Due by Period | |||||||||||||||||||
| Contractual Obligations | Total | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||
| Long-term debt (1) | $ | 1,727.2 | $ | 48.7 | $ | 97.3 | $ | 97.3 | $ | 1,483.9 | ||||||||||
| Leases (2) | 3,423.5 | 350.0 | 663.9 | 579.6 | 1,830.0 | |||||||||||||||
| Purchase obligations (3) | 377.6 | 327.6 | 37.0 | 13.0 | — | |||||||||||||||
| Benefit obligations (4) | 364.8 | 29.5 | 60.0 | 67.4 | 207.9 | |||||||||||||||
| Unrecognized income tax benefits (5) | 17.4 | 0.8 | 4.3 | 12.3 | — | |||||||||||||||
| Total contractual obligations | $ | 5,910.5 | $ | 756.6 | $ | 862.5 | $ | 769.6 | $ | 3,521.8 | ||||||||||
| (in millions) | Amount of Commitment Expiration per Period | |||||||||||||||||||
| Other Commercial Commitments | Total Amounts Committed | Less Than 1 Year | 1-3 Years | 3-5 Years | More Than 5 Years | |||||||||||||||
| Standby letters of credit (6) | $ | 138.1 | $ | 138.1 | $ | — | $ | — | $ | — | ||||||||||
| Guarantees (7) | 163.2 | 38.4 | 65.4 | 40.8 | 18.6 | |||||||||||||||
| Total commercial commitments | $ | 301.3 | $ | 176.5 | $ | 65.4 | $ | 40.8 | $ | 18.6 | ||||||||||
| (in millions, except ratios) | May 28, 2023 | May 29, 2022 | ||||||||||||
| CAPITAL STRUCTURE | ||||||||||||||
| Long-term debt, excluding unamortized discount and issuance costs and fair value hedge | 939.1 | 939.1 | ||||||||||||
| Total debt | $ | 939.1 | $ | 939.1 | ||||||||||
| Stockholders’ equity | 2,201.5 | 2,198.2 | ||||||||||||
| Total capital | $ | 3,140.6 | $ | 3,137.3 | ||||||||||
| CALCULATION OF ADJUSTED CAPITAL | ||||||||||||||
| Total debt | $ | 939.1 | $ | 939.1 | ||||||||||
| Lease-debt equivalent | 2,545.8 | 2,459.0 | ||||||||||||
| Guarantees | 82.0 | 101.0 | ||||||||||||
| Adjusted debt | $ | 3,566.9 | $ | 3,499.1 | ||||||||||
| Stockholders’ equity | 2,201.5 | 2,198.2 | ||||||||||||
| Adjusted total capital | $ | 5,768.4 | $ | 5,697.3 | ||||||||||
| CAPITAL STRUCTURE RATIOS | ||||||||||||||
| Debt to total capital ratio | 30 | % | 30 | % | ||||||||||
| Adjusted debt to adjusted total capital ratio | 62 | % | 61 | % | ||||||||||
| (in millions, except ratios) | May 28, 2017 | May 29, 2016 | ||||||
| CAPITAL STRUCTURE | ||||||||
| Long-term debt, excluding unamortized discount and issuance costs | $ | 950.0 | $ | 450.0 | ||||
| Capital lease obligations | 58.9 | 52.0 | ||||||
| Total debt | $ | 1,008.9 | $ | 502.0 | ||||
| Stockholders’ equity | 2,101.7 | 1,952.0 | ||||||
| Total capital | $ | 3,110.6 | $ | 2,454.0 | ||||
| CALCULATION OF ADJUSTED CAPITAL | ||||||||
| Total debt | $ | 1,008.9 | $ | 502.0 | ||||
| Lease-debt equivalent | 1,896.9 | 1,553.1 | ||||||
| Guarantees | 163.2 | 154.2 | ||||||
| Adjusted debt | $ | 3,069.0 | $ | 2,209.3 | ||||
| Stockholders’ equity | 2,101.7 | 1,952.0 | ||||||
| Adjusted total capital | $ | 5,170.7 | $ | 4,161.3 | ||||
| CAPITAL STRUCTURE RATIOS | ||||||||
| Debt to total capital ratio | 32 | % | 20 | % | ||||
| Adjusted debt to adjusted total capital ratio | 59 | % | 53 | % | ||||
Net cash flows provided by operating activities from continuing operations were $918.2 million, $820.4 million$1.55 billion and $874.3 million$1.26 billion in fiscal 2017, 20162023 and 2015,2022, respectively. Net cash flows provided by operating activities include net earnings from continuing operations of $482.5 million, $359.7 million and $196.4$983.5 million in fiscal 2017, 20162023 and 2015, respectively.$954.7 million in fiscal 2022. Net cash flows provided by operating activities from continuing operations increased in fiscal 20172023 primarily due to higher net earnings from continuing operations partially offset by the timing of payments of accounts payablechanges in working capital and current period activity of taxable timing differences. Net cash flows provided by operating activities from continuing operations decreased in fiscal 2016 primarily due to current period activity of taxable timing differences and the timing of inventory purchases, offset by higher net earnings from continuing operations.
Net cash flows used in investing activities from continuing operations were $1.07 billion in fiscal 2017 compared to net cash flows provided by investing activities from continuing operations of $75.4$568.4 million and $389.0 million in fiscal 20162023 and net cash flows used in investing activities from continuing operations of $235.1 million in fiscal 2015.2022, respectively. Capital expenditures incurred principally for building new restaurants, remodeling existing restaurants, replacing equipment, and technology initiatives were $293.0$564.9 million in fiscal 2017,2023, compared to $228.3$376.9 million in fiscal 2016 and $296.5 million in fiscal 2015. Additionally, for fiscal 2017, net cash used in the acquisition of Cheddar’s Scratch Kitchen was $764.4 million. For fiscal 2016, proceeds from the disposal of land, buildings and equipment of $325.2 million reflect the impact of closed sale-leaseback transactions.2022.
Net cash flows provided by financing activities from continuing operations were $129.2 million in fiscal 2017, compared to net cash flows used in financing activities from continuing operations of $1.12were $1.03 billion and $1.61 billion in fiscal 20162023 and $1.78 billion in fiscal 2015. Net cash flows provided by financing activities in fiscal 2017 reflect proceeds from the issuance of $500.0 million of senior notes and proceeds from the exercise of employee stock options, partially offset by dividend payments of $279.1 million and share repurchases of $230.2 million.2022, respectively. Net cash flows used in financing activities in fiscal 2016 reflected long-term debt payments of $1.10 billion, including repurchase premiums and make-whole provisions,2023 included dividend payments of $268.2$589.8 million and share repurchases of $184.8$458.7 million, partially offset by the $315.0 million cash dividend received by us from Four Corners and proceeds
from the exercise of employee stock options. Net cash flows used in financing activities in fiscal 20152022 included long-term debt payments of $1.07 billion, including repurchase premiums and make-whole provisions, dividend payments of $278.9$563.0 million and share repurchases of $502.3 million and net repayments of short-term debt $207.6 million,$1.07 billion, partially offset by proceeds from the exercise of employee stock options.
Our defined benefit and other postretirement benefit costs and liabilities are determined using various actuarial assumptions and methodologies prescribed under Financial Accounting Standards Board Accounting Standards Codification Topic 715, Compensation - Retirement Benefits and Topic 712, Compensation - Nonretirement Postemployment Benefits. We use certain assumptions including, but not limited to, the selection of a discount rate and expected long-term rate of return on plan assets. We set the discount rate assumption annually for each plan at its valuation date to reflect the yield of high-quality fixed-income debt instruments, with lives that approximate the maturity of the plan benefits. At May 28, 2017, our discount rate was 4.06 percent and 3.98 percent, respectively, for our defined benefit and postretirement benefit plans. The expected long-term rate of return on plan assets is based upon several factors, including our historical assumptions compared with actual results, an analysis of current market conditions, asset allocations and the views of leading financial advisers and economists. Our expected long-term rate of return on plan assets for our defined benefit plans was 6.5 percent for fiscal year 2017, 6.5 percent for fiscal year 2016 and 7.0 percent for fiscal year 2015. We made defined benefit plans contributions of approximately $0.4 million, $25.4 million and $0.4 million in fiscal years 2017, 2016 and 2015, respectively. We expect to contribute approximately $0.4 million to our supplemental defined benefit pension plansplan and approximately $1.3$1.6 million to our postretirement benefit plan during fiscal 2018.
We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our internal cash-generating capabilities, the potential issuance of equity or unsecured debt securities under our shelf registration statement and short-term commercial paper or drawings under our Revolving Credit Agreement should be sufficient to finance our capital expenditures, debt maturities stock repurchase program and other operating activities through fiscal 2018.2024.
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OFF-BALANCE SHEET ARRANGEMENTS
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.
FINANCIAL CONDITION
Our total current assets were $799.8$997.7 million at May 28, 2017,2023, compared with $820.3 million$1.18 billion at May 29, 2016.2022. The decrease was primarily due to the decreasedecreases in prepaid income taxes and cash and cash equivalents driven by the acquisition of Cheddar’s Scratch Kitchen.equivalents.
Our total current liabilities were $1.29$1.94 billion at May 28, 2017, compared with $1.192023 and $1.85 billion at May 29, 2016.2022. The increase was primarily due to an increaseincreases in unearned revenues associated with gift card sales in excess of redemptions.accounts payable and other current liabilities.
APPLICATION OF NEW ACCOUNTING STANDARDS
See Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for a discussion of recently issued accounting standards.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are exposed to a variety of market risks, including fluctuations in interest rates, foreign currency exchange rates, compensation and commodity prices. To manage this exposure, we periodically enter into interest rate, and foreign currency exchange instruments, equity forward and commodity derivative instruments for other than trading purposes. See Notes 1 and 87 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).
We use the variance/covariance method to measure value at risk, over time horizons ranging from one week to one year, at the 95 percent confidence level. At May 28, 2017,2023, our potential losses in future net earnings resulting from changes in foreign currency exchange rate instruments,equity forwards, commodity instruments equity forwards and floating-ratefloating rate debt interest rate exposures were approximately $30.0$75.0 million over a period of one year. The value at risk from an increase in the fair value of all of our long-term fixed-rate debt, over a period of one year, was approximately $100.3$79.7 million. The fair value of our long-term fixed-rate debt outstanding as of May 28, 2017,2023, averaged $574.3$857.3 million, with a high of $1.06 billion$893.7 million and a low of $492.6$798.0 million during fiscal 2017.2023. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows by targeting an appropriate mix of variable and fixed-rate debt.
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Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | |||||
Report of Independent Registered Public Accounting Firm (KPMG LLP, Orlando, FL, Auditor Firm ID: 185) | |||||
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REPORT OF MANAGEMENT’S RESPONSIBILITIES
The management of Darden Restaurants, Inc. is responsible for the fairness and accuracy of the consolidated financial statements. The consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles, using management’s best estimates and judgments where appropriate. The financial information throughout this report is consistent with our consolidated financial statements.
Management has established a system of internal controls over financial reporting that provides reasonable assurance that assets are adequately safeguarded and transactions are recorded accurately, in all material respects, in accordance with management’s authorization. Our internal controls provide for appropriate segregation of duties and responsibilities and there are documented policies regarding utilization of our assets and proper financial reporting. These formally stated and regularly communicated policies set high standards of ethical conduct for all employees. We also maintain a strong audit program that independently evaluates the adequacy of the design and operating effectiveness of these internal controls.
The Audit Committee of the Board of Directors meets at least quarterly to determine that management, internal auditors and the independent registered public accounting firm are properly discharging their duties regarding internal control and financial reporting. Management, internal auditors and the independent registered public accounting firm have full and free access to the Audit Committee at any time.
KPMG LLP, an independent registered public accounting firm, is retained to audit our consolidated financial statements and the effectiveness of our internal control over financial reporting. Their reports follow.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act of 1934, as amended). The Company’s internal control over financial reporting is designed to provide reasonable assurance to the Company’s management and Board of Directors regarding the preparation and fair presentation of published financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of May 28, 2017.2023. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-IntegratedControl - Integrated Framework (2013). Management has concluded that, as of May 28, 2017,2023, the Company’s internal control over financial reporting was effective based on these criteria. Management excluded from its assessment of the effectiveness of the Company’s internal control over financial reporting as of May 28, 2017, Cheddar’s Scratch Kitchen’s internal control over financial reporting associated with total assets of $980.3 million and total revenues of $63.0 million in the consolidated financial statements of the Company as of and for the year ended May 28, 2017.
The Company’s independent registered public accounting firm KPMG LLP, has issued an audit report on the effectiveness of our internal control over financial reporting, which follows.
/s/ Eugene I. Lee, Jr.Ricardo Cardenas
President and Chief Executive Officer
39
Report of Independent Registered Public Accounting Firm
Darden Restaurants, Inc.:
Opinion on Internal Control Over Financial Reporting
We have audited Darden Restaurants, Inc. and subsidiaries’subsidiaries' (the Company) internal control over financial reporting as of May 28, 2017,2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Darden Restaurants, Inc.’sCommission. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of May 28, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of May 28, 2023 and May 29, 2022, the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended May 28, 2023, and the related notes (collectively, the consolidated financial statements), and our report dated July 21, 2023 expressed an unqualified opinion on those consolidated financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Orlando, Florida
July 21, 2023
40
Report of May 28, 2017, based on criteria established in Internal Control – Integrated Framework (2013) issued byIndependent Registered Public Accounting Firm
To the CommitteeStockholders and Board of Sponsoring Organizations of the Treadway Commission (COSO).
Directors
Darden Restaurants, Inc. acquired Cheddar’s Scratch Kitchen during 2017, and management excluded from its assessment of:
Opinion on the effectiveness of Darden Restaurants, Inc.’s internal control over financial reporting as of May 28, 2017, Cheddar’s Scratch Kitchen’s internal control over financial reporting associated with total assets of $980.3 million and total revenues of $63.0 million included in the consolidated financial statements of Darden Restaurants, Inc. and subsidiaries as of and for the year ended May 28, 2017. Our audit of internal control over financial reporting of Darden Restaurants, Inc. also excluded an evaluation of the internal control over financial reporting of Cheddar’s Scratch Kitchen.Consolidated Financial Statements
We also have audited in accordance with the standards of the Public Company Accounting Oversight Board (United States), theaccompanying consolidated balance sheets of Darden Restaurants, Inc. and subsidiaries (the Company) as of May 28, 20172023 and May 29, 2016, and2022, the related consolidated statements of earnings, comprehensive income, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended May 28, 2017,2023, and our report dated July 21, 2017 expressed an unqualified opinion on thosethe related notes (collectively, the consolidated financial statements.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company’s internal control over financial reporting as of May 28, 2023, based on criteria established in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, and our report dated July 21, 2023 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includesmisstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements. An auditOur audits also includes assessingincluded evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statement presentation.statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements referredthat was communicated or required to above present fairly,be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of a critical audit matter does not alter in all material respects,any way our opinion on the consolidated financial positionstatements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Evaluation of Darden Restaurants, Inc.long-lived assets for impairment
As discussed in Notes 1, 4, and 10 to the consolidated financial statements, land, buildings and equipment, net and operating lease right-of-use assets were $7.1 billion as of May 28, 20172023. The Company tests for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. Such indicators may include, among others: a significant decline in expected future cash flows and May 29, 2016,changes in the expected useful life which relates to the Company’s intent and ability to hold its asset groups for a period that recovers their carrying value.
We identified the evaluation of indicators of potential long-lived assets impairment as a critical audit matter. Subjective auditor judgment was required to evaluate certain assumptions in the Company’s analysis, including expected future cash flows and the resultsexpected useful life. Adverse changes in these assumptions could have a significant impact on whether an indicator has been identified and could have a material impact on the Company’s consolidated financial statements.
41
The following are the primary procedures we performed to address this critical audit matter. We evaluated the design and tested the operating effectiveness of their operationscertain internal controls over the Company’s long-lived asset impairment process, including controls over the identification of indicators of impairment and theirthe assumptions listed above. For certain asset groups, we compared the expected future cash flows used by the Company in its evaluation of indicators of potential long-lived asset impairment to historical results. We evaluated the expected useful life for each ofcertain asset groups by inspecting underlying documents, such as real estate meeting minutes and other documents to assess the yearsCompany’s plans to dispose or close asset groups. We corroborated the Company’s plans with others in the three-year period ended May 28, 2017, in conformity with U.S. generally accepted accounting principles.
/s/ KPMG LLP
We have served as the Company’s auditor since 1996.
Orlando, Florida
July 21, 20172023
42
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
| Fiscal Year Ended | ||||||||||||||||||||||||||||
| May 28, 2017 | May 29, 2016 | May 31, 2015 | May 28, 2023 | May 29, 2022 | May 30, 2021 | |||||||||||||||||||||||
| Sales | $ | 7,170.2 | $ | 6,933.5 | $ | 6,764.0 | Sales | $ | 10,487.8 | $ | 9,630.0 | $ | 7,196.1 | |||||||||||||||
| Costs and expenses: | Costs and expenses: | |||||||||||||||||||||||||||
| Food and beverage | 2,070.3 | 2,039.7 | 2,085.1 | Food and beverage | 3,355.9 | 2,943.6 | 2,072.1 | |||||||||||||||||||||
| Restaurant labor | 2,265.3 | 2,189.2 | 2,135.6 | Restaurant labor | 3,346.3 | 3,108.8 | 2,286.3 | |||||||||||||||||||||
| Restaurant expenses | 1,265.2 | 1,163.5 | 1,120.8 | Restaurant expenses | 1,702.2 | 1,582.6 | 1,344.2 | |||||||||||||||||||||
| Marketing expenses | 239.7 | 238.0 | 243.3 | Marketing expenses | 118.3 | 93.2 | 91.1 | |||||||||||||||||||||
| General and administrative expenses | 387.7 | 384.9 | 430.2 | General and administrative expenses | 386.1 | 373.2 | 396.2 | |||||||||||||||||||||
| Depreciation and amortization | 272.9 | 290.2 | 319.3 | Depreciation and amortization | 387.8 | 368.4 | 350.9 | |||||||||||||||||||||
| Impairments and disposal of assets, net | (8.4 | ) | 5.8 | 62.1 | Impairments and disposal of assets, net | (10.6) | (2.0) | 6.6 | ||||||||||||||||||||
| Total operating costs and expenses | $ | 6,492.7 | $ | 6,311.3 | $ | 6,396.4 | Total operating costs and expenses | $ | 9,286.0 | $ | 8,467.8 | $ | 6,547.4 | |||||||||||||||
| Operating income | 677.5 | 622.2 | 367.6 | Operating income | $ | 1,201.8 | $ | 1,162.2 | $ | 648.7 | ||||||||||||||||||
| Interest, net | 40.2 | 172.5 | 192.3 | Interest, net | 81.3 | 68.7 | 63.5 | |||||||||||||||||||||
| Other (income) expense, net | Other (income) expense, net | — | — | 8.7 | ||||||||||||||||||||||||
| Earnings before income taxes | 637.3 | 449.7 | 175.3 | Earnings before income taxes | $ | 1,120.5 | $ | 1,093.5 | $ | 576.5 | ||||||||||||||||||
| Income tax expense (benefit) | 154.8 | 90.0 | (21.1 | ) | Income tax expense (benefit) | 137.0 | 138.8 | (55.9) | ||||||||||||||||||||
| Earnings from continuing operations | $ | 482.5 | $ | 359.7 | $ | 196.4 | Earnings from continuing operations | $ | 983.5 | $ | 954.7 | $ | 632.4 | |||||||||||||||
Earnings (loss) from discontinued operations, net of tax expense (benefit) of $(4.2), $3.4 and $344.8, respectively | (3.4 | ) | 15.3 | 513.1 | ||||||||||||||||||||||||
| Losses from discontinued operations, net of tax benefit of $0.8, $0.2 and $3.2, respectively | Losses from discontinued operations, net of tax benefit of $0.8, $0.2 and $3.2, respectively | (1.6) | (1.9) | (3.1) | ||||||||||||||||||||||||
| Net earnings | $ | 479.1 | $ | 375.0 | $ | 709.5 | Net earnings | $ | 981.9 | $ | 952.8 | $ | 629.3 | |||||||||||||||
| Basic net earnings per share: | Basic net earnings per share: | |||||||||||||||||||||||||||
| Earnings from continuing operations | $ | 3.88 | $ | 2.82 | $ | 1.54 | Earnings from continuing operations | $ | 8.07 | $ | 7.47 | $ | 4.85 | |||||||||||||||
| Earnings (loss) from discontinued operations | (0.03 | ) | 0.12 | 4.02 | ||||||||||||||||||||||||
| Losses from discontinued operations | Losses from discontinued operations | (0.01) | (0.01) | (0.02) | ||||||||||||||||||||||||
| Net earnings | $ | 3.85 | $ | 2.94 | $ | 5.56 | Net earnings | $ | 8.06 | $ | 7.46 | $ | 4.83 | |||||||||||||||
| Diluted net earnings per share: | Diluted net earnings per share: | |||||||||||||||||||||||||||
| Earnings from continuing operations | $ | 3.83 | $ | 2.78 | $ | 1.51 | Earnings from continuing operations | $ | 8.00 | $ | 7.40 | $ | 4.80 | |||||||||||||||
| Earnings (loss) from discontinued operations | (0.03 | ) | 0.12 | 3.96 | ||||||||||||||||||||||||
| Losses from discontinued operations | Losses from discontinued operations | (0.01) | (0.01) | (0.03) | ||||||||||||||||||||||||
| Net earnings | $ | 3.80 | $ | 2.90 | $ | 5.47 | Net earnings | $ | 7.99 | $ | 7.39 | $ | 4.77 | |||||||||||||||
| Average number of common shares outstanding: | Average number of common shares outstanding: | |||||||||||||||||||||||||||
| Basic | 124.3 | 127.4 | 127.7 | Basic | 121.9 | 127.8 | 130.4 | |||||||||||||||||||||
| Diluted | 126.0 | 129.3 | 129.7 | Diluted | 122.9 | 129.0 | 131.8 | |||||||||||||||||||||
| Dividends declared per common share | $ | 2.24 | $ | 2.10 | $ | 2.20 | ||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
43
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
| Fiscal Year Ended | ||||||||||||||||||||||||||||
| May 28, 2017 | May 29, 2016 | May 31, 2015 | May 28, 2023 | May 29, 2022 | May 30, 2021 | |||||||||||||||||||||||
| Net earnings | $ | 479.1 | $ | 375.0 | $ | 709.5 | Net earnings | $ | 981.9 | $ | 952.8 | $ | 629.3 | |||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||
| Foreign currency adjustment | 0.5 | 0.5 | 3.0 | Foreign currency adjustment | (0.3) | (0.4) | 0.7 | |||||||||||||||||||||
| Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $0.5, $14.3 and $17.4, respectively | 4.3 | 23.0 | 31.3 | |||||||||||||||||||||||||
| Net unamortized gain (loss) arising during period, including amortization of unrecognized net actuarial loss, net of taxes of $11.9, $(16.0) and $4.8, respectively | 19.3 | (23.9 | ) | 7.2 | ||||||||||||||||||||||||
| Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $(1.5), $0.2 and $0.4, respectively | Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $(1.5), $0.2 and $0.4, respectively | 4.3 | (8.3) | 16.5 | ||||||||||||||||||||||||
| Net unamortized gain (loss) arising during period, including amortization of unrecognized net actuarial loss, net of taxes of $0.4, $0.9 and $1.5, respectively | Net unamortized gain (loss) arising during period, including amortization of unrecognized net actuarial loss, net of taxes of $0.4, $0.9 and $1.5, respectively | 1.1 | 2.6 | 4.6 | ||||||||||||||||||||||||
| Other comprehensive income (loss) | $ | 24.1 | $ | (0.4 | ) | $ | 41.5 | Other comprehensive income (loss) | $ | 5.1 | $ | (6.1) | $ | 21.8 | ||||||||||||||
| Total comprehensive income | $ | 503.2 | $ | 374.6 | $ | 751.0 | Total comprehensive income | $ | 987.0 | $ | 946.7 | $ | 651.1 | |||||||||||||||
See accompanying notes to consolidated financial statements.
44
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions)
| May 28, 2023 | May 29, 2022 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | 367.8 | $ | 420.6 | |||||||
| Receivables, net | 80.2 | 72.0 | |||||||||
| Inventories | 287.9 | 270.6 | |||||||||
| Prepaid income taxes | 107.3 | 274.8 | |||||||||
| Prepaid expenses and other current assets | 154.5 | 141.4 | |||||||||
| Total current assets | $ | 997.7 | $ | 1,179.4 | |||||||
| Land, buildings and equipment, net | 3,725.1 | 3,356.0 | |||||||||
| Operating lease right-of-use assets | 3,373.9 | 3,465.1 | |||||||||
| Goodwill | 1,037.4 | 1,037.4 | |||||||||
| Trademarks | 806.3 | 806.3 | |||||||||
| Other assets | 301.1 | 291.6 | |||||||||
| Total assets | $ | 10,241.5 | $ | 10,135.8 | |||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Accounts payable | $ | 426.2 | $ | 366.9 | |||||||
| Accrued payroll | 173.0 | 181.5 | |||||||||
| Accrued income taxes | 7.8 | 32.1 | |||||||||
| Other accrued taxes | 65.9 | 64.5 | |||||||||
| Unearned revenues | 512.0 | 498.0 | |||||||||
| Other current liabilities | 752.5 | 704.5 | |||||||||
| Total current liabilities | $ | 1,937.4 | $ | 1,847.5 | |||||||
| Long-term debt | 884.9 | 901.0 | |||||||||
| Deferred income taxes | 142.2 | 201.1 | |||||||||
| Operating lease liabilities - non-current | 3,667.6 | 3,755.8 | |||||||||
| Other liabilities | 1,407.9 | 1,232.2 | |||||||||
| Total liabilities | $ | 8,040.0 | $ | 7,937.6 | |||||||
| Stockholders’ equity: | |||||||||||
| Common stock and surplus, no par value. Authorized 500.0 shares; issued 121.1 and 123.9 shares, respectively; outstanding 121.1 and 123.9 shares, respectively | 2,230.8 | 2,226.0 | |||||||||
| Preferred stock, no par value. Authorized 25.0 shares; none issued and outstanding | — | — | |||||||||
| Retained earnings (deficit) | (32.5) | (25.9) | |||||||||
| Accumulated other comprehensive income (loss) | 3.2 | (1.9) | |||||||||
| Total stockholders’ equity | $ | 2,201.5 | $ | 2,198.2 | |||||||
| Total liabilities and stockholders’ equity | $ | 10,241.5 | $ | 10,135.8 | |||||||
| May 28, 2017 | May 29, 2016 | ||||||
| ASSETS | |||||||
| Current assets: | |||||||
| Cash and cash equivalents | $ | 233.1 | $ | 274.8 | |||
| Receivables, net | 75.9 | 64.0 | |||||
| Inventories | 178.9 | 175.4 | |||||
| Prepaid income taxes | 6.2 | 46.1 | |||||
| Prepaid expenses and other current assets | 80.7 | 76.4 | |||||
| Deferred income taxes | 211.8 | 163.3 | |||||
| Assets held for sale | 13.2 | 20.3 | |||||
| Total current assets | $ | 799.8 | $ | 820.3 | |||
| Land, buildings and equipment, net | 2,272.3 | 2,041.6 | |||||
| Goodwill | 1,201.7 | 872.3 | |||||
| Trademarks | 950.2 | 574.6 | |||||
| Other assets | 280.2 | 273.8 | |||||
| Total assets | $ | 5,504.2 | $ | 4,582.6 | |||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||
| Current liabilities: | |||||||
| Accounts payable | $ | 249.5 | $ | 241.9 | |||
| Accrued payroll | 149.1 | 135.1 | |||||
| Accrued income taxes | 1.9 | — | |||||
| Other accrued taxes | 54.2 | 49.1 | |||||
| Unearned revenues | 388.6 | 360.4 | |||||
| Other current liabilities | 445.9 | 400.6 | |||||
| Total current liabilities | $ | 1,289.2 | $ | 1,187.1 | |||
| Long-term debt | 936.6 | 440.0 | |||||
| Deferred income taxes | 357.5 | 255.2 | |||||
| Deferred rent | 282.8 | 249.7 | |||||
| Other liabilities | 536.4 | 498.6 | |||||
| Total liabilities | $ | 3,402.5 | $ | 2,630.6 | |||
| Stockholders’ equity: | |||||||
| Common stock and surplus, no par value. Authorized 500.0 shares; issued 126.7 and 127.5 shares, respectively; outstanding 125.4 and 126.2 shares, respectively | 1,614.6 | 1,502.6 | |||||
| Preferred stock, no par value. Authorized 25.0 shares; none issued and outstanding | — | — | |||||
| Retained earnings | 560.1 | 547.5 | |||||
| Treasury stock, 1.3 and 1.3 shares, at cost, respectively | (7.8 | ) | (7.8 | ) | |||
| Accumulated other comprehensive income (loss) | (62.9 | ) | (87.0 | ) | |||
| Unearned compensation | (2.3 | ) | (3.3 | ) | |||
| Total stockholders’ equity | $ | 2,101.7 | $ | 1,952.0 | |||
| Total liabilities and stockholders’ equity | $ | 5,504.2 | $ | 4,582.6 | |||
See accompanying notes to consolidated financial statements.
45
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(In millions, except per share data)
| Common Stock And Surplus | Retained Earnings | Treasury Stock | Accumulated Other Comprehensive Income (Loss) | Unearned Compensation | Total Stockholders’ Equity | ||||||||||||||||||
| Balances at May 25, 2014 | $ | 1,302.2 | $ | 995.8 | $ | (7.8 | ) | $ | (128.1 | ) | $ | (5.2 | ) | $ | 2,156.9 | ||||||||
| Net earnings | — | 709.5 | — | — | — | 709.5 | |||||||||||||||||
| Other comprehensive income | — | — | — | 41.5 | — | 41.5 | |||||||||||||||||
| Dividends declared ($2.20 per share) | — | (279.5 | ) | — | — | — | (279.5 | ) | |||||||||||||||
| Stock option exercises (4.2 shares) | 154.6 | — | — | — | — | 154.6 | |||||||||||||||||
| Stock-based compensation | 26.4 | — | — | — | — | 26.4 | |||||||||||||||||
| Income tax benefits credited to equity | 18.4 | — | — | — | — | 18.4 | |||||||||||||||||
| Repurchases of common stock (10.0 shares) | (102.5 | ) | (399.8 | ) | — | — | — | (502.3 | ) | ||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans (0.1 shares) | 6.8 | — | — | — | — | 6.8 | |||||||||||||||||
| Other | — | — | — | — | 1.2 | 1.2 | |||||||||||||||||
| Balances at May 31, 2015 | $ | 1,405.9 | $ | 1,026.0 | $ | (7.8 | ) | $ | (86.6 | ) | $ | (4.0 | ) | $ | 2,333.5 | ||||||||
| Net earnings | — | 375.0 | — | — | — | 375.0 | |||||||||||||||||
| Other comprehensive income | — | — | — | (0.4 | ) | — | (0.4 | ) | |||||||||||||||
| Dividends declared ($2.10 per share) | — | (268.2 | ) | — | — | — | (268.2 | ) | |||||||||||||||
| Stock option exercises (2.4 shares) | 94.4 | — | — | — | — | 94.4 | |||||||||||||||||
| Stock-based compensation | 14.9 | — | — | — | — | 14.9 | |||||||||||||||||
| Income tax benefits credited to equity | 17.5 | — | — | — | — | 17.5 | |||||||||||||||||
| Repurchases of common stock (3.0 shares) | (34.9 | ) | (149.9 | ) | — | — | — | (184.8 | ) | ||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans (0.2 shares) | 4.8 | — | — | — | 0.1 | 4.9 | |||||||||||||||||
| Separation of Four Corners Property Trust | — | (435.4 | ) | — | — | — | (435.4 | ) | |||||||||||||||
| Other | — | — | — | — | 0.6 | 0.6 | |||||||||||||||||
| Balances at May 29, 2016 | $ | 1,502.6 | $ | 547.5 | $ | (7.8 | ) | $ | (87.0 | ) | $ | (3.3 | ) | $ | 1,952.0 | ||||||||
| Net earnings | — | 479.1 | — | — | — | 479.1 | |||||||||||||||||
| Other comprehensive income | — | — | — | 24.1 | — | 24.1 | |||||||||||||||||
| Dividends declared ($2.24 per share) | — | (279.6 | ) | — | — | — | (279.6 | ) | |||||||||||||||
| Stock option exercises (2.7 shares) | 107.8 | — | — | — | — | 107.8 | |||||||||||||||||
| Stock-based compensation | 15.6 | — | — | — | — | 15.6 | |||||||||||||||||
| Income tax benefits credited to equity | 27.2 | — | — | — | — | 27.2 | |||||||||||||||||
| Repurchases of common stock (3.7 shares) | (43.7 | ) | (186.5 | ) | — | — | — | (230.2 | ) | ||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans (0.2 shares) | 5.1 | — | — | — | 0.2 | 5.3 | |||||||||||||||||
| Other | — | (0.4 | ) | — | — | 0.8 | 0.4 | ||||||||||||||||
| Balances at May 28, 2017 | $ | 1,614.6 | $ | 560.1 | $ | (7.8 | ) | $ | (62.9 | ) | $ | (2.3 | ) | $ | 2,101.7 | ||||||||
| Common Stock And Surplus | |||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Retained Earnings (Deficit) | Accumulated Other Comprehensive Income (Loss) | Total Stockholders’ Equity | |||||||||||||||||||||||||||||||||||||
| Balances at May 31, 2020 | 129.9 | $ | 2,205.3 | $ | 143.5 | $ | (17.6) | $ | 2,331.2 | ||||||||||||||||||||||||||||||||
| Net earnings | — | — | 629.3 | — | 629.3 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 21.8 | 21.8 | ||||||||||||||||||||||||||||||||||||
| Dividends declared ($1.55 per share) | — | — | (203.9) | — | (203.9) | ||||||||||||||||||||||||||||||||||||
| Stock option exercises | 0.7 | 36.6 | — | — | 36.6 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 39.8 | — | — | 39.8 | ||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (0.4) | (6.3) | (39.1) | — | (45.4) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | 0.6 | 9.6 | — | — | 9.6 | ||||||||||||||||||||||||||||||||||||
| Other | — | 1.6 | (7.5) | — | (5.9) | ||||||||||||||||||||||||||||||||||||
| Balances at May 30, 2021 | 130.8 | $ | 2,286.6 | $ | 522.3 | $ | 4.2 | $ | 2,813.1 | ||||||||||||||||||||||||||||||||
| Net earnings | — | — | 952.8 | — | 952.8 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | (6.1) | (6.1) | ||||||||||||||||||||||||||||||||||||
| Dividends declared ($4.40 per share) | — | — | (565.4) | — | (565.4) | ||||||||||||||||||||||||||||||||||||
| Stock option exercises | 0.5 | 29.7 | — | — | 29.7 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 33.6 | — | — | 33.6 | ||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (7.6) | (135.7) | (935.6) | — | (1,071.3) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | 0.1 | 10.5 | — | — | 10.5 | ||||||||||||||||||||||||||||||||||||
| Other | 0.1 | 1.3 | — | — | 1.3 | ||||||||||||||||||||||||||||||||||||
| Balances at May 29, 2022 | 123.9 | $ | 2,226.0 | $ | (25.9) | $ | (1.9) | $ | 2,198.2 | ||||||||||||||||||||||||||||||||
| Net earnings | — | — | 981.9 | — | 981.9 | ||||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | 5.1 | 5.1 | ||||||||||||||||||||||||||||||||||||
| Dividends declared ($4.84 per share) | — | — | (594.1) | — | (594.1) | ||||||||||||||||||||||||||||||||||||
| Stock option exercises | 0.4 | 24.2 | — | — | 24.2 | ||||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | 32.7 | — | — | 32.7 | ||||||||||||||||||||||||||||||||||||
| Repurchases of common stock | (3.5) | (64.3) | (394.4) | — | (458.7) | ||||||||||||||||||||||||||||||||||||
| Issuance of stock under Employee Stock Purchase Plan and other plans | 0.3 | 11.2 | — | — | 11.2 | ||||||||||||||||||||||||||||||||||||
| Other | — | 1.0 | — | — | 1.0 | ||||||||||||||||||||||||||||||||||||
| Balances at May 28, 2023 | 121.1 | $ | 2,230.8 | $ | (32.5) | $ | 3.2 | $ | 2,201.5 | ||||||||||||||||||||||||||||||||
See accompanying notes to consolidated financial statements.
46
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
| Fiscal Year Ended | |||||||||||||||||
| May 28, 2023 | May 29, 2022 | May 30, 2021 | |||||||||||||||
| Cash flows - operating activities | |||||||||||||||||
| Net earnings | $ | 981.9 | $ | 952.8 | $ | 629.3 | |||||||||||
| Losses from discontinued operations, net of tax | 1.6 | 1.9 | 3.1 | ||||||||||||||
| Adjustments to reconcile net earnings (loss) from continuing operations to cash flows: | |||||||||||||||||
| Depreciation and amortization | 387.8 | 368.4 | 350.9 | ||||||||||||||
| Impairments and disposal of assets, net | (10.6) | (2.0) | 6.6 | ||||||||||||||
| Stock-based compensation expense | 67.5 | 60.5 | 72.4 | ||||||||||||||
| Change in current assets and liabilities | 175.7 | (96.7) | (25.9) | ||||||||||||||
| Contributions to pension and postretirement plans | (2.1) | (2.2) | (1.8) | ||||||||||||||
| Deferred income taxes | (59.5) | (23.7) | 169.2 | ||||||||||||||
| Change in other assets and liabilities | 9.0 | (7.4) | 23.0 | ||||||||||||||
| Other, net | 1.5 | 13.0 | (33.3) | ||||||||||||||
| Net cash provided by operating activities of continuing operations | $ | 1,552.8 | $ | 1,264.6 | $ | 1,193.5 | |||||||||||
| Cash flows - investing activities | |||||||||||||||||
| Purchases of land, buildings and equipment | (564.9) | (376.9) | (254.9) | ||||||||||||||
| Proceeds from disposal of land, buildings and equipment | 25.4 | 10.1 | 5.4 | ||||||||||||||
| Purchases of capitalized software and other assets | (29.4) | (25.6) | (15.4) | ||||||||||||||
| Other, net | 0.5 | 3.4 | 1.2 | ||||||||||||||
| Net cash used in investing activities of continuing operations | $ | (568.4) | $ | (389.0) | $ | (263.7) | |||||||||||
| Cash flows - financing activities | |||||||||||||||||
| Net proceeds from issuance of common stock | 35.4 | 40.2 | 46.2 | ||||||||||||||
| Dividends paid | (589.8) | (563.0) | (202.6) | ||||||||||||||
| Repurchases of common stock | (458.7) | (1,071.3) | (45.4) | ||||||||||||||
| Repayments of short-term debt | (427.0) | — | (270.0) | ||||||||||||||
| Proceeds from issuance of short-term debt | 427.0 | — | — | ||||||||||||||
| Principal payments on finance leases | (19.8) | (12.9) | (7.1) | ||||||||||||||
| Other, net | (0.2) | (2.7) | — | ||||||||||||||
| Net cash used in financing activities of continuing operations | $ | (1,033.1) | $ | (1,609.7) | $ | (478.9) | |||||||||||
| Cash flows - discontinued operations | |||||||||||||||||
| Net cash provided by (used in) operating activities of discontinued operations | (7.2) | (8.5) | 0.5 | ||||||||||||||
| Net cash provided by (used in) discontinued operations | $ | (7.2) | $ | (8.5) | $ | 0.5 | |||||||||||
| (Decrease) increase in cash and cash equivalents | (55.9) | (742.6) | 451.4 | ||||||||||||||
| Cash and cash equivalents - beginning of year | 472.1 | 1,214.7 | 763.3 | ||||||||||||||
| Cash and cash equivalents - end of year | $ | 416.2 | $ | 472.1 | $ | 1,214.7 | |||||||||||
| Reconciliation of cash, cash equivalents, and restricted cash: | May 28, 2023 | May 29, 2022 | May 30, 2021 | ||||||||||||||
| Cash and cash equivalents | $ | 367.8 | $ | 420.6 | $ | 1,214.7 | |||||||||||
| Restricted cash included in prepaid and other current assets | 48.4 | 51.5 | — | ||||||||||||||
| Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | $ | 416.2 | $ | 472.1 | $ | 1,214.7 | |||||||||||
47
| Fiscal Year Ended | |||||||||||
| May 28, 2017 | May 29, 2016 | May 31, 2015 | |||||||||
| Cash flows - operating activities | |||||||||||
| Net earnings | $ | 479.1 | $ | 375.0 | $ | 709.5 | |||||
| (Earnings) losses from discontinued operations, net of tax | 3.4 | (15.3 | ) | (513.1 | ) | ||||||
| Adjustments to reconcile net earnings from continuing operations to cash flows: | |||||||||||
| Depreciation and amortization | 272.9 | 290.2 | 319.3 | ||||||||
| Impairments and disposal of assets, net | (8.4 | ) | 5.8 | 62.1 | |||||||
| Amortization of loan costs and losses on interest-rate related derivatives | 1.0 | 3.6 | 8.6 | ||||||||
| Stock-based compensation expense | 40.7 | 37.3 | 53.7 | ||||||||
| Change in current assets and liabilities | 112.6 | 13.7 | 76.3 | ||||||||
| Contributions to pension and postretirement plans | (1.6 | ) | (26.5 | ) | (1.5 | ) | |||||
| Change in cash surrender value of trust-owned life insurance | (10.3 | ) | 3.3 | (6.5 | ) | ||||||
| Deferred income taxes | (22.9 | ) | (10.8 | ) | 42.0 | ||||||
| Change in deferred rent | 32.9 | 23.8 | 22.0 | ||||||||
| Change in other assets and liabilities | (5.0 | ) | 5.3 | 3.8 | |||||||
| Loss on extinguishment of debt | — | 106.8 | 91.3 | ||||||||
| Other, net | 23.8 | 8.2 | 6.8 | ||||||||
| Net cash provided by operating activities of continuing operations | $ | 918.2 | $ | 820.4 | $ | 874.3 | |||||
| Cash flows - investing activities | |||||||||||
| Purchases of land, buildings and equipment | (293.0 | ) | (228.3 | ) | (296.5 | ) | |||||
| Proceeds from disposal of land, buildings and equipment | 8.3 | 325.2 | 67.9 | ||||||||
| Purchases of marketable securities | (0.9 | ) | — | — | |||||||
| Proceeds from sale of marketable securities | 3.7 | 1.8 | 9.7 | ||||||||
| Cash used in business acquisitions, net of cash acquired | (764.4 | ) | — | — | |||||||
| Purchases of capitalized software and other assets | (25.3 | ) | (23.3 | ) | (16.2 | ) | |||||
| Net cash provided by (used in) investing activities of continuing operations | $ | (1,071.6 | ) | $ | 75.4 | $ | (235.1 | ) | |||
| Cash flows - financing activities | |||||||||||
| Proceeds from issuance of common stock | 113.1 | 99.3 | 159.7 | ||||||||
| Income tax benefits credited to equity | 27.2 | 17.5 | 18.4 | ||||||||
| Special cash distribution from Four Corners Property Trust | — | 315.0 | — | ||||||||
| Dividends paid | (279.1 | ) | (268.2 | ) | (278.9 | ) | |||||
| Repurchases of common stock | (230.2 | ) | (184.8 | ) | (502.3 | ) | |||||
| ESOP note receivable repayments | 0.8 | 0.6 | 1.2 | ||||||||
| Proceeds from issuance of short-term debt | — | — | 397.4 | ||||||||
| Repayments of short-term debt | — | — | (605.0 | ) | |||||||
| Repayments of long-term debt | — | (1,096.8 | ) | (1,065.9 | ) | ||||||
| Proceeds from issuance of long-term debt | 500.0 | — | — | ||||||||
| Payment of debt issuance costs | (4.4 | ) | — | — | |||||||
| Principal payments on capital and financing leases | (3.9 | ) | (3.4 | ) | (2.2 | ) | |||||
| Proceeds from financing lease obligation | 5.7 | — | 93.1 | ||||||||
| Net cash provided by (used) in financing activities of continuing operations | $ | 129.2 | $ | (1,120.8 | ) | $ | (1,784.5 | ) | |||
| Cash flows - discontinued operations | |||||||||||
| Net cash used in operating activities of discontinued operations | (18.3 | ) | (42.4 | ) | (403.3 | ) | |||||
| Net cash provided by investing activities of discontinued operations | 0.8 | 6.3 | 1,986.2 | ||||||||
| Net cash provided by (used) in discontinued operations | $ | (17.5 | ) | $ | (36.1 | ) | $ | 1,582.9 | |||
| Increase (decrease) in cash and cash equivalents | (41.7 | ) | (261.1 | ) | 437.6 | ||||||
| Cash and cash equivalents - beginning of year | 274.8 | 535.9 | 98.3 | ||||||||
| Cash and cash equivalents - end of year | $ | 233.1 | $ | 274.8 | $ | 535.9 | |||||
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
| Fiscal Year Ended | |||||||||||||||||
| May 28, 2023 | May 29, 2022 | May 30, 2021 | |||||||||||||||
| Cash flows from changes in current assets and liabilities | |||||||||||||||||
| Receivables, net | $ | (8.2) | $ | (3.9) | $ | (18.4) | |||||||||||
| Inventories | (17.3) | (79.8) | 16.1 | ||||||||||||||
| Prepaid expenses and other current assets | (24.5) | (22.6) | 3.1 | ||||||||||||||
| Accounts payable | 40.9 | 43.2 | 48.9 | ||||||||||||||
| Accrued payroll | (8.4) | 4.1 | 27.4 | ||||||||||||||
| Prepaid/accrued income taxes | 143.3 | 58.5 | (289.1) | ||||||||||||||
| Other accrued taxes | 1.3 | 4.1 | 17.1 | ||||||||||||||
| Unearned revenues | 14.0 | 23.8 | 6.2 | ||||||||||||||
| Other current liabilities | 34.6 | (124.1) | 162.8 | ||||||||||||||
| Change in current assets and liabilities | $ | 175.7 | $ | (96.7) | $ | (25.9) | |||||||||||
| Fiscal Year Ended | |||||||||||
| May 28, 2017 | May 29, 2016 | May 31, 2015 | |||||||||
| Cash flows from changes in current assets and liabilities | |||||||||||
| Receivables, net | $ | (6.5 | ) | $ | 14.0 | $ | 7.8 | ||||
| Inventories | 5.0 | (11.8 | ) | 64.5 | |||||||
| Prepaid expenses and other current assets | (1.1 | ) | (10.8 | ) | 2.9 | ||||||
| Accounts payable | (9.0 | ) | 45.6 | (20.9 | ) | ||||||
| Accrued payroll | 0.8 | (5.9 | ) | 23.4 | |||||||
| Prepaid/accrued income taxes | 41.4 | (21.3 | ) | (13.8 | ) | ||||||
| Other accrued taxes | 0.4 | (1.4 | ) | 2.2 | |||||||
| Unearned revenues | 41.6 | 46.0 | 34.9 | ||||||||
| Other current liabilities | 40.0 | (40.7 | ) | (24.7 | ) | ||||||
| Change in current assets and liabilities | $ | 112.6 | $ | 13.7 | $ | 76.3 | |||||
See accompanying notes to consolidated financial statements.
48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the operations of Darden Restaurants, Inc. and its wholly owned subsidiaries (Darden, the Company, we, us or our). We own and operate the Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Yard House®, Bahama Breeze®, Seasons 52®, andBahama Breeze®, Eddie V’s Prime Seafood® and Wildfish Seafood GrilleThe Capital Burger® (collectively, “Eddie V’s”) restaurant brands located in the United States and Canada. Through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for 92 joint venture restaurants managed by us and 4534 franchised restaurants. We also have 3335 franchised restaurants in operation located in Latin America, the Caribbean, Asia, and the Middle East and Malaysia.East. All significant intercompany balances and transactions have been eliminated in consolidation.
On April 24, 2017,June 14, 2023, we completed our acquisition of Ruth’s Hospitality Group, Inc., a Delaware corporation (Ruth’s), for $21.50 per share in cash. Ruth’s is the owner, operator and franchisor of Ruth’s Chris Steak House restaurants. As the acquisition of Cheddar’s Scratch Kitchenwas subsequent to our fiscal year ended on May 28, 2023, there was no impact to our financial statements or operations for $799.0 million in total consideration.fiscal year 2023. The acquired operations of Cheddar’s Scratch Kitchen included 140 company-owned restaurants and 25 franchised restaurants. The results of operations, financial position and cash flows are included in ouraccompanying consolidated financial statements asdo not include any results of the date of acquisition. See Note 2 for additional information.Ruth’s Chris Steak House.
COVID-19 Pandemic and Other Impacts to our Operating Environment
During fiscal 2022, increases in the number of cases of COVID-19 throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, subjected some of our restaurants to COVID-19-related restrictions such as mask and/or vaccine requirements for team members, guests or both.Along with COVID-19, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and other cost of goods sold; these events further impacted the availability of team members needed to staff our restaurants and caused additional information.disruptions in our product supply chain.
The ongoing efforts to recover from the effects of the COVID-19 pandemic and its variants, along with other geopolitical and macroeconomic events, could impact our restaurants through wage inflation, staffing challenges, product cost inflation and disruptions in the supply chain that impact our restaurants’ ability to obtain the products needed to support their operations.
Unless otherwise noted, amounts and disclosures throughout these notes to consolidated financial statements relate to our continuing operations.
We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.
Fiscal Year
We operate on a 52/53-week fiscal year, which ends on the last Sunday in May. Fiscal 2017,2023, which ended May 28, 2017,2023, consisted of 52 weeks. Fiscal 2016,2022, which ended May 29, 2016,2022, consisted of 52 weeks and fiscal 2015,2021, which ended May 31, 2015,30, 2021, consisted of 5352 weeks.
Use of Estimates
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles.principles (GAAP). The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash equivalents include highly liquid investments such as U.S. Treasury bills, taxable municipal bondsbank deposits and money market funds that have an original maturity of three months or less. Amounts receivable from credit card companies are also considered cash equivalents because they are both short term and highly liquid in nature and are typically converted to cash within three days of the sales transaction.
49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The components of cash and cash equivalents are as follows:
| (in millions) | May 28, 2017 | May 29, 2016 | |||||
| Short-term investments | $ | 102.8 | $ | 166.7 | |||
| Credit card receivables | 93.6 | 81.1 | |||||
| Depository accounts | 36.7 | 27.0 | |||||
| Total cash and cash equivalents | $ | 233.1 | $ | 274.8 | |||
| (in millions) | May 28, 2023 | May 29, 2022 | |||||||||
| Short-term investments | $ | 185.6 | $ | 246.0 | |||||||
| Credit card receivables | 142.3 | 133.1 | |||||||||
| Depository accounts | 39.9 | 41.5 | |||||||||
| Total cash and cash equivalents | $ | 367.8 | $ | 420.6 | |||||||
As of May 28, 2017,2023, and May 29, 2016,2022, we had cash and cash equivalent accounts in excess of insured limits. We manage the credit risk of our positions through utilizing multiple financial institutions and monitoring the credit quality of those financial institutions that hold our cash and cash equivalents. We had restricted cash of $48.4 million and $51.5 million as of May 28, 2023 and May 29, 2022, respectively, which represents cash held as security for a standby letter of credit. Restricted cash is included in Prepaid Expenses and Other Current Assets on the balance sheet. See Note 15, Commitments and Contingencies.
Receivables, Net
Receivables, net of the allowance for doubtful accounts, represent their estimated net realizable value. Provisions for doubtful accounts are recorded based on historical collection experience and the age of the receivables. Receivables are written off when they are deemed uncollectible. See Note 1211 for additional information.
Inventories
Inventories consist of food and beverages and are valued at the lower of weighted-average cost or market.
Land, Buildings and Equipment, Net
Land, buildings and equipment are recorded at cost less accumulated depreciation. Building components are depreciated over estimated useful lives ranging from 73 to 4030 years using the straight-line method. Leasehold improvements, which are reflected on our consolidated balance sheets as a component of buildings in land, buildings and equipment, net, are amortized over the lesser of the expected lease term including cancelable option periods, or the estimated useful lives of the related assets using the straight-line method. Equipment is depreciated over estimated useful lives ranging from 2 to 1520 years also using the straight-line method. See Note 54 for additional information. Gains and losses on the disposal of land, buildings and equipment are included in impairments and disposal of assets, net, while the write-off of undepreciatednet book value associated with the replacement of equipment in the normal course of business is recorded as a component of restaurant expenses in our accompanying consolidated statements of earnings. Depreciation and amortization expense from continuing operations associated with buildings and equipment and losses on replacement of equipment were as follows:
| Fiscal Year | Fiscal Year Ended | |||||||||||||||||||||||||||
(in millions) | 2017 | 2016 | 2015 | (in millions) | May 28, 2023 | May 29, 2022 | May 30, 2021 | |||||||||||||||||||||
| Depreciation and amortization on buildings and equipment | $ | 253.3 | $ | 274.4 | $ | 305.0 | Depreciation and amortization on buildings and equipment | $ | 367.4 | $ | 346.7 | $ | 323.5 | |||||||||||||||
| Losses on replacement of equipment | 3.2 | 5.5 | 5.5 | Losses on replacement of equipment | 2.2 | 2.1 | 2.6 | |||||||||||||||||||||
Capitalized Software Costs and Other Definite-Lived Intangibles
Capitalized software, which is a component of other assets, is recorded at cost less accumulated amortization. Capitalized software is amortized using the straight-line method over estimated useful lives ranging from 31 to 10 years. The cost of capitalized software and related accumulated amortization was as follows:
| (in millions) | May 28, 2017 | May 29, 2016 | (in millions) | May 28, 2023 | May 29, 2022 | |||||||||||||
| Capitalized software | $ | 190.1 | $ | 169.7 | Capitalized software | $ | 263.8 | $ | 250.2 | |||||||||
| Accumulated amortization | (108.2 | ) | (93.1 | ) | Accumulated amortization | (196.8) | (190.7) | |||||||||||
| Capitalized software, net of accumulated amortization | $ | 81.9 | $ | 76.6 | Capitalized software, net of accumulated amortization | $ | 67.0 | $ | 59.5 | |||||||||
50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
We have other definite-lived intangible assets, including assets related to the value of below-market leasesreacquired franchise rights resulting from our acquisitions that are included as a component of other assets on our consolidated balance sheets. We also haveand definite-lived intangible liabilities related to the value of above-market leases and below-market agreements resulting from our acquisitions that are included in other liabilities on our consolidated balance sheets. Definite-lived intangibles are amortized on a straight-line basis over estimated useful lives of 1 to 20 years. The cost and related accumulated amortization was as follows:
| (in millions) | May 28, 2017 | May 29, 2016 | (in millions) | May 28, 2023 | May 29, 2022 | |||||||||||||
| Definite-lived intangible assets | $ | 43.4 | $ | 43.4 | Definite-lived intangible assets | $ | 23.8 | $ | 23.8 | |||||||||
| Accumulated amortization | (23.3 | ) | (20.6 | ) | Accumulated amortization | (12.5) | (10.5) | |||||||||||
| Definite-lived intangible assets, net of accumulated amortization | $ | 20.1 | $ | 22.8 | Definite-lived intangible assets, net of accumulated amortization | $ | 11.3 | $ | 13.3 | |||||||||
| Definite-lived intangible liabilities | $ | (31.6 | ) | $ | (21.4 | ) | Definite-lived intangible liabilities | $ | (3.0) | $ | (3.0) | |||||||
| Accumulated amortization | 8.8 | 8.3 | Accumulated amortization | 1.8 | 1.5 | |||||||||||||
| Definite-lived intangible liabilities, net of accumulated amortization | $ | (22.8 | ) | $ | (13.1 | ) | Definite-lived intangible liabilities, net of accumulated amortization | $ | (1.2) | $ | (1.5) | |||||||