QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended November 27, 2022
or
☐
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
1-13666
Commission File Number
DARDEN RESTAURANTS, INC.
(Exact name of registrant as specified in its charter)
Florida
59-3305930
(State or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
1000 Darden Center Drive
Orlando,
Florida
32837
(Address of principal executive offices)
(Zip Code)
407-245-4000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, without par value
DRI
New York Stock Exchange
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒Yes☐ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒Yes☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☒
Accelerated filer
☐
Non-accelerated filer
☐
Smaller reporting company
☐
Emerging growth company
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
Number of shares of common stock outstanding as of December 15, 2022: 121,705,296.
Statements set forth in or incorporated into this report that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan”, “outlook” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. The most significant of these uncertainties are described in Darden’s Form 10-K, Form 10-Q (including this report) and Form 8-K reports.
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $(0.5), $0.0, $0.1 and $0.0, respectively
5.6
(5.3)
7.8
(3.5)
Net unamortized gain (loss) arising during the period, including amortization of unrecognized net actuarial gain (loss), net of taxes of $0.0, $0.1, $0.1 and $0.2, respectively, related to pension and other post-employment benefits
0.2
0.2
0.3
0.4
Other comprehensive income (loss)
$
5.6
$
(5.2)
$
7.9
$
(3.6)
Total comprehensive income
$
192.8
$
188.0
$
388.1
$
420.5
See accompanying notes to our unaudited consolidated financial statements.
Darden Restaurants, Inc. (we, our, Darden or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze®, Eddie V’s Prime Seafood® and The Capital Burger®. As of November 27, 2022, through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for 2 joint venture restaurants managed by us and 34 franchised restaurants. We also have 31 franchised restaurants in operation located in Latin America, the Caribbean, and Asia.
We have prepared these consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally presented in annual financial statements prepared in accordance with U.S. generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments considered necessary for a fair presentation have been included and are of a normal recurring nature. We operate on a 52/53-week fiscal year which ends on the last Sunday in May. Our fiscal year ending May 28, 2023 will contain 52 weeks of operation. Operating results for interim periods presented are not necessarily indicative of results that may be expected for the full fiscal year.
These statements should be read in conjunction with the consolidated financial statements and related notes to consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended May 29, 2022. We prepare our consolidated financial statements in conformity with 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 costs and expenses during the reporting period. Actual results could differ from those estimates.
We have reclassified certain amounts in prior-period financial statements to conform to the current period’s presentation.
COVID-19 Pandemic and Other Impacts to our Operating Environment
During fiscal 2022, increasing numbers of COVID-19 cases throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, mostly in January 2022, subjected some of our restaurants to COVID-19-related restrictions such as mask and/or vaccine requirements for team members, guests or both. Exclusions and quarantines of restaurant team members or groups thereof disrupt an individual restaurant’s operations and often come with little or no notice to the local restaurant management. During fiscal 2022, along with COVID-19, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and other cost of goods sold. These events further impacted the availability of team members needed to staff our restaurants and caused additional disruptions in our product supply chain. During fiscal 2023, these events have continued to impact our operating results as wage and cost inflation continue to exceed recent norms.
The ongoing effects of COVID-19 and its variants, along with other geopolitical and macroeconomic events could lead to further capacity restrictions, mask and vaccination mandates, 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.
Recently Adopted Accounting Standards
In November 2021, the FASB issued ASU 2021-10, Government Assistance (Topic 832), which requires annual disclosures that increase the transparency of transactions involving government grants, including (i) information about the nature of the transactions and related accounting policy used to account for the transactions; (ii) the line items on the balance sheet and income statement affected by these transactions including amounts applicable to each line; and (iii) significant terms and conditions of the transactions, including commitments and contingencies. The guidance is effective for annual periods beginning after December 15, 2021. The Company adopted this guidance in the first quarter of fiscal 2023, but the adoption did not have a material impact on our financial statements.
The components of lease assets and liabilities on the consolidated balance sheet are as follows:
(in millions)
Balance Sheet Classification
November 27, 2022
May 29, 2022
Operating lease right-of-use assets
Operating lease right-of-use assets
$
3,434.8
$
3,465.1
Finance lease right-of-use assets
Land, buildings and equipment, net
893.3
838.1
Total lease assets, net
$
4,328.1
$
4,303.2
Operating lease liabilities - current
Other current liabilities
$
182.5
$
185.8
Finance lease liabilities - current
Other current liabilities
17.6
16.6
Operating lease liabilities - non-current
Operating lease liabilities - non-current
3,730.5
3,755.8
Finance lease liabilities - non-current
Other liabilities
1,087.0
1,018.6
Total lease liabilities
$
5,017.6
$
4,976.8
Supplemental Cash Flow Information
Cash paid for interest and income taxes are as follows:
Six Months Ended
(in millions)
November 27, 2022
November 28, 2021
Interest, net of amounts capitalized
$
38.1
$
30.3
Income taxes, net of refunds
(68.2)
58.0
Non-cash investing and financing activities are as follows:
Six Months Ended
(in millions)
November 27, 2022
November 28, 2021
Increase in land, buildings and equipment through accrued purchases
$
79.2
$
43.2
Right-of-use assets obtained in exchange for new operating lease liabilities
69.1
3.6
Right-of-use assets obtained in exchange for new finance lease liabilities
41.5
92.9
Net change in right-of-use assets mainly due to lease modifications resulting in reclassification of leases from operating to finance
37.4
108.3
We have restricted cash of $59.6 million and $51.5 million as of November 27, 2022 and May 29, 2022, respectively, which represents cash held as security for a standby letter of credit and cash held in escrow related to the sale of properties. Restricted cash is included in Prepaid Expenses and Other Current Assets on the balance sheet. See Note 12, Commitments and Contingencies, for further details around standby letters of credit.
Note 4.Income Taxes
The effective income tax rate for continuing operations for the quarter ended November 27, 2022 was 12.1 percent compared to an effective income tax rate for the quarter ended November 28, 2021 of 14.4 percent. This change was primarily driven by the impact of federal tax credits and hedge mark-to-market impacts. The effective income tax rate for continuing operations for the six months ended November 27, 2022 was 13.0 percent compared to an effective income tax rate for the quarter ended November 28, 2021 of 13.4 percent. This change was primarily driven by the impact of federal tax credits and lower net earnings from continuing operations.
Included in our remaining balance of unrecognized tax benefits is $7.9 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations or as a result of the expiration of the statute of limitations for specific jurisdictions.
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on share repurchases that occur after December 31, 2022 and introduces a 15% corporate alternative minimum tax
(“CAMT”) on adjusted financial statement income. The CAMT will be effective for us beginning in fiscal 2024. We currently are not expecting the IRA to have a material adverse impact to our financial statements.
Note 5.Net Earnings per Share
Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding, none of which impact the numerator of the diluted net earnings per share computation. Stock options, restricted stock and equity-settled performance stock units excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, are as follows:
Three Months Ended
Six Months Ended
(in millions)
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Anti-dilutive stock-based compensation awards
0.3
0.2
0.3
0.1
Note 6.Segment Information
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V’s and The Capital Burger in North America as operating segments. The brands operate principally in the U.S. within full-service dining. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. We have four reportable segments: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business.
The Olive Garden segment includes the results of our company-owned Olive Garden restaurants in the U.S. and Canada. The LongHorn Steakhouse segment includes the results of our company-owned LongHorn Steakhouse restaurants in the U.S. The Fine Dining segment aggregates our premium brands that operate within the fine-dining sub-segment of full-service dining and includes the results of our company-owned The Capital Grille and Eddie V’s restaurants in the U.S. The Other Business segment aggregates our remaining brands and includes the results of our company-owned Cheddar’s Scratch Kitchen, Yard House, Seasons 52, Bahama Breeze and The Capital Burger restaurants in the U.S and results from our franchise operations.
External sales are derived principally from food and beverage sales. We do not rely on any major customers as a source of sales, and the customers and long-lived assets of our reportable segments are predominantly in the U.S. There were no material transactions among reportable segments.
Our management uses segment profit as the measure for assessing performance of our segments. Segment profit includes revenues and expenses directly attributable to restaurant-level results of operations (sometimes referred to as restaurant-level earnings). These expenses include food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (collectively “restaurant and marketing expenses”). Non-cash lease-related expenses included in restaurant expenses (which is a component of segment profit) and lease-related depreciation and amortization are reported at the corporate level as these are expenses for which our operating segments are not being evaluated. Additionally, our lease-related right-of-use assets are not managed or evaluated at the operating segment level, but rather at the corporate level.
The components of accumulated other comprehensive income (loss), net of tax, for the quarter ended November 28, 2021 are as follows:
(in millions)
Foreign Currency Translation Adjustment
Unrealized Gains (Losses) on Derivatives
Benefit Plan Funding Position
Accumulated Other Comprehensive Income (Loss)
Balance at August 29, 2021
$
4.8
$
9.7
$
(8.7)
$
5.8
Gain (loss)
(0.1)
(5.3)
—
(5.4)
Reclassification realized in net earnings
—
—
0.2
0.2
Balance at November 28, 2021
$
4.7
$
4.4
$
(8.5)
$
0.6
Balances at May 30, 2021
$
5.2
$
7.9
$
(8.9)
$
4.2
Gain (loss)
(0.5)
(2.7)
—
(3.2)
Reclassification realized in net earnings
—
(0.8)
0.4
(0.4)
Balance at November 28, 2021
$
4.7
$
4.4
$
(8.5)
$
0.6
The following table presents the amounts and line items in our consolidated statements of earnings where adjustments reclassified from AOCI into net earnings were recorded.
Amount Reclassified from AOCI into Net Earnings
Three Months Ended
Six Months Ended
(in millions)
AOCI Components
Location of Gain (Loss) Recognized in Earnings
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Derivatives
Commodity contracts
(1)
$
0.7
$
—
$
0.8
$
—
Equity contracts
(2)
—
0.1
(0.8)
0.9
Interest rate contracts
(3)
(0.1)
(0.1)
(0.1)
(0.1)
Total before tax
$
0.6
$
—
$
(0.1)
$
0.8
Tax (expense) benefit
(0.1)
—
(0.1)
—
Net of tax
$
0.5
$
—
$
(0.2)
$
0.8
Benefit plan funding position
Recognized net actuarial loss - pension/postretirement plans
(3)
$
(0.1)
$
(0.2)
$
(0.1)
$
(0.3)
Recognized net actuarial gain (loss) - other plans
(3)
(0.1)
(0.1)
(0.3)
(0.3)
Total before tax
$
(0.2)
$
(0.3)
$
(0.4)
$
(0.6)
Tax (expense) benefit
—
0.1
0.1
0.2
Net of tax
$
(0.2)
$
(0.2)
$
(0.3)
$
(0.4)
(1)Primarily included in food and beverage costs and restaurant expenses. See Note 10 for additional details.
(2)Included in general and administrative expenses. See Note 10 for additional details.
(3)Included in the computation of net periodic benefit costs, which is a component of general and administrative expenses.
Note 9. Stock-Based Compensation
We grant stock options for a fixed number of shares to certain employees with an exercise price equal to the fair value of the shares at the date of grant. We also grant restricted stock, restricted stock units and performance stock units with a fair value
generally determined based on our closing stock price on the date of grant. In addition, we grant cash settled stock units (Darden stock units) which are classified as liabilities and are marked to market as of the end of each period.
The weighted-average fair value of non-qualified stock options and the related assumptions used in the Black-Scholes option pricing model for options granted during the periods presented, were as follows:
Six Months Ended
November 27, 2022
November 28, 2021
Weighted-average fair value
$
36.20
$
41.02
Dividend yield
3.8
%
3.2
%
Expected volatility of stock
42.0
%
39.6
%
Risk-free interest rate
2.8
%
0.9
%
Expected option life (in years)
5.9
6.3
Weighted-average exercise price per share
$
121.47
$
148.20
The weighted-average grant date fair value of market-based performance stock units and the related assumptions used in the Monte Carlo simulation to record stock-based compensation for units granted during the periods presented, were as follows:
Six Months Ended
November 27, 2022
November 28, 2021
Dividend yield (1)
0.0
%
0.0
%
Expected volatility of stock
55.5
%
53.4
%
Risk-free interest rate
2.9
%
0.4
%
Expected life (in years)
2.8
2.8
Weighted-average grant date fair value per unit
$
137.73
$
172.34
(1)Assumes a reinvestment of dividends.
The following table presents a summary of our stock-based compensation activity for the six months ended November 27, 2022.
We recognized expense from stock-based compensation as follows:
Three Months Ended
Six Months Ended
(in millions)
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Stock options
$
1.5
$
1.1
$
4.1
$
4.5
Restricted stock/restricted stock units
1.8
1.2
4.6
5.0
Equity-settled performance stock units
3.4
2.3
8.9
10.5
Cash-settled Darden stock units
10.3
4.9
18.5
16.2
Employee stock purchase plan
0.7
0.6
1.4
1.3
Director compensation program/other
0.3
0.4
0.9
0.6
Total stock-based compensation expense
$
18.0
$
10.5
$
38.4
$
38.1
Note 10. Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as provided by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial derivatives to manage interest rate and compensation risks inherent in our business operations. Cash flows related to derivatives are included in operating activities.
By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a change in interest rates, commodity prices, or the market price of our common stock.We minimize this market risk by establishing and monitoring parameters that limit the types and degree of market risk that may be undertaken.
We designate commodity contracts and equity forward contracts as cash flow hedging instruments. Our interest rate swap agreements are designated as fair value hedges of the related debt.Further, we entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, employee-directed investments in Darden stock within the non-qualified deferred compensation plan. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of Darden stock investments in the non-qualified deferred compensation plan.
The notional and fair values of our derivative contracts are as follows:
(1)Derivative assets and liabilities are included in receivables, net and other current liabilities, as applicable, on our consolidated balance sheets.
(2)Designated and undesignated equity forwards extend through July 2026 and April 2027, respectively.
(3)Commodity contracts extend through February 2024.
The effects of derivative instruments accounted for as cash flow hedging instruments in the consolidated statements of earnings are as follows:
Amount of Gain (Loss) Recognized in AOCI
Amount of Gain (Loss) Reclassified from AOCI to Earnings
Three Months Ended
Three Months Ended
(in millions)
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Equity (1)
$
7.3
$
(5.4)
$
—
$
0.1
Commodity (2)
(1.6)
0.1
0.7
—
Interest rate (3)
—
—
(0.1)
(0.1)
Total
$
5.7
$
(5.3)
$
0.6
$
—
Amount of Gain (Loss) Recognized in AOCI
Amount of Gain (Loss) Reclassified from AOCI to Earnings
Six Months Ended
Six Months Ended
(in millions)
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Equity (1)
$
6.8
$
(2.7)
$
(0.8)
$
0.9
Commodity (2)
1.0
—
0.8
—
Interest rate (3)
—
—
(0.1)
(0.1)
Total
$
7.8
$
(2.7)
$
(0.1)
$
0.8
(1)Location of the gain (loss) reclassified from AOCI to earnings is general and administrative expenses.
(2)Location of the gain (loss) reclassified from AOCI to earnings is food and beverage costs and restaurant expenses.
(3)Location of gain (loss) reclassified from AOCI to earnings is interest, net.
The effects of derivative instruments in fair value hedging relationships in the consolidated statement of earnings are as follows:
Amount of Gain (Loss) Recognized in Earnings on Derivatives
Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item
Three Months Ended
Three Months Ended
(in millions)
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Interest rate (1)(2)
$
(9.7)
$
(5.5)
$
9.7
$
5.5
Amount of Gain (Loss) Recognized in Earnings on Derivatives
Amount of Gain (Loss) Recognized in Earnings on Related Hedged Item
Six Months Ended
Six Months Ended
(in millions)
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Interest rate (1)(2)
$
(16.0)
$
1.2
$
16.0
$
(1.2)
(1) Location of the gain (loss) recognized in earnings on derivatives and related hedged item is interest, net.
(2) Hedged item in fair value hedge relationship is debt.
The effects of derivatives not designated as hedging instruments in the consolidated statements of earnings are as follows:
Amount of Gain (Loss) Recognized in Earnings
(in millions)
Three Months Ended
Six Months Ended
Location of Gain (Loss) Recognized in Earnings on Derivatives
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Food and beverage costs and restaurant expenses
$
—
$
—
$
—
$
0.1
General and administrative expenses
10.8
(3.5)
9.7
1.6
Total
$
10.8
$
(3.5)
$
9.7
$
1.7
Based on the fair value of our derivative instruments designated as cash flow hedges as of November 27, 2022, we expect to reclassify $1.1 million of net gains on derivative instruments from accumulated other comprehensive income (loss) to earnings during the next 12 months based on the maturity of our contracts. However, the amounts ultimately realized in earnings will be dependent on the fair value of the contracts on the settlement dates.
The fair values of cash equivalents, receivables, net, accounts payable and short-term debt approximate their carrying amounts due to their short duration.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis as of November 27, 2022 and May 29, 2022.
Items Measured at Fair Value at November 27, 2022
(in millions)
Fair value of assets (liabilities)
Quoted prices in active market for identical assets (liabilities) (Level 1)
Significant other observable inputs (Level 2)
Significant unobservable inputs (Level 3)
Derivatives:
Commodities futures, swaps & options
(1)
$
0.8
$
—
$
0.8
$
—
Equity forwards
(2)
$
4.1
$
—
$
4.1
$
—
Interest rate swaps
(3)
(43.9)
—
(43.9)
—
Total
$
(39.0)
$
—
$
(39.0)
$
—
Items Measured at Fair Value at May 29, 2022
(in millions)
Fair value of assets (liabilities)
Quoted prices in active market for identical assets (liabilities) (Level 1)
Significant other observable inputs (Level 2)
Significant unobservable inputs (Level 3)
Derivatives:
Commodities futures, swaps & options
(1)
$
0.6
$
—
$
0.6
$
—
Equity forwards
(2)
(0.3)
—
(0.3)
—
Interest rate swaps
(3)
(28.0)
—
(28.0)
—
Total
$
(27.7)
$
—
$
(27.7)
$
—
(1)The fair value of our commodities futures, swaps and options is based on closing market prices of the contracts, inclusive of the risk of nonperformance.
(2)The fair value of equity forwards is based on the closing market value of Darden stock, inclusive of the risk of nonperformance.
(3)The fair value of our interest rate swap agreements is based on current and expected market interest rates, inclusive of the risk of nonperformance.
The carrying value and fair value of long-term debt as of November 27, 2022, was $885.8 million and $839.9 million, respectively. The carrying value and fair value of long-term debt as of May 29, 2022, was $901.0 million and $896.9 million, respectively. The fair value of long-term debt, which is classified as Level 2 in the fair value hierarchy, is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.
The fair value of non-financial assets measured at fair value on a non-recurring basis, classified as Level 2 in the fair value hierarchy, is determined based on third-party market appraisals. As of November 27, 2022 and May 29, 2022, adjustments to the fair values of non-financial assets measured at fair value on a non-recurring basis, classified as Level 2, were not material.
The fair value of non-financial assets measured at fair value on a non-recurring basis, classified as Level 3 in the fair value hierarchy, is determined based on appraisals, sales prices of comparable assets, or estimates of discounted future cash flows. As of November 27, 2022, adjustments to the fair values of non-financial assets, classified as Level 3, were not material. As of May 29, 2022, long-lived assets held and used with a carrying amount of $4.9 million, primarily related to one
underperforming restaurant, were determined to have a fair value of $0.9 million resulting in an impairment charge of $4.0 million.
Note 12. Commitments and Contingencies
As collateral for performance on contracts and as credit guarantees to banks and insurers, we are contingently liable for guarantees of subsidiary obligations under standby letters of credit. As of November 27, 2022 and May 29, 2022, we had $85.4 million and $104.8 million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. As of November 27, 2022 and May 29, 2022, we had $19.3 million and $18.8 million, respectively, of surety bonds related to other payments. Most surety bonds are renewable annually.
As of November 27, 2022 and May 29, 2022, we had $91.4 million and $101.0 million, respectively, of guarantees associated with leased properties that have been assigned to third parties. These amounts represent the maximum potential amount of future payments under the guarantees. The fair value of the maximum potential future payments discounted at our weighted-average cost of capital as of November 27, 2022 and May 29, 2022, amounted to $75.8 million and $83.6 million, respectively. In the event of default by a third party, the indemnity and default clauses in our assignment agreements govern our ability to recover from and pursue the third party for damages incurred as a result of its default. We do not hold any third-party assets as collateral related to these assignment agreements, except to the extent that the assignment allows us to repossess the building and personal property. These guarantees expire over their respective lease terms, which range from fiscal 2023 through fiscal 2034.
We are subject to private lawsuits, administrative proceedings and claims that arise in the ordinary course of our business. A number of these lawsuits, proceedings and claims may exist at any given time. These matters typically involve claims from guests, employees and others related to operational issues common to the restaurant industry, and can also involve infringement of, or challenges to, our trademarks. While the resolution of a lawsuit, proceeding or claim may have an impact on our financial results for the period in which it is resolved, we believe that the final disposition of the lawsuits, proceedings and claims in which we are currently involved, either individually or in the aggregate, will not have a material adverse effect on our financial position, results of operations or liquidity.
Note 13. Subsequent Events
On December 14, 2022, the Board of Directors declared a cash dividend of $1.21 per share to be paid February 1, 2023 to all shareholders of record as of the close of business on January 10, 2023.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The discussion and analysis below for the Company, which contains forward-looking statements, should be read in conjunction with the unaudited financial statements, the notes to such financial statements and the “Forward-Looking Statements” included elsewhere in this Form 10-Q.
To facilitate review of our discussion and analysis, the following table sets forth our financial results for the periods indicated. All information is derived from the unaudited consolidated statements of earnings for the quarters and six months ended November 27, 2022 and November 28, 2021.
The following table details the number of company-owned restaurants currently reported in continuing operations that were open at the end of the second quarter of fiscal 2023, compared with the number open at the end of fiscal 2022 and the end of the second quarter of fiscal 2022.
November 27, 2022
May 29, 2022
November 28, 2021
Olive Garden
890
884
879
LongHorn Steakhouse
553
546
539
Cheddar’s Scratch Kitchen
179
172
172
Yard House
85
85
85
The Capital Grille
61
62
61
Seasons 52
45
45
44
Bahama Breeze
42
42
42
Eddie V’s
29
28
27
The Capital Burger
3
3
3
Total
1,887
1,867
1,852
OVERVIEW OF OPERATIONS
COVID-19 Pandemic
During fiscal 2022, increasing numbers of COVID-19 cases throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, mostly in January 2022, subjected some of our restaurants to COVID-19-related restrictions such as mask and/or vaccine requirements for team members, guests or both. Exclusions and quarantines of restaurant team members or groups thereof disrupt an individual restaurant’s operations and often come with little or no notice to the local restaurant management. During fiscal 2022, along with COVID-19, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and other cost of goods sold. These events further impacted the availability of team members needed to staff our restaurants and caused additional disruptions in our product supply chain. During fiscal 2023, these events have continued to impact our operating results as wage and cost inflation continue to exceed recent norms.
The ongoing effects of COVID-19 and its variants, along with other geopolitical and macroeconomic events could lead to further capacity restrictions, mask and vaccination mandates, wage inflation, staffing challenges, product cost inflation and disruptions in the supply chain that impact our restaurants’ ability to obtain the products needed to support their operations.
Financial Highlights - Consolidated
•Total sales increased 9.4% and 7.7% to $2.49 billion and $4.93 billion for the second quarter and six months of fiscal 2023 compared to $2.27 billion and $4.58 billion for the second quarter and six months of fiscal 2022 driven by blended same-restaurant sales increases of 7.3% and 5.7% and sales from 35 net new restaurants.
•Our net earnings from continuing operations were $187.5 million and $381.1 million for the second quarter and six months of fiscal 2023 compared to $193.4 million and $425.1 million for the second quarter and six months of fiscal 2022.
•Reported diluted net earnings per share from continuing operations were $1.52 and $3.09 for the second quarter and six months of fiscal 2023 compared to $1.48 and $3.24 for the second quarter and six months of fiscal 2022.
Outlook
We expect sales for fiscal 2023 to be between $10.3 and $10.45 billion, driven by same-restaurant sales growth of 5.0 to 6.5 percent and 55 to 60 new restaurant openings. Additionally, we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and for technology initiatives to be $525 to $575 million.
The following table presents our sales by segment for the periods indicated.
Three Months Ended
Six Months Ended
(in millions)
November 27, 2022
November 28, 2021
% Chg
SRS (1)
November 27, 2022
November 28, 2021
% Chg
SRS (1)
Olive Garden
$
1,176.7
$
1,077.2
9.2
%
7.6
%
$
2,307.4
$
2,167.6
6.4
%
5.0
%
LongHorn Steakhouse
$
600.5
$
547.2
9.7
%
7.3
%
$
1,205.1
$
1,114.3
8.1
%
5.7
%
Fine Dining
$
202.0
$
188.7
7.0
%
5.9
%
$
385.4
$
357.5
7.8
%
6.7
%
Other Business
$
507.3
$
459.1
10.5
%
7.1
%
$
1,034.7
$
938.8
10.2
%
7.4
%
(1)Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants open, or operated by Darden, at least 16 months.
Olive Garden’s sales increase for the second quarter and six months of fiscal 2023 was primarily driven by U.S. same-restaurant sales increases combined with revenue from new restaurants. The increase in U.S. same-restaurant sales for the second quarter of fiscal 2023 resulted from a 8.0 percent increase in average check offset by a 0.3 percent decrease in same-restaurant guest counts. The increase in U.S. same-restaurant sales for the six months of fiscal 2023 resulted from a 8.5 percent increase in average check offset by a 3.3 percent decrease in same-restaurant guest counts.
LongHorn Steakhouse’s sales increase for the second quarter and six months of fiscal 2023 was primarily driven by same-restaurant sales increases combined with revenue from new restaurants. The increase in same-restaurant sales for the second quarter of fiscal 2023 resulted from a 7.2 percent increase in average check combined with a 0.1 percent increase in same-restaurant guest counts. The increase in same-restaurant sales for the six months of fiscal 2023 resulted from a 6.8 percent increase in average check offset by a 1.0 percent decrease in same-restaurant guest counts.
Fine Dining’s sales increase for the second quarter and six months of fiscal 2023 was primarily driven by same-restaurant sales increases combined with revenue from new restaurants. The increase in same-restaurant sales for the second quarter of fiscal 2023 resulted from a 7.1 percent increase in average check offset by a 1.1 percent decrease in same-restaurant guest counts. The increase in same-restaurant sales for the six months of fiscal 2023 resulted from a 6.6 percent increase in average check combined with a 0.1 percent increase in same-restaurant guest counts.
Other Business’ sales increase for the second quarter and six months of fiscal 2023 was primarily driven by same-restaurant sales increases combined with revenue from new restaurants. The increase in same-restaurant sales for the second quarter months of fiscal 2023 resulted from a 7.4 percent increase in average check offset by a 0.3 percent decrease in same-restaurant guest counts. The increase in same-restaurant sales for the six months of fiscal 2023 resulted from a 7.1 percent increase in average check combined with a 0.3 percent increase in same-restaurant guest counts.
The following table sets forth selected operating data as a percent of sales for the periods indicated. All information is derived from the unaudited consolidated statements of earnings for the quarters and six months ended November 27, 2022 and November 28, 2021.
Three Months Ended
Six Months Ended
November 27, 2022
November 28, 2021
November 27, 2022
November 28, 2021
Sales
100.0
%
100.0
%
100.0
%
100.0
%
Costs and expenses:
Food and beverage
32.9
30.5
32.7
30.1
Restaurant labor
32.5
32.8
32.5
32.3
Restaurant expenses
16.8
16.9
16.6
16.7
Marketing expenses
1.3
1.0
1.2
1.0
General and administrative expenses
3.6
4.0
3.6
4.5
Depreciation and amortization
3.9
4.1
3.9
4.0
Impairments and disposal of assets, net
(0.4)
—
(0.3)
—
Total operating costs and expenses
90.6
%
89.3
%
90.3
%
88.6
%
Operating income
9.4
10.7
9.7
11.4
Interest, net
0.8
0.7
0.8
0.7
Earnings before income taxes
8.6
9.9
8.9
10.7
Income tax expense
1.0
1.4
1.1
1.4
Earnings from continuing operations
7.5
%
8.5
%
7.7
%
9.3
%
Quarter Ended November 27, 2022 Compared to Quarter Ended November 28, 2021
•Food and beverage costs increased as a percent of sales primarily due to a 3.7% impact from inflation and a 0.8% impact from menu mix, partially offset by a 2.1% impact from pricing.
•Restaurant labor costs decreased as a percent of sales primarily due to a 2.3% impact from pricing and sales leverage, partially offset by a 1.3% impact from inflation and a 0.7% impact from decreased productivity.
•Restaurant expenses decreased as a percent of sales primarily due to a 1.5% impact from pricing and sales leverage, partially offset by a 0.3% impact from higher utility costs, a 0.3% impact from higher repairs and maintenance expenses, a 0.2% impact from credit card expense, and a 0.6% impact from all other costs.
•Marketing expenses increased as a percent of sales primarily due to increased marketing media.
•General and administrative expenses decreased as a percent of sales primarily due to a 0.4% impact related to lower incentive pay accrual and a 0.4% impact due to sales leverage, partially offset by a 0.3% impact on mark to market on deferred compensation plans.
•Depreciation and amortization expenses decreased as a percent of sales primarily due to sales leverage.
•Impairment and disposal of assets, net decreased as a percent of sales due to gains recognized on the sale of properties.
Six Months Ended November 27, 2022 Compared to Six Months Ended November 28, 2021
•Food and beverage costs increased as a percent of sales primarily due to a 4.0% impact from inflation and a 0.9% impact from menu mix, partially offset by a 2.1% impact from pricing.
•Restaurant labor costs increased as a percent of sales primarily due to a 1.4% impact from inflation and a 0.8% impact from decreased productivity, partially offset by a 2.1% impact from pricing and sales leverage.
•Restaurant expenses decreased as a percent of sales primarily due to a 1.1% impact from pricing and sales leverage, partially offset by a 0.4% impact from higher utility costs, a 0.4% impact from higher repairs and maintenance expenses, and a 0.2% impact from credit card expense.
•Marketing expenses increased as a percent of sales primarily due to increased marketing media.
•General and administrative expenses decreased as a percent of sales primarily due to a 0.6% impact from lower incentive pay accrual and a 0.3% impact related to sales leverage.
•Depreciation and amortization expenses decreased as a percent of sales primarily due to sales leverage.
•Impairment and disposal of assets, net decreased as a percent of sales due to gains recognized on the sale of properties.
The effective income tax rate for continuing operations for the quarter ended November 27, 2022 was 12.1 percent compared to an effective income tax rate for the quarter ended November 28, 2021 of 14.4 percent. This change was primarily driven by the impact of federal tax credits and hedge mark-to-market impacts. The effective income tax rate for continuing operations for the six months ended November 27, 2022 was 13.0 percent compared to an effective income tax rate for the quarter ended November 28, 2021 of 13.4 percent. This change was primarily driven by the impact of federal tax credits and lower net earnings from continuing operations.
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1% excise tax on share repurchases that occur after December 31, 2022 and introduces a 15% corporate alternative minimum tax (“CAMT”) on adjusted financial statement income. The CAMT will be effective for us beginning in fiscal 2024. We currently are not expecting the IRA to have a material adverse impact to our financial statements.
LOSSES FROM DISCONTINUED OPERATIONS
On an after-tax basis, losses from discontinued operations for the second quarter and six months ended of fiscal 2023 were $0.3 million ($0.00 per diluted share) and 0.9 million ($(0.01) per diluted share) compared with losses from discontinued operations for the second quarter and six months of fiscal 2022 of $0.2 million ($0.00 per diluted share) and 1.0 million ($(0.01) per diluted share).
SEGMENT RESULTS
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V’s and The Capital Burger in North America as operating segments. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. Our four reportable segments are: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business (see Note 6 to our unaudited consolidated financial statements in Part I, Item 1 of this report).
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.
Three Months Ended
Six Months Ended
Segment
November 27, 2022
November 28, 2021
Change
November 27, 2022
November 28, 2021
Change
Olive Garden
18.6%
21.8%
(320) BPS
18.9%
22.5%
(360)
BPS
LongHorn Steakhouse
14.3%
15.3%
(100) BPS
14.7%
17.1%
(240)
BPS
Fine Dining
19.3%
21.0%
(170) BPS
17.9%
20.5%
(260)
BPS
Other Business
11.6%
13.6%
(200) BPS
12.7%
15.7%
(300)
BPS
The decrease in Olive Garden and LongHorn’s segment profit margin for the second quarter and six months of fiscal 2023 was driven primarily by food and beverage costs partially offset by positive same-restaurant sales.The decrease in Fine Dining and Other Business’ segment profit margin for the second quarter and six months of fiscal 2023 was driven primarily by food and beverage and restaurant labor costs partially offset by positive same-restaurant sales.
SEASONALITY
Our sales volumes fluctuate seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. Holidays, changes in the economy, severe weather, effects of the COVID-19 pandemic and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
LIQUIDITY AND CAPITAL RESOURCES
Typically, cash flows generated from operating activities are our principal source of liquidity, which we use to finance capital expenditures for new restaurants and to remodel and maintain existing restaurants, to pay dividends to our shareholders and to repurchase shares of our common stock. Since substantially all of our sales are for cash and cash equivalents, and accounts payable are generally paid in 5 to 90 days, we are typically able to carry current liabilities in excess of current assets.
27
We currently manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable costs. Our publicly issued long-term debt currently carries the following ratings:
•Moody’s Investors Service “Baa2”;
•Standard & Poor’s “BBB”; and
•Fitch “BBB”.
Our commercial paper has ratings of:
•Moody’s Investors Service “P-2”;
•Standard & Poor’s “A-2”; and
•Fitch “F-2”.
These ratings are as of the date of the filing of this Form 10-Q and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.
On September 10, 2021, we entered into a $1 billion Revolving Credit Agreement (Revolving Credit Agreement) with Bank of America, N.A. (BOA), as administrative agent, and the lenders and other agents party thereto. The Revolving Credit Agreement is a senior unsecured credit commitment to the Company and contains customary representations and affirmative and negative covenants (including limitations on liens and subsidiary debt and a maximum consolidated lease adjusted total debt to total capitalization ratio of 0.75 to 1.00) and events of default usual for credit facilities of this type. As of November 27, 2022, we had no outstanding balances and were in compliance with all covenants under the Revolving Credit Agreement. As of November 27, 2022, $58.0 million of commercial paper was outstanding, which was backed by this facility. After consideration of commercial paper backed by the Revolving Credit Agreement, as of November 27, 2022, we had $942.0 million of credit available under the Revolving Credit Agreement.
The Revolving Credit Agreement matures on September 10, 2026, and the proceeds may be used for working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. Loans under the Revolving Credit Agreement bear interest at a rate of LIBOR plus a margin determined by reference to a ratings-based pricing grid (Applicable Margin), or the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the Eurodollar Rate plus 1.00 percent) plus the Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement will be 1.000 percent for LIBOR loans and 0.000 percent for base rate loans.
As of November 27, 2022, our outstanding long-term debt consisted principally of:
•$500.0 million of unsecured 3.850 percent senior notes due in May 2027;
•$96.3 million of unsecured 6.000 percent senior notes due in August 2035;
•$42.8 million of unsecured 6.800 percent senior notes due in October 2037; and
•$300.0 million of unsecured 4.550 percent senior notes due in February 2048.
The interest rate on our $42.8 million senior notes due in October 2037 is subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of November 27, 2022, no such adjustments are made to this rate.
We may from time to time repurchase our remaining outstanding debt in privately negotiated transactions. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements and other factors.
From time to time we enter into interest rate derivative instruments. See Note 10 to our unaudited consolidated financial statements in Part I, Item 1 of this report, which is incorporated by reference.
Net cash flows provided by operating activities of continuing operations increased to $635.6 million for the six months of fiscal 2023, from $481.5 million for the six months of fiscal 2022. Net cash flows provided by operating activities include net earnings from continuing operations of $381.1 million and $425.1 million in the six months of fiscal 2023 and 2022, respectively. Net cash flows provided by operating activities increased in fiscal 2023 primarily due to the change in working capital compared to fiscal 2022 offset by lower net earnings from continuing operations.
Net cash flows used in investing activities of continuing operations were $273.4 million for the six months of fiscal 2023, compared to $177.8 million for the six months of fiscal 2022. Capital expenditures increased to $280.3 million for the six
28
months of fiscal 2023 from $173.3 million for the six months of fiscal 2022 reflecting an increase in new restaurant construction and remodel activity during fiscal 2023.
Net cash flows used in financing activities of continuing operations were $534.9 million for the six months of fiscal 2023, compared to $721.0 million for the six months of fiscal 2022. Net cash flows used in financing activities for the six months of fiscal 2023 included dividends paid of $296.5 million, share repurchases of $299.2 million, and repayments of short-term debt of $253.5 million partially offset by proceeds from the issuance of short-term debt. Net cash flows used in financing activities for the six months of fiscal 2022 included dividends paid of $286.1 million and share repurchases of $452.3 million partially offset by proceeds from the exercise of employee stock options. Dividends declared by our Board of Directors totaled $2.42 and $2.20 per share for the six months of fiscal 2023 and 2022, respectively.
On June 22, 2022, our Board of Directors authorized a new share repurchase program under which we may repurchase up to $1 billion of our outstanding common stock. This repurchase program does not have an expiration and replaces the existing share repurchase authorization. During the quarter and six months ended November 27, 2022, we repurchased 0.76 million and 2.4 million shares of our common stock, respectively, compared to 1.8 million and 3.1 million shares of our common stock, respectively, during the quarter and six months ended November 28, 2021.
We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales, costs or expenses, results of operations, liquidity, capital expenditures or capital resources.
Impairment of our assets, including goodwill or trademarks, adversely affects our financial position and results of operations, and our leverage ratio for purposes of our Revolving Credit Agreement. A leverage ratio exceeding the maximum permitted under our Revolving Credit Agreement would be a default under our Revolving Credit Agreement. At November 27, 2022, write-downs of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $824.7 million would have been required to cause our leverage ratio to exceed the permitted maximum. As our leverage ratio is determined on a quarterly basis, and due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.
FINANCIAL CONDITION
Our current assets totaled $892.1 million as of November 27, 2022, compared to $1.18 billion as of May 29, 2022. The decrease was primarily due to a decrease in prepaid income taxes as well as cash and cash equivalents.
Our current liabilities totaled $1.91 billion as of November 27, 2022, compared to $1.85 billion as of May 29, 2022. The increase was primarily driven by an increase in accounts payable and short-term debt, offset by a decrease in accrued payroll.
CRITICAL ACCOUNTING ESTIMATES
We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales, costs and expenses during the reporting period. Actual results could differ from those estimates. We have discussed the development, selection and disclosure of those estimates with the Audit Committee. Our critical accounting estimates have not changed materially from those previously reported in our Annual Report on Form 10-K for the fiscal year ended May 29, 2022.
APPLICATION OF NEW ACCOUNTING STANDARDS
Information regarding application of new accounting standards is incorporated by reference from Note 1 to our unaudited consolidated financial statements in Part I, Item 1 of this report.
Statements set forth in or incorporated into this report regarding the expected increase in the number of our restaurants and capital expenditures in fiscal 2023, projections for sales and all other statements that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan,” “outlook” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 and are included, along with this statement, for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. In addition to the risks and uncertainties of ordinary business obligations, and those described in information incorporated into this report, the forward-looking statements contained in this report are subject to the risks and uncertainties described in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended May 29, 2022 and in our Forms 10-Q (including this report), which are summarized as follows:
•The disruption of our business and the global economy caused by the novel coronavirus (COVID-19) pandemic;
•A failure to address cost pressures, including rising costs for commodities, labor, health care and utilities used by our restaurants, and a failure to effectively deliver cost management activities and achieve economies of scale in purchasing;
•Economic and business factors and their impacts on the restaurant industry and general macroeconomic factors including unemployment, energy prices and interest rates;
•The inability to hire, train, reward and retain restaurant team members and determine and maintain adequate staffing;
•A failure to recruit, develop and retain effective leaders or the loss or shortage of personnel with key capacities and skills;
•Increases in labor and insurance costs;
•Health concerns arising from food-related pandemics, outbreaks of flu, viruses or other diseases;
•Failures to maintain food safety throughout the supply chain and food-borne illness concerns;
•Insufficient guest or employee facing technology or a failure to maintain a continuous or secure cyber network
•Increased costs related to compliance with privacy and data protection laws and government enforcement, litigation or adverse publicity relating to potential failures thereof;
•Insufficient or ineffective response to legislation or government regulation may impact our cost structure, operational efficiencies and talent availability;
•Intense competition, or an insufficient focus on competition and the consumer landscape;
•Changes in consumer preferences that may adversely affect demand for food at our restaurants;
•An inability or failure to recognize, respond to and effectively manage the accelerated impact of social media;
•A failure to identify and execute innovative marketing and guest relationship tactics and ineffective or improper use of other marketing initiatives and increased advertising and marketing costs;
•Impacts of climate change, adverse weather conditions and natural disasters;
•The inability to cancel long-term, non-cancelable leases that we may want to cancel or the inability to renew the leases that we may want to extend at the end of their terms;
•Our inability or failure to execute a comprehensive business continuity plan following a major natural disaster such as a hurricane or manmade disaster, including terrorism;
•The impact of shortages, delay or interruptions in the delivery of food and other products from third-party vendors and suppliers;
•Our failure to drive both short-term and long-term profitable sales growth through brand relevance, operating excellence, opening new restaurants of existing brands and developing or acquiring new dining brands;
•A lack of suitable new restaurant locations or a decline in the quality of the locations of our current restaurants;
•Higher-than-anticipated costs or delays to open, close, relocate or remodel restaurants;
•Risks associated with doing business with franchisees and licensees;
•Risks associated with doing business with business partners and vendors in foreign markets;
•Volatility in the market value of derivatives we may use to hedge commodity and broader market prices;
•Volatility in the United States equity markets that may affect our ability to efficiently hedge exposures to our market risk related to equity-based compensation awards;
•Failure to protect our service marks or other intellectual property;
•Litigation, including allegations of illegal, unfair or inconsistent employment practices;
•Unfavorable publicity, or a failure to respond effectively to adverse publicity;
•Disruptions in the financial markets that may impact consumer spending patterns, affect the availability and cost of credit;
•Impairment of the carrying value of our goodwill or other intangible assets;
•Changes in tax laws or treaties and unanticipated tax liabilities; and
•A failure of our internal controls over financial reporting and future changes in accounting standards.
Any of the risks described above or elsewhere in this report or our other filings with the SEC could have a material impact on our business, financial condition or results of operations. It is not possible to predict or identify all risk factors. Additional risks and uncertainties not presently known to us or that we currently believe to be immaterial may also impair our business operations. Therefore, the above is not intended to be a complete discussion of all potential risks or uncertainties.
Item 3.Quantitative and Qualitative Disclosures About Market Risk
We are exposed to a variety of market risks, including fluctuations in interest rates, foreign currency exchange rates, compensation and commodity prices. To manage this exposure, we periodically enter into interest rate, foreign currency exchange rate, equity forward and commodity derivative instruments for other than trading purposes (see Note 10 to our unaudited consolidated financial statements in Part I, Item 1 of this report).
We use the variance/covariance method to measure value at risk, over time horizons ranging from one week to one year, at the 95 percent confidence level. As of November 27, 2022, our potential losses in future net earnings resulting from changes in equity forwards, commodity instruments and floating rate debt interest rate exposures were approximately $74.5 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 $82.4 million. The fair value of our long-term fixed-rate debt outstanding as of November 27, 2022, averaged $851.9 million, with a high of $893.7 million and a low of $798.0 million during the six months of fiscal 2023. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows by targeting an appropriate mix of variable and fixed-rate debt.
Item 4.Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of November 27, 2022, the end of the period covered by this report. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of November 27, 2022.
During the fiscal quarter ended November 27, 2022, there was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
See the discussion of legal proceedings contained in the third paragraph of Note 12 to our unaudited consolidated financial statements in Part I, Item 1 of this report, which is incorporated herein by reference.
Item 1A.Risk Factors
There have been no material changes to the risk factors contained in Item 1A of our Annual Report on Form 10-K for the year ended May 29, 2022.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The table below provides information concerning our repurchase of shares of our common stock during the quarter ended November 27, 2022.
(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)
August 29, 2022 through October 2, 2022
331,620
$
125.55
331,620
$
870.1
October 3, 2022 through October 30, 2022
288,679
$
131.09
288,679
$
832.3
October 31, 2022 through November 27, 2022
144,512
$
143.93
144,512
$
811.5
Quarter-to-Date
764,811
$
131.11
764,811
$
811.5
(1)All of the shares purchased during the quarter ended November 27, 2022 were purchased as part of our repurchase program. On June 22, 2022, our Board of Directors authorized a new share repurchase program under which we may repurchase up to $1 billion of our outstanding common stock. This repurchase program, which was announced publicly in a press release issued on June 23, 2022, does not have an expiration and replaces the existing share repurchase authorization.
(2)The number of shares purchased includes shares withheld for taxes on vesting of restricted stock, shares delivered or deemed to be delivered to us on tender of stock in payment for the exercise price of options, and shares reacquired pursuant to tax withholding on option exercises. These shares are included as part of our repurchase program and deplete the repurchase authority granted by our Board. The number of shares repurchased excludes shares we reacquired pursuant to forfeiture of restricted stock.
(3)Repurchases are subject to prevailing market prices, may be made in open market or private transactions and may occur or be discontinued at any time. There can be no assurance that we will repurchase any shares.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
