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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
| | | | | |
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended August 27, 2023
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 September 15, 2023: 120,314,697.
TABLE OF CONTENTS
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| | | Page |
Part I - | Financial Information | |
| Item 1. | | |
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| Item 2. | | |
| Item 3. | | |
| Item 4. | | |
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Part II - | Other Information | |
| Item 1. | | |
| Item 1A. | | |
| Item 2. | | |
| Item 5. | | |
| Item 6. | | |
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Cautionary Statement Regarding Forward-Looking Statements
Statements set forth in or incorporated into this report that are not historical facts, including without limitation statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Darden Restaurants, Inc. and its subsidiaries that are preceded by, followed by or that include words such as “may,” “will,” “expect,” “intend,” “anticipate,” “continue,” “estimate,” “project,” “believe,” “plan”, “outlook” or similar expressions, are forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. This statement is included for purposes of complying with the safe harbor provisions of that Act. Any forward-looking statements speak only as of the date on which such statements are made, and we undertake no obligation to update such statements for any reason to reflect events or circumstances arising after such date. By their nature, forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from those set forth in or implied by such forward-looking statements. The most significant of these uncertainties are described in Darden’s Form 10-K, Form 10-Q (including this report) and Form 8-K reports.
PART I
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF EARNINGS
(In millions, except per share data)
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | August 27, 2023 | | August 28, 2022 |
Sales | | | | | $ | 2,730.6 | | | $ | 2,446.1 | |
Costs and expenses: | | | | | | | |
Food and beverage | | | | | 851.0 | | | 795.3 | |
Restaurant labor | | | | | 875.3 | | | 793.8 | |
Restaurant expenses | | | | | 446.6 | | | 403.5 | |
Marketing expenses | | | | | 38.6 | | | 30.3 | |
General and administrative expenses | | | | | 153.3 | | | 88.3 | |
Depreciation and amortization | | | | | 109.8 | | | 95.6 | |
Impairments and disposal of assets, net | | | | | 3.1 | | | (4.9) | |
Total operating costs and expenses | | | | | $ | 2,477.7 | | | $ | 2,201.9 | |
Operating income | | | | | 252.9 | | | 244.2 | |
Interest, net | | | | | 29.7 | | | 19.8 | |
| | | | | | | |
Earnings before income taxes | | | | | 223.2 | | | 224.4 | |
Income tax expense | | | | | 28.4 | | | 30.8 | |
Earnings from continuing operations | | | | | $ | 194.8 | | | $ | 193.6 | |
Losses from discontinued operations, net of tax benefit of $0.1 and $0.0, respectively | | | | | (0.3) | | | (0.6) | |
Net earnings | | | | | $ | 194.5 | | | $ | 193.0 | |
Basic net earnings per share: | | | | | | | |
Earnings from continuing operations | | | | | $ | 1.61 | | | $ | 1.58 | |
Losses from discontinued operations | | | | | — | | | (0.01) | |
Net earnings | | | | | $ | 1.61 | | | $ | 1.57 | |
Diluted net earnings per share: | | | | | | | |
Earnings from continuing operations | | | | | $ | 1.60 | | | $ | 1.56 | |
Losses from discontinued operations | | | | | (0.01) | | | — | |
Net earnings | | | | | $ | 1.59 | | | $ | 1.56 | |
Average number of common shares outstanding: | | | | | | | |
Basic | | | | | 120.9 | | | 122.9 | |
Diluted | | | | | 122.0 | | | 123.9 | |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended |
| | | | | August 27, 2023 | | August 28, 2022 |
Net earnings | | | | | $ | 194.5 | | | $ | 193.0 | |
| | | | | | | |
Foreign currency adjustment | | | | | — | | | — | |
Change in fair value of derivatives and amortization of unrecognized gains and losses on derivatives, net of taxes of $5.4 and $0.6, respectively | | | | | 12.6 | | | 2.2 | |
Net unamortized gain (loss) arising during the period, including amortization of unrecognized net actuarial gain (loss), net of taxes of $0.0 and $0.1, respectively, related to pension and other post-employment benefits | | | | | 0.2 | | | 0.1 | |
Other comprehensive income | | | | | $ | 12.8 | | | $ | 2.3 | |
Total comprehensive income | | | | | $ | 207.3 | | | $ | 195.3 | |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions) | | | | | | | | | | | |
| August 27, 2023 | | May 28, 2023 |
| (Unaudited) | | |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 192.1 | | | $ | 367.8 | |
Receivables, net | 59.2 | | | 80.2 | |
Inventories | 287.0 | | | 287.9 | |
Prepaid income taxes | 98.8 | | | 107.3 | |
Prepaid expenses and other current assets | 198.6 | | | 154.5 | |
| | | |
Total current assets | $ | 835.7 | | | $ | 997.7 | |
Land, buildings and equipment, net of accumulated depreciation and amortization of $3,506.2 and $3,422.0, respectively | 3,991.7 | | | 3,725.1 | |
Operating lease right-of-use assets | 3,600.3 | | | 3,373.9 | |
Goodwill | 1,376.9 | | | 1,037.4 | |
Trademarks | 1,148.0 | | | 806.3 | |
Other assets | 316.6 | | | 301.1 | |
Total assets | $ | 11,269.2 | | | $ | 10,241.5 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Accounts payable | $ | 419.6 | | | $ | 426.2 | |
Short-term debt | 95.4 | | | — | |
Accrued payroll | 168.6 | | | 173.0 | |
Accrued income taxes | 8.5 | | | 7.8 | |
Other accrued taxes | 74.3 | | | 65.9 | |
Unearned revenues | 541.7 | | | 512.0 | |
| | | |
Other current liabilities | 786.1 | | | 752.5 | |
Total current liabilities | $ | 2,094.2 | | | $ | 1,937.4 | |
Long-term debt | 1,477.1 | | | 884.9 | |
Deferred income taxes | 231.4 | | | 142.2 | |
Operating lease liabilities - non-current | 3,877.5 | | | 3,667.6 | |
Other liabilities | 1,441.0 | | | 1,407.9 | |
Total liabilities | $ | 9,121.2 | | | $ | 8,040.0 | |
Stockholders’ equity: | | | |
Common stock and surplus | $ | 2,256.8 | | | $ | 2,230.8 | |
Retained earnings (deficit) | (124.8) | | | (32.5) | |
Accumulated other comprehensive income (loss) | 16.0 | | | 3.2 | |
| | | |
Total stockholders’ equity | $ | 2,148.0 | | | $ | 2,201.5 | |
Total liabilities and stockholders’ equity | $ | 11,269.2 | | | $ | 10,241.5 | |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
For the Three Months Ended August 27, 2023 and August 28, 2022
(In millions)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common Stock And Surplus | | | | | | | | | | |
| Shares | | Amount | | Retained Earnings (Deficit) | | | | Accumulated Other Comprehensive Income (Loss) | | | | Total Stockholders’ Equity |
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Balance at May 28, 2023 | 121.1 | | $ | 2,230.8 | | | $ | (32.5) | | | | | $ | 3.2 | | | | | $ | 2,201.5 | |
Net earnings | — | | — | | | 194.5 | | | | | — | | | | | 194.5 | |
Other comprehensive income (loss) | — | | — | | | — | | | | | 12.8 | | | | | 12.8 | |
Dividends declared ($1.31 per share) | — | | — | | | (160.1) | | | | | — | | | | | (160.1) | |
Stock option exercises | 0.2 | | | 19.4 | | | — | | | | | — | | | | | 19.4 | |
Stock-based compensation | — | | 20.6 | | | — | | | | | — | | | | | 20.6 | |
Repurchases of common stock | (0.9) | | (16.2) | | | (126.7) | | | | | — | | | | | (142.9) | |
Issuance of stock under Employee Stock Purchase Plan and other plans | 0.3 | | | 2.9 | | | — | | | | | — | | | | | 2.9 | |
Other | — | | (0.7) | | | — | | | | | — | | | | | (0.7) | |
Balance at August 27, 2023 | 120.7 | | $ | 2,256.8 | | | $ | (124.8) | | | | | $ | 16.0 | | | | | $ | 2,148.0 | |
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Balance at May 29, 2022 | 123.9 | | $ | 2,226.0 | | | $ | (25.9) | | | | | $ | (1.9) | | | | | $ | 2,198.2 | |
Net earnings | — | | — | | | 193.0 | | | | | — | | | | | 193.0 | |
Other comprehensive income (loss) | — | | — | | | — | | | | | 2.3 | | | | | 2.3 | |
Dividends declared ($1.21 per share) | — | | — | | | (150.0) | | | | | — | | | | | (150.0) | |
Stock option exercises | 0.1 | | 3.6 | | | — | | | | | — | | | | | 3.6 | |
Stock-based compensation | — | | 12.1 | | | — | | | | | — | | | | | 12.1 | |
Repurchases of common stock | (1.7) | | (30.2) | | | (168.8) | | | | | — | | | | | (199.0) | |
Issuance of stock under Employee Stock Purchase Plan and other plans | 0.2 | | 2.8 | | | — | | | | | — | | | | | 2.8 | |
Other | — | | 1.1 | | | — | | | | | — | | | | | 1.1 | |
Balance at August 28, 2022 | 122.5 | | $ | 2,215.4 | | | $ | (151.7) | | | | | $ | 0.4 | | | | | $ | 2,064.1 | |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In millions)
(Unaudited) | | | | | | | | | | | |
| Three Months Ended |
| August 27, 2023 | | August 28, 2022 |
Cash flows—operating activities | | | |
Net earnings | $ | 194.5 | | | $ | 193.0 | |
Losses from discontinued operations, net of tax | 0.3 | | | 0.6 | |
Adjustments to reconcile net earnings from continuing operations to cash flows: | | | |
Depreciation and amortization | 109.8 | | | 95.6 | |
Impairments and disposal of assets, net | 3.1 | | | (4.9) | |
Stock-based compensation expense | 30.3 | | | 20.3 | |
Change in current assets and liabilities | (59.5) | | | 133.5 | |
Contributions to pension and postretirement plans | (0.4) | | | (0.5) | |
Deferred income taxes | 4.2 | | | (9.6) | |
Change in other assets and liabilities | (10.4) | | | (4.2) | |
| | | |
Other, net | (2.8) | | | 4.0 | |
Net cash provided by operating activities of continuing operations | $ | 269.1 | | | $ | 427.8 | |
Cash flows—investing activities | | | |
Purchases of land, buildings and equipment | (150.9) | | | (122.8) | |
Proceeds from disposal of land, buildings and equipment | 1.6 | | | 10.4 | |
Cash used in business acquisitions, net of cash acquired | (699.9) | | | — | |
Purchases of capitalized software and other assets | (5.2) | | | (5.8) | |
Other, net | 0.2 | | | 0.1 | |
Net cash used in investing activities of continuing operations | $ | (854.2) | | | $ | (118.1) | |
Cash flows—financing activities | | | |
Proceeds from issuance of common stock | 22.3 | | | 6.4 | |
Dividends paid | (158.5) | | | (148.5) | |
Repurchases of common stock | (142.9) | | | (199.0) | |
Proceeds from issuance of short-term debt | 872.1 | | | — | |
Repayments of short-term debt | (776.7) | | | — | |
| | | |
Proceeds from issuance of long-term debt | 600.0 | | | — | |
Principal payments on finance leases | (5.5) | | | (4.3) | |
Payments of debt issuance costs | (1.4) | | | — | |
Net cash provided by (used in) financing activities of continuing operations | $ | 409.4 | | | $ | (345.4) | |
Cash flows—discontinued operations | | | |
Net cash used in operating activities of discontinued operations | — | | | (0.5) | |
| | | |
Net cash used in discontinued operations | $ | — | | | $ | (0.5) | |
| | | |
Decrease in cash, cash equivalents, and restricted cash | (175.7) | | | (36.2) | |
Cash, cash equivalents, and restricted cash - beginning of period | 416.2 | | | 472.1 | |
Cash, cash equivalents, and restricted cash - end of period | $ | 240.5 | | | $ | 435.9 | |
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Reconciliation of cash, cash equivalents, and restricted cash: | | August 27, 2023 | | August 28, 2022 |
Cash and cash equivalents | | $ | 192.1 | | | $ | 377.5 | |
Restricted cash included in prepaid expenses and other current assets | | 48.4 | | | 58.4 | |
Total cash, cash equivalents, and restricted cash shown in the statement of cash flows | | $ | 240.5 | | | $ | 435.9 | |
DARDEN RESTAURANTS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
(In millions)
(Unaudited)
| | | | | | | | | | | |
| Three Months Ended |
| August 27, 2023 | | August 28, 2022 |
Cash flows from changes in current assets and liabilities | | | |
Receivables, net | 29.5 | | | 21.3 | |
Inventories | 9.4 | | | (2.5) | |
Prepaid expenses and other current assets | (40.1) | | | (28.0) | |
Accounts payable | (16.0) | | | 12.6 | |
Accrued payroll | (13.7) | | | (44.3) | |
Prepaid/accrued income taxes | 20.8 | | | 217.0 | |
Other accrued taxes | 7.8 | | | 6.3 | |
Unearned revenues | (32.1) | | | (30.2) | |
Other current liabilities | (25.1) | | | (18.7) | |
Change in current assets and liabilities | $ | (59.5) | | | $ | 133.5 | |
See accompanying notes to our unaudited consolidated financial statements.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1.Basis of Presentation
Darden Restaurants, Inc. (we, our, Darden or the Company) owns and operates full-service dining restaurants in the United States and Canada under the trade names Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, Ruth’s Chris Steak House®, The Capital Grille®, Seasons 52®, Bahama Breeze®, Eddie V’s Prime Seafood® and The Capital Burger®. As of August 27, 2023, through subsidiaries, we own and operate all of our restaurants in the United States and Canada, except for 2 joint venture restaurants managed by us, 4 managed locations operating under contractual agreements and 92 franchised restaurants. We also have 53 franchised restaurants in operation located in Latin America, the Caribbean, Asia, and the Middle East.
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 26, 2024 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 28, 2023. 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.
Note 2.Acquisition of Ruth’s Chris Steak House
On June 14, 2023, we acquired 100 percent of the equity interest of Ruth’s Chris Steak House (Ruth’s Chris) for $724.6 million in total consideration. We funded the acquisition with the proceeds from the issuance of a $600.0 million Term Loan (Term Loan Agreement) combined with cash on hand.
The acquired operations of Ruth’s Chris included 77 company-owned locations, 74 franchisee-owned locations and 4 managed locations operating under contractual agreement. The results of Ruth’s Chris operations are included in our consolidated financial statements from the date of acquisition.
The Term Loan Agreement is a senior unsecured $600 million 3-year credit 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 our existing revolving credit agreement. The Term Loan Agreement bears 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 Term Loan Agreement is 1.125 percent for Term SOFR loans and 0.125 percent for base rate loans. The Term Loan Agreement matures on the third anniversary of the funding date thereunder, June 14, 2023.
The assets and liabilities of Ruth’s Chris were recorded at their respective fair values as of the date of acquisition. We are in the process of confirming, through internal studies and third-party valuations, the fair value of these assets, including land, buildings and equipment, intangible assets, and income tax assets and liabilities. The fair values set forth below are based on preliminary valuations and are subject to adjustment as additional information is obtained. When the valuation process is completed, adjustments to goodwill may result.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The preliminary allocation of the purchase price is as follows:
| | | | | | | | |
| | Balances at |
(in millions) | | June 14, 2023 |
Current assets | | $ | 45.6 | |
Land, buildings and equipment | | 170.5 | |
Operating lease right-of-use assets | | 291.6 | |
Trademark | | 341.7 | |
Other assets | | 12.0 | |
Goodwill | | 339.5 | |
Total assets acquired | | $ | 1,200.9 | |
Current liabilities | | 113.5 | |
Deferred income taxes | | 79.5 | |
Operating lease liabilities - non-current | | 276.3 | |
Other liabilities | | 7.0 | |
Total liabilities assumed | | $ | 476.3 | |
Net assets acquired | | $ | 724.6 | |
The excess of the purchase price over the aggregate fair value of net assets acquired was allocated to goodwill. Of the $339.5 million recorded as goodwill, $15.2 million is deductible for tax purposes. The portion of the purchase price attributable to goodwill represents benefits expected because of the acquisition, including sales and unit growth opportunities in addition to supply-chain and support-cost synergies. The trademark has an indefinite life based on the expected use of the asset and the regulatory and economic environment within which it is being used. The trademark represents a highly respected brand with positive connotations, and we intend to cultivate and protect the use of this brand. Goodwill and indefinite-lived trademarks are not amortized but are reviewed annually for impairment or more frequently if indicators of impairment exist. Buildings and equipment will be depreciated over a period of 2 years to 30 years.
As a result of the acquisition and related integration efforts, we incurred expenses of approximately $24.8 million during the quarter ended August 27, 2023, which are included in general and administrative expenses in our consolidated statements of earnings. Pro-forma financial information of the combined entities for periods prior to the acquisition is not presented due to the immaterial impact of the financial results of Ruth’s Chris on our consolidated financial statements.
Note 3. Revenue Recognition
Deferred revenue liabilities from contracts with customers included on our accompanying consolidated balance sheets was comprised of the following:
| | | | | | | | | | | | | | |
(in millions) | | August 27, 2023 | | May 28, 2023 |
Unearned revenues | | | | |
Deferred gift card revenue | | $ | 563.4 | | | $ | 537.0 | |
Deferred gift card discounts | | (22.4) | | | (25.5) | |
Other | | 0.7 | | | 0.5 | |
Total | | $ | 541.7 | | | $ | 512.0 | |
| | | | |
Other liabilities | | | | |
Deferred franchise fees - non-current | | $ | 4.9 | | | $ | 2.7 | |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following table presents a rollforward of deferred gift card revenue.
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
(in millions) | | | | | | August 27, 2023 | | August 28, 2022 |
Beginning balance | | | | | | $ | 537.0 | | | $ | 521.1 | |
Acquired deferred gift card revenue | | | | | | 61.8 | | | — | |
Activations | | | | | | 130.1 | | | 114.4 | |
Redemptions and breakage | | | | | | (165.5) | | | (147.0) | |
Ending balance | | | | | | $ | 563.4 | | | $ | 488.5 | |
Note 4. Additional Financial Information
Supplemental Balance Sheet Information
The components of lease assets and liabilities on the consolidated balance sheet were as follows:
| | | | | | | | | | | | | | | | | | | | |
(in millions) | | Balance Sheet Classification | | August 27, 2023 | | May 28, 2023 |
Operating lease right-of-use assets | | Operating lease right-of-use assets | | $ | 3,600.3 | | | $ | 3,373.9 | |
Finance lease right-of-use assets | | Land, buildings and equipment, net | | 1,006.5 | | | 958.1 | |
Total lease assets, net | | | | $ | 4,606.8 | | | $ | 4,332.0 | |
| | | | | | |
Operating lease liabilities - current | | Other current liabilities | | $ | 193.9 | | | $ | 182.5 | |
Finance lease liabilities - current | | Other current liabilities | | 12.5 | | | 13.5 | |
Operating lease liabilities - non-current | | Operating lease liabilities - non-current | | 3,877.5 | | | 3,667.6 | |
Finance lease liabilities - non-current | | Other liabilities | | 1,229.0 | | | 1,172.6 | |
Total lease liabilities | | | | $ | 5,312.9 | | | $ | 5,036.2 | |
Supplemental Cash Flow Information | | | | | | | | | | | | | | |
Cash paid for interest and income taxes were as follows: | | Three Months Ended |
(in millions) | | August 27, 2023 | | August 28, 2022 |
Interest, net of amounts capitalized | | $ | 34.3 | | | $ | 21.1 | |
Income taxes, net of refunds | | 2.0 | | | (176.7) | |
| | | | | | | | | | | | | | |
Non-cash investing and financing activities were as follows: | | Three Months Ended |
(in millions) | | August 27, 2023 | | August 28, 2022 |
Increase in land, buildings and equipment through accrued purchases | | $ | 64.0 | | | $ | 75.9 | |
Right-of-use assets obtained in exchange for new operating lease liabilities (1) | | 298.0 | | | 49.6 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | | 45.3 | | | 41.5 | |
Net change in right-of-use assets mainly due to lease modifications resulting in reclassification of leases from operating to finance | | 2.1 | | | 25.3 | |
(1) Right-of-use assets obtained in fiscal 2024 includes $291.6 million from the acquisition of Ruth’s Chris.
We had restricted cash of $48.4 million as of August 27, 2023 and May 28, 2023, which represents cash held as security for a standby letter of credit. Restricted cash is included in Prepaid Expenses and Other Current Assets on our consolidated balance sheet. See Note 13, Commitments and Contingencies, for further details around standby letters of credit.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 5. Income Taxes
The effective income tax rate for continuing operations for the three months ended August 27, 2023 was 12.7 percent compared to an effective income tax rate for the three months ended August 28, 2022 of 13.7 percent. The decrease in the tax rate is driven by an increase in certain tax credits, primarily attributable to Ruth’s Chris, and higher tax benefits related to option exercises partially offset by certain non-deductible acquisition related costs.
Included in our remaining balance of unrecognized tax benefits is $8.4 million related to tax positions for which it is reasonably possible that the total amounts could change within the next twelve months based on the outcome of examinations or as a result of the expiration of the statute of limitations for specific jurisdictions.
The Inflation Reduction Act (“IRA”) was enacted on August 16, 2022. The IRA includes provisions imposing a 1 percent excise tax on share repurchases that occur after December 31, 2022 and introduces a 15 percent corporate alternative minimum tax (“CAMT”) on adjusted financial statement income. The IRA excise tax and CAMT are immaterial to our consolidated financial statements for the three months ended August 27, 2023.
Note 6. Net Earnings per Share
Outstanding stock options, restricted stock and equity-settled performance stock units granted by us represent the only dilutive effect reflected in diluted weighted average shares outstanding, none of which impact the numerator of the diluted net earnings per share computation. Stock options, restricted stock and equity-settled performance stock units excluded from the calculation of diluted net earnings per share because the effect would have been anti-dilutive, were as follows:
| | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
(in millions) | | | | | | August 27, 2023 | | August 28, 2022 |
Anti-dilutive stock-based compensation awards | | | | | | — | | | 0.5 | |
Note 7. Segment Information
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, Ruth’s Chris, 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 Ruth’s Chris, 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.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The following tables reconcile our segment results to our consolidated results reported in accordance with GAAP.
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(in millions) | | Olive Garden | | LongHorn Steakhouse | | Fine Dining1 | | Other Business | | Corporate | | Consolidated |
For the three months ended August 27, 2023 | |
Sales | | $ | 1,227.9 | | | $ | 669.8 | | | $ | 273.5 | | | $ | 559.4 | | | $ | — | | | $ | 2,730.6 | |
Restaurant and marketing expenses | | 965.6 | | | 552.4 | | | 233.8 | | | 475.1 | | | (15.4) | | | 2,211.5 | |
Segment profit | | $ | 262.3 | | | $ | 117.4 | | | $ | 39.7 | | | $ | 84.3 | | | $ | 15.4 | | | $ | 519.1 | |
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 39.6 | | | $ | 18.2 | | | $ | 15.6 | | | $ | 25.1 | | | $ | 11.3 | | | $ | 109.8 | |
Impairments and disposal of assets, net | | 0.2 | | | — | | | — | | | — | | | 2.9 | | | 3.1 | |
Purchases of land, buildings and equipment | | 65.8 | | | 34.5 | | | 23.5 | | | 26.6 | | | 0.5 | | | 150.9 | |
1 Includes Ruth’s Chris results from the date of acquisition forward. |
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(in millions) | | Olive Garden | | LongHorn Steakhouse | | Fine Dining | | Other Business | | Corporate | | Consolidated |
For the three months ended August 28, 2022 | |
Sales | | $ | 1,130.7 | | | $ | 604.6 | | | $ | 183.4 | | | $ | 527.4 | | | $ | — | | | $ | 2,446.1 | |
Restaurant and marketing expenses | | 914.6 | | | 512.6 | | | 153.4 | | | 455.1 | | | (12.8) | | | 2,022.9 | |
Segment profit | | $ | 216.1 | | | $ | 92.0 | | | $ | 30.0 | | | $ | 72.3 | | | $ | 12.8 | | | $ | 423.2 | |
| | | | | | | | | | | | |
Depreciation and amortization | | $ | 35.8 | | | $ | 16.8 | | | $ | 8.9 | | | $ | 24.3 | | | $ | 9.8 | | | $ | 95.6 | |
Impairments and disposal of assets, net | | — | | | — | | | — | | | — | | | (4.9) | | | (4.9) | |
Purchases of land, buildings and equipment | | 56.1 | | | 28.0 | | | 11.3 | | | 25.6 | | | 1.8 | | | 122.8 | |
A reconciliation of segment profit to earnings from continuing operations before income taxes is below. | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
(in millions) | | | | | | August 27, 2023 | | August 28, 2022 |
Segment profit | | | | | | $ | 519.1 | | | $ | 423.2 | |
Less general and administrative expenses | | | | | | (153.3) | | | (88.3) | |
Less depreciation and amortization | | | | | | (109.8) | | | (95.6) | |
Less impairments and disposal of assets, net | | | | | | (3.1) | | | 4.9 | |
Less interest, net | | | | | | (29.7) | | | (19.8) | |
| | | | | | | | |
Earnings before income taxes | | | | | | $ | 223.2 | | | $ | 224.4 | |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 8. Impairments and Disposal of Assets, Net
Impairments and disposal of assets, net, in our accompanying consolidated statements of earnings were comprised of the following:
| | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
(in millions) | | | | | | August 27, 2023 | | August 28, 2022 |
Restaurant impairments | | | | | | $ | 0.3 | | | $ | — | |
Disposal (gains) losses | | | | | | 4.9 | | | (4.9) | |
Other | | | | | | (2.1) | | | — | |
Impairments and disposal of assets, net | | | | | | $ | 3.1 | | | $ | (4.9) | |
Restaurant impairments and disposal (gains) losses for the quarter ended August 27, 2023 were related to the decision to close four locations. Disposal (gains) losses for the quarter ended August 28, 2022 were related to the sale of properties. Other impacts for the quarter ended August 27, 2023 related to right-of-use asset adjustments on early lease terminations.
Note 9. Stockholders’ Equity
Accumulated Other Comprehensive Income (Loss) (AOCI)
The components of AOCI, net of tax, for the quarter ended August 27, 2023 were as follows:
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(in millions) | | Foreign Currency Translation Adjustment | | Unrealized Gains (Losses) on Derivatives | | Benefit Plan Funding Position | | Accumulated Other Comprehensive Income (Loss) |
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Balance at May 28, 2023 | | $ | 4.5 | | | $ | 3.9 | | | $ | (5.2) | | | $ | 3.2 | |
Gain (loss) | | — | | | 12.5 | | | — | | | 12.5 | |
Reclassification realized in net earnings | | — | | | 0.1 | | | 0.2 | | | 0.3 | |
Balance at August 27, 2023 | | $ | 4.5 | | | $ | 16.5 | | | $ | (5.0) | | | $ | 16.0 | |
The components of AOCI, net of tax, for the quarter ended August 28, 2022 were as follows:
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(in millions) | | Foreign Currency Translation Adjustment | | Unrealized Gains (Losses) on Derivatives | | Benefit Plan Funding Position | | Accumulated Other Comprehensive Income (Loss) |
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Balances at May 29, 2022 | | $ | 4.8 | | | $ | (0.4) | | | $ | (6.3) | | | $ | (1.9) | |
Gain (loss) | | — | | | 1.5 | | | — | | | 1.5 | |
Reclassification realized in net earnings | | — | | | 0.7 | | | 0.1 | | | 0.8 | |
Balance at August 28, 2022 | | $ | 4.8 | | | $ | 1.8 | | | $ | (6.2) | | | $ | 0.4 | |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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.
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| | | | | | | Amount Reclassified from AOCI into Net Earnings |
| | | | | Three Months Ended |
(in millions) AOCI Components | Location of Gain (Loss) Recognized in Earnings | | | | | | August 27, 2023 | | August 28, 2022 |
Derivatives | | | | | | | | | |
Commodity contracts | (1) | | | | | | $ | (1.9) | | | $ | 0.1 | |
Equity contracts | (2) | | | | | | 1.3 | | | (0.8) | |
Interest rate contracts | (3) | | | | | | — | | | — | |
Total before tax | | | | | | | $ | (0.6) | | | $ | (0.7) | |
Tax (expense) benefit | | | | | | | 0.5 | | | — | |
Net of tax | | | | | | | $ | (0.1) | | | $ | (0.7) | |
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Benefit plan funding position | | | | | | | | | |
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Recognized net actuarial gain (loss) - other plans | (4) | | | | | | (0.2) | | | (0.2) | |
Total before tax | | | | | | | $ | (0.2) | | | $ | (0.2) | |
Tax (expense) benefit | | | | | | | — | | | 0.1 | |
Net of tax | | | | | | | $ | (0.2) | | | $ | (0.1) | |
(1)Primarily included in food and beverage costs and restaurant expenses. See Note 11 for additional details.
(2)Included in general and administrative expenses. See Note 11 for additional details.
(3)Included in interest, net on our consolidated statement of earnings.
(4)Included in the computation of net periodic benefit costs, which is a component of general and administrative expenses.
Note 10. 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:
| | | | | | | | | | | |
| Three Months Ended |
| August 27, 2023 | | August 28, 2022 |
Weighted-average fair value | $ | 55.56 | | $ | 36.20 |
Dividend yield | 3.4 | % | | 3.8 | % |
Expected volatility of stock | 42.2 | % | | 42.0 | % |
Risk-free interest rate | 4.0 | % | | 2.8 | % |
Expected option life (in years) | 5.9 | | 5.9 |
Weighted-average exercise price per share | $ | 169.02 | | $ | 121.47 |
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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:
| | | | | | | | | | | |
| Three Months Ended |
| August 27, 2023 | | August 28, 2022 |
Dividend yield (1) | 0.0 | % | | 0.0 | % |
Expected volatility of stock | 32.3 | % | | 55.5 | % |
Risk-free interest rate | 4.5 | % | | 2.9 | % |
Expected life (in years) | 2.9 | | 2.8 |
Weighted-average grant date fair value per unit | $ | 217.11 | | $ | 137.73 |
(1)Assumes a reinvestment of dividends.
The following table presents a summary of our stock-based compensation activity for the three months ended August 27, 2023.
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(in millions) | | Stock Options | | Restricted Stock/ Restricted Stock Units | | Equity-Settled Performance Stock Units | | Cash-Settled Darden Stock Units |
Outstanding beginning of period | | 1.62 | | | 0.28 | | | 0.36 | | | 0.81 | |
Awards granted | | 0.13 | | | 0.05 | | | 0.16 | | | 0.14 | |
Awards granted performance impact | | — | | | — | | | — | | | — | |
Awards exercised/vested | | (0.23) | | | (0.08) | | | (0.16) | | | (0.15) | |
Awards forfeited | | — | | | — | | | — | | | (0.01) | |
Outstanding end of period | | 1.52 | | | 0.25 | | | 0.36 | | | 0.79 | |
We recognized expense from stock-based compensation as follows:
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| | | | Three Months Ended |
(in millions) | | | | | | August 27, 2023 | | August 28, 2022 |
Stock options | | | | | | $ | 4.2 | | | $ | 2.6 | |
Restricted stock/restricted stock units | | | | | | 4.6 | | | 2.8 | |
Equity-settled performance stock units | | | | | | 10.5 | | | 5.6 | |
Cash-settled Darden stock units | | | | | | 9.7 | | | 8.2 | |
Employee stock purchase plan | | | | | | 0.7 | | | 0.7 | |
Director compensation program/other | | | | | | 0.6 | | | 0.4 | |
Total stock-based compensation expense | | | | | | $ | 30.3 | | | $ | 20.3 | |
Note 11. Derivative Instruments and Hedging Activities
We enter into derivative instruments for risk management purposes only, including derivatives designated as hedging instruments as provided by FASB ASC Topic 815, Derivatives and Hedging, and those utilized as economic hedges. We use financial derivatives to manage interest rate, commodity and compensation risks inherent in our business operations. Cash flows related to derivatives are included in operating activities.
By using these instruments, we expose ourselves, from time to time, to credit risk and market risk. Credit risk is the failure of the counterparty to perform under the terms of the derivative contract. When the fair value of a derivative contract is positive, the counterparty owes us, which creates credit risk for us. We minimize this credit risk by entering into transactions with high quality counterparties. Market risk is the adverse effect on the value of a financial instrument that results from a
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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. We have two interest rate swap agreements. One is designated as a fair value hedge of the related debt and the other is designated as a cash flow hedge of the floating rate interest payments on the Term Loan Agreement entered into June 2023 or any related refinancing of the Term Loan. Further, we entered into equity forward contracts to hedge the risk of changes in future cash flows associated with recognized, employee-directed investments in our common stock within the non-qualified deferred compensation plan. We did not elect hedge accounting with the expectation that changes in the fair value of the equity forward contracts would offset changes in the fair value of our common stock investments in the non-qualified deferred compensation plan.
The notional and fair values of our derivative contracts were as follows:
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| | | | | | | Fair Values |
(in millions, except per share data) | Number of Shares Outstanding | | Weighted-Average Per Share Forward Rates | | Notional Values | | Derivative Assets (1) | | Derivative Liabilities (1) |
| August 27, 2023 | | August 27, 2023 | | May 28, 2023 | | August 27, 2023 | | May 28, 2023 |
Equity forwards: | | | | | | | | | | | | | |
Designated | 0.3 | | $139.71 | | $ | 41.3 | | | $ | — | | | $ | 2.2 | | | $ | 1.7 | | | $ | — | |
Not designated | 0.5 | | 128.59 | | 58.7 | | | — | | | 5.1 | | | 2.6 | | | — | |
Total equity forwards (2) | $ | — | | | $ | 7.3 | | | $ | 4.3 | | | $ | — | |
Commodity contracts: | | | | | | | | | | | | | |
Designated | N/A | | N/A | | $ | 22.3 | | | $ | 0.7 | | | $ | — | | | $ | 2.6 | | | $ | 5.6 | |
Not designated | N/A | | N/A | | — | | | — | | | — | | | — | | | — | |
Total commodity contracts (3) | | $ | 0.7 | | | $ | — | | | $ | 2.6 | | | $ | 5.6 | |
Interest rate related | | | | | | | | | | | | | |
Designated - Fair Value Hedge | N/A | | N/A | | $ | 300.0 | | | $ | — | | | $ | — | | | $ | 52.3 | | | $ | 45.4 | |
Designated - Cash Flow Hedge | N/A | | N/A | | 500.0 | | | 17.6 | | | — | | | — | | | — | |
Not designated | N/A | | N/A | | | | — | | | — | | | — | | | — | |
Total interest rate related | | | | | | $ | 17.6 | | | $ | — | | | $ | 52.3 | | | $ | 45.4 | |
Total derivative contracts | | $ | 18.3 | | | $ | 7.3 | | | $ | 59.2 | | | $ | 51.0 | |
(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 2027.
(3)Commodity contracts extend through June 2024.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
The effects of derivative instruments accounted for as cash flow hedging instruments in the consolidated statements of earnings were as follows: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
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| | Amount of Gain (Loss) Recognized in AOCI | | Amount of Gain (Loss) Reclassified from AOCI to Earnings | | |
| | Three Months Ended | | Three Months Ended | | |
(in millions) | | August 27, 2023 | | August 28, 2022 | | August 27, 2023 | | August 28, 2022 | | | | |
Equity (1) | | $ | (2.2) | | | $ | (0.5) | | | $ | 1.3 | | | $ | (0.8) | | | | | |
Commodity (2) | | 1.7 | | | 2.6 | | | (1.9) | | | 0.1 | | | | | |
Interest rate (3) | | 17.9 | | | — | | | — | | | — | | | | | |
Total | | $ | 17.4 | | | $ | 2.1 | | | $ | (0.6) | | | $ | (0.7) | | | | | |
(1)Location of the gain (loss) reclassified from AOCI to earnings is general and administrative expenses.
(2)Location of the gain (loss) reclassified from AOCI to earnings is food and beverage costs and restaurant expenses.
(3)Location of the gain (loss) reclassified from AOCI to earnings is interest, net.
The effects of derivative instruments in fair value hedging relationships in the consolidated statement of earnings were as follows:
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| | 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) | | August 27, 2023 | | August 28, 2022 | | August 27, 2023 | | August 28, 2022 | | | | |
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Interest rate (1)(2) | | $ | (6.9) | | | $ | (6.3) | | | $ | 6.9 | | | $ | 6.3 | | | | | |
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(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 were as follows: | | | | | | | | | | | | | | | | | | |
| | | | | Amount of Gain (Loss) Recognized in Earnings |
(in millions) | | | Three Months Ended |
Location of Gain (Loss) Recognized in Earnings on Derivatives | | | | | August 27, 2023 | | August 28, 2022 |
Food and beverage costs and restaurant expenses | | | | | | $ | — | | | $ | — | |
General and administrative expenses | | | | | | (0.1) | | | (1.1) | |
Total | | | | | | $ | (0.1) | | | $ | (1.1) | |
Based on the fair value of our derivative instruments designated as cash flow hedges as of August 27, 2023, we expect to reclassify $7.4 million of net gains on derivative instruments from AOCI to earnings during the next 12 months based on the maturity of our contracts. However, the amounts ultimately realized in earnings may change and will be dependent on the fair value of the contracts on the respective settlement dates.
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 12. Fair Value Measurements
The fair values of cash equivalents, receivables, net, accounts payable, short-term debt and the Term Loan approximate their carrying amounts due to their short duration or market based interest rates.
The following tables summarize the fair values of financial instruments measured at fair value on a recurring basis as of August 27, 2023 and May 28, 2023.
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Items Measured at Fair Value at August 27, 2023 |
(in millions) | | | Fair value of assets (liabilities) | | Quoted prices in active market for identical assets (liabilities) (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Derivatives: | | | | | | | | | |
Commodities futures, swaps & options | (1) | | $ | (1.9) | | | $ | — | | | $ | (1.9) | | | $ | — | |
Equity forwards | (2) | | (4.3) | | | — | | | (4.3) | | | $ | — | |
Interest rate swaps - fair value hedge | (3) | | (52.3) | | | — | | | (52.3) | | | — | |
Interest rate swaps - cash flow hedge | (3) | | 17.6 | | | — | | | 17.6 | | | — | |
Total | | | $ | (40.9) | | | $ | — | | | $ | (40.9) | | | $ | — | |
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Items Measured at Fair Value at May 28, 2023 |
(in millions) | | | Fair value of assets (liabilities) | | Quoted prices in active market for identical assets (liabilities) (Level 1) | | Significant other observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Derivatives: | | | | | | | | | |
Commodities futures, swaps & options | (1) | | $ | (5.6) | | | $ | — | | | $ | (5.6) | | | $ | — | |
Equity forwards | (2) | | 7.3 | | | — | | | 7.3 | | | — | |
Interest rate swaps - fair value hedge | (3) | | (45.4) | | | — | | | (45.4) | | | — | |
Total | | | $ | (43.7) | | | $ | — | | | $ | (43.7) | | | $ | — | |
(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 August 27, 2023, was $1.48 billion and $1.45 billion, respectively. The carrying value and fair value of long-term debt as of May 28, 2023, was $884.9 million and $857.0 million, respectively. The fair value of long-term debt, classified as Level 2 in the fair value hierarchy, is determined based on market prices or, if market prices are not available, the present value of the underlying cash flows discounted at our incremental borrowing rates.
The fair value of non-financial assets measured at fair value on a non-recurring basis, classified as Level 2 in the fair value hierarchy, is determined based on third-party market appraisals. As of August 27, 2023 and May 28, 2023, 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 August 27, 2023, adjustments to the fair values of non-financial assets, classified as Level 3, were not material. As of May 28, 2023, long-lived assets held and used with a carrying amount of $10.0 million, primarily related to one
DARDEN RESTAURANTS, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
underperforming restaurant, were determined to have a fair value of $8.4 million resulting in an impairment charge of $1.6 million.
Note 13. 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 August 27, 2023 and May 28, 2023, we had $79.6 million and $85.3 million, respectively, of standby letters of credit related to workers’ compensation and general liabilities accrued in our consolidated financial statements. As of August 27, 2023 and May 28, 2023, we had $16.1 million and $15.2 million, respectively, of surety bonds related to other payments. Most surety bonds are renewable annually.
As of August 27, 2023 and May 28, 2023, we had $84.3 million and $82.0 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 August 27, 2023 and May 28, 2023, amounted to $68.8 million and $68.4 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 2024 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 14. Subsequent Events
On September 19, 2023, the Board of Directors declared a cash dividend of $1.31 per share payable on November 1, 2023 to all shareholders of record as of the close of business on October 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 consolidated financial statements and the notes to such financial statements included elsewhere in this quarterly report on Form 10-Q (Form 10-Q) and the audited consolidated financial statements and the notes thereto included in our Form 10-K for the fiscal year ended May 28, 2023 (Form 10-K). In addition to historical consolidated financial information, this discussion contains forward-looking statements that reflect our plans, estimates, and beliefs and involve numerous risks and uncertainties, including but not limited to those described in the “Item 1A. Risk Factors” section of the Form 10-K. Actual results may differ materially from those contained in any forward-looking statements. You should carefully read “Forward-Looking Statements” included elsewhere in this Form 10-Q.
To facilitate review of our discussion and analysis, the following table sets forth our financial results for the periods indicated. All information is derived from the unaudited consolidated statements of earnings for the quarters and three months ended August 27, 2023 and August 28, 2022.
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| | | | | Three Months Ended | | |
(in millions) | | | | | | | August 27, 2023 | | August 28, 2022 | | % Chg |
Sales | | | | | | | $ | 2,730.6 | | | $ | 2,446.1 | | | 11.6% |
Costs and expenses: | | | | | | | | | | | |
Food and beverage | | | | | | | 851.0 | | | 795.3 | | | 7.0 |
Restaurant labor | | | | | | | 875.3 | | | 793.8 | | | 10.3 |
Restaurant expenses | | | | | | | 446.6 | | | 403.5 | | | 10.7 |
Marketing expenses | | | | | | | 38.6 | | | 30.3 | | | 27.4 |
General and administrative expenses | | | | | | | 153.3 | | | 88.3 | | | 73.6 |
Depreciation and amortization | | | | | | | 109.8 | | | 95.6 | | | 14.9 |
Impairments and disposal of assets, net | | | | | | | 3.1 | | | (4.9) | | | NM |
Total costs and expenses | | | | | | | $ | 2,477.7 | | | $ | 2,201.9 | | | 12.5 |
Operating income | | | | | | | 252.9 | | | 244.2 | | | 3.6 |
Interest, net | | | | | | | 29.7 | | | 19.8 | | | 50.0 |
| | | | | | | | | | | |
Earnings before income taxes | | | | | | | $ | 223.2 | | | $ | 224.4 | | | (0.5) |
Income tax expense (1) | | | | | | | 28.4 | | | 30.8 | | | (7.8) |
Earnings from continuing operations | | | | | | | $ | 194.8 | | | $ | 193.6 | | | 0.6 |
Losses from discontinued operations, net of tax | | | | | | | (0.3) | | | (0.6) | | | (50.0) |
Net earnings | | | | | | | $ | 194.5 | | | $ | 193.0 | | | 0.8% |
Diluted net earnings per share: | | | | | | | | | | | |
Earnings from continuing operations | | | | | | | $ | 1.60 | | | $ | 1.56 | | | 2.6% |
Losses from discontinued operations | | | | | | | (0.01) | | | — | | | NM |
Net earnings | | | | | | | $ | 1.59 | | | $ | 1.56 | | | 1.9% |
| | | | | | | | | | | |
(1) Effective tax rate | | | | | | | 12.7 | % | | 13.7 | % | | |
NM- Percentage not considered meaningful. | | | | |
The following table details the number of company-owned restaurants currently reported in continuing operations that were open at the end of the first quarter of fiscal 2024, compared with the number open at the end of fiscal 2023 and the end of the first quarter of fiscal 2023.
| | | | | | | | | | | | | | | | | | | | |
| | August 27, 2023 | | May 28, 2023 | | August 28, 2022 |
Olive Garden | | 906 | | | 905 | | | 887 | |
LongHorn Steakhouse | | 562 | | | 562 | | | 549 | |
Cheddar’s Scratch Kitchen | | 183 | | | 180 | | | 174 | |
Yard House | | 86 | | | 86 | | | 85 | |
Ruth’s Chris Steak House | | 77 | | | — | | | — | |
The Capital Grille | | 64 | | | 62 | | | 61 | |
Seasons 52 | | 44 | | | 44 | | | 45 | |
Bahama Breeze | | 42 | | | 42 | | | 42 | |
Eddie V’s | | 30 | | | 29 | | | 29 | |
The Capital Burger | | 4 | | | 4 | | | 3 | |
Total | | 1,998 | | | 1,914 | | | 1,875 | |
OVERVIEW OF OPERATIONS
Financial Highlights - Consolidated
•Total sales increased 11.6% to $2.73 billion for the first quarter of fiscal 2024 compared to $2.45 billion for the first quarter of fiscal 2023 driven by blended same-restaurant sales increases of 5.0%1 and sales from the addition of 77 Ruth's Chris Steak House (Ruth’s Chris) restaurants and 46 other net new restaurants.
•Our net earnings from continuing operations were $194.8 million for the first quarter of fiscal 2024 compared $193.6 million for the first quarter of fiscal 2023.
•Reported diluted net earnings per share from continuing operations were $1.60 for the first quarter of fiscal 2024 compared to $1.56 for the first quarter of fiscal 2023.
Outlook
We expect sales for fiscal 2024 to be between $11.5 and $11.6 billion, driven by same-restaurant sales growth of 2.5 to 3.5 percent1 and approximately 50 new restaurant openings inclusive of Ruth’s Chris new restaurant openings. Additionally, we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and for technology initiatives to be $550 to $600 million.
1 Same-restaurant sales results excludes Ruth's Chris as they have not yet been owned and operated by Darden for a 16-month period.
SALES
The following table presents our sales by segment for the periods indicated.
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| | | Three Months Ended |
(in millions) | | | | | | August 27, 2023 | August 28, 2022 | % Chg | SRS (1) |
Olive Garden | | | | | | $ | 1,227.9 | | $ | 1,130.7 | | 8.6 | % | 6.1 | % |
LongHorn Steakhouse | | | | | | $ | 669.8 | | $ | 604.6 | | 10.8 | % | 8.1 | % |
Fine Dining | | | | | | $ | 273.5 | | $ | 183.4 | | 49.1 | % | (2.8) | % |
Other Business | | | | | | $ | 559.4 | | $ | 527.4 | | |