DARDEN RESTAURANTS, INC. 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 nine months endedFebruary 28, 2021 andFebruary 23, 2020 . Three Months Ended Nine Months Ended February 28, February 23, February 28, February 23, (in millions) 2021 2020 % Chg 2021 2020 % Chg Sales$ 1,733.0 $ 2,346.5 (26.1)%$ 4,916.9 $ 6,536.8 (24.8)% Costs and expenses: Food and beverage 499.4 658.0 (24.1) 1,409.0 1,844.3 (23.6) Restaurant labor 559.4 753.8 (25.8) 1,595.6 2,149.9 (25.8) Restaurant expenses 336.8 396.7 (15.1) 958.2 1,144.7 (16.3) Marketing expenses 19.2 71.6 (73.2) 66.8 206.6 (67.7) General and administrative expenses 78.9 100.3 (21.3) 298.8 289.6 3.2 Depreciation and amortization 88.2 87.7 0.6 261.8 261.5 0.1 Impairments and disposal of assets, net 3.1 0.1 NM 1.4 0.2 NM Total costs and expenses$ 1,585.0 $ 2,068.2 (23.4)$ 4,591.6 $ 5,896.8 (22.1) Operating income 148.0 278.3 (46.8) 325.3 640.0 (49.2) Interest, net 15.2 13.2 15.2 46.4 37.4 24.1 Other (income) expense, net 0.5 - NM 8.4 153.3 (94.5) Earnings before income taxes 132.3 265.1 (50.1) 270.5 449.3 (39.8) Income tax expense (1) 3.1 31.8 (90.3) 7.1 18.8 (62.2)
Earnings from continuing operations
(44.6)$ 263.4 $ 430.5 (38.8) Losses from discontinued operations, net of tax (0.5) (1.0) (50.0) (2.6) (2.9) (10.3) Net earnings$ 128.7 $ 232.3 (44.6)%$ 260.8 $ 427.6 (39.0)% Diluted net earnings per share: Earnings from continuing operations$ 0.98 $ 1.90 (48.4)%$ 2.00 $ 3.48 (42.5)% Losses from discontinued operations - (0.01) (100.0) (0.02) (0.02) - Net earnings$ 0.98 $ 1.89 (48.1)%$ 1.98 $ 3.46 (42.8)% (1) Effective tax rate 2.3 % 12.0 % 2.6 % 4.2 %
NM- Percentage not considered meaningful.
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The following table details the number of company-owned restaurants currently
reported in continuing operations that were open at the end of the third quarter
of fiscal 2021, compared with the number open at the end of fiscal 2020 and the
end of the third quarter of fiscal 2020.
February 28, May 31, February 23,
2021 2020 2020
Olive Garden 874 868 870
LongHorn Steakhouse 528 522 522
Cheddar's Scratch Kitchen 170 165 169
Yard House 81 81 81
The Capital Grille (1) 60 60 60
Seasons 52 43 44 45
Bahama Breeze 41 41 42
Eddie V's 25 23 23
Total 1,822 1,804 1,812
(1)Includes two The Capital Burger restaurants.
OVERVIEW OF OPERATIONS
COVID-19 Pandemic
The COVID-19 pandemic has resulted in a significant reduction in guest traffic
at our restaurants due to changes in consumer behavior as public health
officials encouraged social distancing and state and local governments mandated
restrictions including suspension of dine-in operations, reduced restaurant
seating capacity, table spacing requirements, bar closures and additional
physical barriers. Beginning in late March 2020 , we operated with all of our
dining rooms closed and served our guests in a To Go only or To Go and delivery
format. In late April 2020 , state and local governments began to allow us to
open dining rooms at limited capacities, along with other operating
restrictions. While increasing our in-restaurant dining capacity is subject to
the ordinances in the jurisdictions where we operate, we are focused on
increasing capacity where possible, while continuing to provide a safe
environment for our team members and guests, and maintaining many of the
operating efficiencies established during this time. As we navigate through the
pandemic, we have taken significant steps to adapt our business to allow us to
continue to serve guests, support our team members and secure our liquidity
position to provide financial flexibility. During the first quarter of fiscal
2021, we undertook a strategic restructuring of our corporate organization and
workforce in order to reduce costs and better align corporate expenses to our
sales levels in the current environment. The corporate restructuring included a
voluntary early retirement incentive program and other involuntary strategic
workforce reductions and we incurred employee termination benefits costs and
other costs of $47.8 million .
Through our second and third quarters of fiscal 2021, most of our restaurants
were able to operate with at least restricted dine-in capacity. As of the date
of this filing, nearly all of our restaurants were able to open their dining
rooms to some extent. With approved vaccines being distributed, we expect our
restaurants' dining room capacity to increase as public health conditions
improve and restrictions are eased. However, it is possible additional outbreaks
could require us to reduce our capacity or further suspend our in-restaurant
dining operations.
Financial Highlights - Consolidated
Our sales from continuing operations were $1.73 billion and $4.92 billion for
the third quarter and first nine months of fiscal 2021, respectively, compared
to $2.35 billion and $6.54 billion for the third quarter and first nine months
of fiscal 2020, respectively. The 26.1 percent and 24.8 percent decreases in
sales for the third quarter and first nine months of fiscal 2021 were driven by
combined Darden same-restaurant sales decreases of 26.7 percent and 25.5 percent
for the third quarter and first nine months of fiscal 2021, respectively,
partially offset by revenue from the addition of 10 net new company-owned
restaurants since the third quarter of fiscal 2020.
For the third quarter of fiscal 2021, our net earnings from continuing
operations were $129.2 million compared to $233.3 million for the third quarter
of fiscal 2020, and our diluted net earnings per share from continuing
operations were $0.98 for the third quarter of fiscal 2021 compared to $1.90 for
the third quarter of fiscal 2020. For the first nine months of fiscal 2021, our
net earnings from continuing operations were $263.4 million compared to $430.5
million for the first nine months of fiscal 2020, and our diluted net earnings
per share from continuing operations were $2.00 for the first nine months of
fiscal 2021 compared to $3.48 for the first nine months of fiscal 2020. Our
diluted per share results from continuing operations for the first nine months
of fiscal 2021 were adversely impacted by approximately $0.28 due to charges
associated with our corporate restructuring plan. Our diluted per share results
from continuing operations for the first nine months of fiscal 2020 were
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adversely impacted by approximately $0.90 due to a pension settlement charge and
approximately $0.01 due to an international structure simplification.
Outlook
We expect sales for the fourth quarter of fiscal 2021 to be approximately $2.1
billion .
Additionally, for the full year we expect to open 33 net new restaurants and we
expect capital expenditures incurred to build new restaurants, remodel and
maintain existing restaurants and for technology initiatives to be between $285
and $295 million .
SALES
The following table presents our sales by segment for the periods indicated.
Three Months Ended Nine Months Ended
February 28, February 23, February 28, February 23,
(in millions) 2021 2020 % Chg SRS (1) 2021 2020 % Chg SRS (1)
Olive Garden $ 872.0 $ 1,169.3 (25.4) %
(25.8) %
(12.6) %$ 1,238.4 $ 1,408.2 (12.1) % (13.9) % Fine Dining$ 104.4 $ 188.4 (44.6) % (45.2) %$ 295.6 $ 479.4 (38.3) % (38.8) % Other Business$ 302.3 $ 478.1 (36.8) % (36.9) %$ 893.2 $ 1,366.2 (34.6) % (35.0) % (1)Same-restaurant sales is a year-over-year comparison of each period's sales volumes for a 52-week year and is limited to restaurants open at least 16 months. Olive Garden's sales decrease for the third quarter and first nine months of fiscal 2021 was primarily driven byU.S. same-restaurant sales decreases driven by the impact of COVID-19, partially offset by revenue from new restaurants. The decrease inU.S. same-restaurant sales for the third quarter of fiscal 2021 resulted from a 27.5 percent decrease in same-restaurant guest counts, partially offset by a 1.7 percent increase in average check. The decrease inU.S. same-restaurant sales for the first nine months of fiscal 2021 resulted from a 26.2 percent decrease in same-restaurant guest counts, partially offset by a 1.5 percent increase in average check.LongHorn Steakhouse's sales decrease for the third quarter and first nine months of fiscal 2021 was primarily driven by same-restaurant sales decreases driven by the impact of COVID-19, partially offset by revenue from new restaurants. The decrease in same-restaurant sales for the third quarter of fiscal 2021 resulted from a 13.6 percent decrease in same-restaurant guest counts, partially offset by a 1.0 percent increase in average check. The decrease inU.S. same-restaurant sales for the first nine months of fiscal 2021 resulted from a 14.8 percent decrease in same-restaurant guest counts, partially offset by a 0.9 percent increase in average check. Fine Dining's sales decrease for the third quarter and first nine months of fiscal 2021 was primarily driven by same-restaurant sales decreases driven by the impact of COVID-19, partially offset by revenue from new restaurants. The decrease in same-restaurant sales for the third quarter of fiscal 2021 resulted from a 45.6 percent decrease in same-restaurant guest counts, partially offset by a 0.4 percent increase in average check. The decrease in same-restaurant sales for the first nine months of fiscal 2021 resulted from a 39.6 percent decrease in same-restaurant guest counts, partially offset by a 0.8 percent increase in average check. Other Business' sales decrease for the third quarter and first nine months of fiscal 2021 was primarily driven by same-restaurant sales decreases driven by the impact of COVID-19. The decrease in same-restaurant sales for the third quarter of fiscal 2021 resulted from a 34.7 percent decrease in same-restaurant guest counts and a 2.2 percent decrease in average check. The decrease in same-restaurant sales for the first nine months of fiscal 2021 resulted from a 35.1 percent decrease in same-restaurant guest counts, partially offset by a 0.1 percent increase in average check. 25 -------------------------------------------------------------------------------- Table of Contents COSTS AND EXPENSES The following table sets forth selected operating data as a percent of sales for the periods indicated. All information is derived from the unaudited consolidated statements of earnings for the quarter and nine months endedFebruary 28, 2021 andFebruary 23, 2020 . Three Months Ended Nine Months Ended February 28, 2021 February 23, 2020 February 28, 2021 February 23, 2020 Sales 100.0 % 100.0 % 100.0 % 100.0 % Costs and expenses: Food and beverage 28.8 28.0 28.7 28.2 Restaurant labor 32.3 32.1 32.5 32.9 Restaurant expenses 19.4 16.9 19.5 17.5 Marketing expenses 1.1 3.1 1.4 3.2 General and administrative expenses 4.6 4.3 6.1 4.4 Depreciation and amortization 5.1 3.7 5.3 4.0 Impairments and disposal of assets, net 0.2 - - - Total operating costs and expenses 91.5 % 88.1 % 93.4 % 90.2 % Operating income 8.5 11.9 6.6 9.8 Interest, net 0.9 0.6 0.9 0.6 Other (income) expense, net - - 0.2 2.3 Earnings before income taxes 7.6 11.3 5.5 6.9 Income tax expense 0.2 1.4 0.1 3.0 Earnings from continuing operations 7.5 % 9.9 % 5.4 % 6.6 %
Quarter Ended
•Food and beverage costs increased as a percent of sales primarily due to a 1.5% impact from menu mix and investments in food quality in addition to a 0.4% impact from inflation, partially offset by a 1.1% impact from pricing leverage and cost savings initiatives. •Restaurant labor costs increased as a percent of sales primarily due to sales deleverage of 2.9% and a 1.0% impact from team member bonuses, partially offset by a 3.1% impact from productivity improvement driven by operational simplification and a 0.7% impact from pricing leverage. •Restaurant expenses increased as a percent of sales primarily due to a 5.1% impact from sales deleverage, partially offset by a 1.0% impact from lower repairs and maintenance expenses, 0.8% impact from costs savings initiatives and pricing leverage and a 0.8% impact from lower utility costs and worker's compensation and public liability costs. •Marketing expenses decreased as a percent of sales primarily due to a 3.0% impact from lower media spending atOlive Garden andLongHorn Steakhouse , partially offset by a 1.0% impact from sales deleverage. •General and administrative expenses increased as a percent of sales primarily due to a 1.5% impact from sales deleverage, a 0.2% impact from the mark to market impact of our deferred compensation plans and a 0.2% impact from restaurant development related costs, partially offset by a 0.9% impact from a legal recovery and a 0.8% impact from cost savings initiatives. •Depreciation and amortization expenses increased as a percent of sales primarily due to sales deleverage. •Impairments and disposal of assets, net increased as a percent of sales due to the total impairment of a restaurant in the third quarter of fiscal 2021. There was only nominal net impairment and disposal activity during the third fiscal quarter of 2020.
Nine Months Ended
•Food and beverage costs increased as a percent of sales primarily due to a 0.5%
impact from menu mix and investments in food quality in addition to a 0.5%
impact from inflation, partially offset by a 0.5% impact from cost savings
initiatives.
•Restaurant labor costs decreased as a percent of sales primarily due to a 2.9%
impact from productivity improvement driven by operational simplification and a
0.7% impact from pricing leverage, partially offset by a 2.5% impact from sales
deleverage, a 0.4% impact from inflation and a 0.3% impact from team member
bonuses.
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•Restaurant expenses increased as a percent of sales primarily due to a 5.0%
impact from sales deleverage, partially offset by a 1.2% impact from lower
repairs and maintenance expenses, a 1.1% impact from cost savings initiatives
and pricing leverage and a 0.5% impact from lower utility costs.
•Marketing expenses decreased as a percent of sales primarily due to a 2.8%
impact from lower media spending at Olive Garden and LongHorn Steakhouse ,
partially offset by a 1.0% impact from sales deleverage.
•General and administrative expenses increased as a percent of sales primarily
due to a 1.5% impact from sales deleverage, a 0.8% impact related to our
corporate restructuring actions during the first quarter of fiscal 2021 and a
0.3% impact from the mark to market of our deferred compensation plans,
partially offset by a 0.6% impact from cost savings initiatives and a 0.3%
impact from a legal recovery.
•Depreciation and amortization expenses increased as a percent of sales
primarily due to sales deleverage.
INTEREST EXPENSE
Net interest expense increased as a percent of sales for the third quarter of
fiscal 2021 primarily due to sales deleverage. Net interest expense increased as
a percent of sales for the first nine months of fiscal 2021 primarily due to
interest incurred on our $270.0 million term loan and sales deleverage.
OTHER (INCOME) EXPENSE, NET
Other (income) expense, net was $0.5 million for the third quarter and $8.4
million for the first nine months of fiscal 2021 primarily due to a
postretirement benefit plan valuation adjustment resulting from our corporate
restructuring in the first quarter of fiscal 2021.
INCOME TAXES
The effective income tax rate for continuing operations for the quarter ended
February 28, 2021 was 2.3 percent, compared to an effective income tax rate for
the quarter ended February 23, 2020 of 12.0 percent. The effective income tax
rate for continuing operations for the nine months ended February 28, 2021 was
2.6 percent, compared to an effective income tax rate of 4.2 percent for the
nine months ended February 23, 2020 . The change was driven primarily by lower
net earnings from continuing operations in the quarter ended February 28, 2021 ,
compared to the quarter ended February 23, 2020 and the impact of certain tax
credits on our lower earnings before income taxes, in addition to tax benefits
related to stock option exercises and hedge mark to market impacts related to
deferred compensation. Subsequent to the quarter ended February 28, 2021 , we
filed our fiscal 2020 tax return, along with applications for certain tax
accounting method changes. These method changes, along with the effects of
COVID-19 on our fiscal 2021 taxable income, could have a one-time favorable
impact on our fiscal 2021 effective tax rate during our fourth fiscal quarter.
However, the amount of such impact is dependent on our actual results of
operations for fiscal 2021 and final positions ultimately taken on our fiscal
2021 tax return, and, as such, is not determinable at this time.
LOSSES FROM DISCONTINUED OPERATIONS
On an after-tax basis, losses from discontinued operations for the third quarter
and first nine months of fiscal 2021 were $0.5 million ($0.00 per diluted share)
and $2.6 million ($0.02 per diluted share), respectively, compared with losses
from discontinued operations for the third quarter and first nine months of
fiscal 2020 of $1.0 million ($0.01 per diluted share) and 2.9 million ($0.02 per
diluted share), respectively.
SEGMENT RESULTS
We manage our restaurant brands, Olive Garden, LongHorn Steakhouse , Cheddar's
Scratch Kitchen , Yard House, The Capital Grille , Seasons 52, Bahama Breeze and
Eddie V's 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).
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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 Nine Months Ended
Segment February 28, 2021 February 23, 2020 Change February 28, 2021 February 23, 2020 Change
Olive Garden 23.2% 21.1% 210 BPS 22.1% 20.3% 180 BPS
LongHorn Steakhouse 18.1% 20.5% (240) BPS 16.6% 17.8% (120) BPS
Fine Dining 15.7% 24.8% (910) BPS 15.8% 20.3% (450) BPS
Other Business 10.5% 14.5% (400) BPS 12.0% 13.3% (130) BPS
The increase in Olive Garden's segment profit margin for the third quarter and
first nine months of fiscal 2021 was driven primarily by decreased restaurant
labor costs and decreased television and digital media related marketing
expense, partially offset by negative same restaurant sales resulting from the
economic impact of COVID-19. The decrease in LongHorn Steakhouse's segment
profit margin for the third quarter and first nine months of fiscal 2021 was
driven primarily by negative same-restaurant sales resulting from the economic
impact of COVID-19, partially offset by decreased marketing costs. The decrease
in Fine Dining's segment profit margins for the third quarter and first nine
months of fiscal 2021 was driven primarily by negative same-restaurant sales
resulting from the economic impact of COVID-19, partially offset by decreased
marketing costs. The decrease in Other Business' segment profit margin for the
third quarter and first nine months of fiscal 2021 was driven primarily by
negative same restaurant sales resulting from the economic impact of COVID-19,
offset by decreased marketing and restaurant labor costs.
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 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. We are not able to predict the impact that the COVID-19 pandemic may have
on the seasonality of our business.
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. As previously noted, in March
2020 , all of our restaurants began operating at reduced capacities due to the
COVID-19 outbreak and initially were not able to generate sufficient cash from
operations to cover all of our projected expenditures while operating at those
reduced capacities. Accordingly, we took significant steps to adapt our
business, which allowed us to continue to serve guests, support our team members
and secure our liquidity position to provide financial flexibility. As state and
local governments allowed us to open dining rooms at limited capacities our cash
flows have improved, and during fiscal 2021 we have generated positive operating
cash flows and fully repaid our $270.0 million 364-day term loan prior to
maturity. Additionally, our Board of Directors has declared a cash dividend of
$0.88 per share to be paid May 3, 2021 to all shareholders of record as of the
close of business on April 9, 2021 .
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 "Baa3";
•Standard & Poor's "BBB-"; and
•Fitch "BBB-".
Our commercial paper has ratings of:
•Moody's Investors Service "P-3";
•Standard & Poor's "A-3"; and
•Fitch "F-3".
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
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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.
We maintain a $750.0 million Revolving Credit Agreement with Bank of America,
N.A . (BOA), as administrative agent, and the lenders and other agents party
thereto. The Revolving Credit Agreement is a senior unsecured credit commitment
to the Company and contains customary representations and affirmative and
negative covenants (including limitations on liens and subsidiary debt and a
maximum consolidated lease adjusted total debt to total capitalization ratio of
0.75 to 1.00) and events of default usual for credit facilities of this type. As
of February 28, 2021 , we were in compliance with all covenants under the
Revolving Credit Agreement.
The Revolving Credit Agreement matures on October 27, 2022 , 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 plus 0.075
percent, the Federal Funds rate plus 0.500 percent, and the Eurocurrency Rate
plus 1.075 percent) plus the Applicable Margin. Assuming a "BBB-" equivalent
credit rating level, the Applicable Margin under the Revolving Credit Agreement
will be 1.075 percent for LIBOR loans and 0.075 percent for base rate loans. As
of February 28, 2021 , we had no outstanding balances under the Revolving Credit
Agreement.
As of February 28, 2021 , our outstanding long-term debt consisted principally
of:
•$500.0 million of unsecured 3.850 percent senior notes due in May 2027 ;
•$96.3 million of unsecured 6.000 percent senior notes due in August 2035 ;
•$42.8 million of unsecured 6.800 percent senior notes due in October 2037 ; and
•$300.0 million of unsecured 4.550 percent senior notes due in February 2048 .
The interest rate on our $42.8 million senior notes due in October 2037 is
subject to adjustment from time to time if the debt rating assigned to such
series of notes is downgraded below a certain rating level (or subsequently
upgraded). The maximum adjustment is 2.000 percent above the initial interest
rate and the interest rate cannot be reduced below the initial interest rate. As
of February 28, 2021 , 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 9
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
decreased to $746.0 million for the first nine months of fiscal 2021, from
$922.4 million for the first nine months of fiscal 2020. Net cash flows provided
by operating activities include net earnings from continuing operations of
$263.4 million and $430.5 million in the first nine months of fiscal 2021 and
2020, respectively. The decrease in net earnings is primarily driven by the
impact of COVID-19.
Net cash flows used in investing activities of continuing operations were $181.4
million for the first nine months of fiscal 2021, compared to $447.4 million for
the first nine months of fiscal 2020. Capital expenditures decreased to $177.3
million for the first nine months of fiscal 2021 from $374.5 million for the
first nine months of fiscal 2020 reflecting a decrease in new restaurant
construction and remodel activity during fiscal 2021. Net cash flows used in
investing activities for fiscal 2020 also reflect net cash used of $50.1 million
in the acquisition of Cheddar's Scratch Kitchen restaurants from existing
franchisees.
Net cash flows used in financing activities of continuing operations were $335.5
million for the first nine months of fiscal 2021, compared to $608.1 million for
the first nine months of fiscal 2020. Net cash flows used in financing
activities for the first nine months of fiscal 2021 included repayment of a
364-day term loan of $270.0 million prior to maturity as well as dividends paid
of $87.3 million partially offset by proceeds from the exercise of employee
stock options. Net cash flows used in financing activities for the first nine
months of fiscal 2020 reflected dividends paid of $322.3 million and share
repurchases of $300.3 million partially offset by proceeds from the exercise of
employee stock options. Dividends declared by our Board of Directors totaled
$0.67 and $2.64 per share for the first nine months of fiscal 2021 and 2020,
respectively.
On March 23, 2021 , our Board of Directors authorized a new share repurchase
program under which we may repurchase up to $500.0 million of our outstanding
common stock. This repurchase program does not have an expiration and replaces
all other outstanding share repurchase authorizations. During the quarter and
nine months ended February 28, 2021 , we repurchased 0.0 million and 0.1 million
shares of our common stock, respectively, compared to 0.6 million and 2.6
million
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shares of our common stock, respectively, during the quarter and nine months
ended February 23, 2020 . All shares repurchased during the quarter and nine
months ended February 28, 2021 were solely related to 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, or shares
reacquired pursuant to tax withholding on option exercises.
We are not a party to any off-balance sheet arrangements that have, or are
reasonably likely to have, a current or future material effect on our financial
condition, changes in financial condition, sales, costs or expenses, results of
operations, liquidity, capital expenditures or capital resources.
Impairment of our assets, including goodwill or trademarks, adversely affects
our financial position and results of operations, and our leverage ratio for
purposes of our Revolving Credit Agreement. A leverage ratio exceeding the
maximum permitted under our Revolving Credit Agreement would be a default under
our Revolving Credit Agreement. At February 28, 2021 , write-downs of goodwill,
other indefinite-lived intangible assets, or any other assets in excess of
approximately $1.44 billion would have been required to cause our leverage ratio
to exceed the permitted maximum. As our leverage ratio is determined on a
quarterly basis, and due to the seasonal nature of our business, a lesser amount
of impairment in future quarters could cause our leverage ratio to exceed the
permitted maximum.
FINANCIAL CONDITION
Our current assets totaled $1.30 billion as of February 28, 2021 , compared to
$1.10 billion as of May 31, 2020 . The increase was primarily due to an increase
in cash and cash equivalents.
Our current liabilities totaled $1.65 billion as of February 28, 2021 , compared
to $1.79 billion as of May 31, 2020 . The decrease was primarily driven by
repayment of short-term debt, partially offset by an increase in other current
liabilities.
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 31, 2020 .
APPLICATION OF NEW ACCOUNTING STANDARDS
Information regarding application of new accounting standards is incorporated by
reference from Note 1 to our unaudited consolidated financial statements in Part
I, Item 1 of this report.
FORWARD-LOOKING STATEMENTS
Statements set forth in or incorporated into this report regarding the expected
increase in the number of our restaurants and capital expenditures in fiscal
2021, 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 31, 2020 and in our Forms 10-Q (including this report), which are
summarized as follows:
•The impacts of the novel coronavirus (COVID-19) pandemic on our business,
including the response of governments and of our company to the pandemic and the
effectiveness, acceptance, availability, timing and distribution of approved
vaccines;
•Health concerns arising from food-related pandemics, outbreaks of flu viruses
or other diseases;
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•Insufficient guest or employee facing technology, or a failure to maintain a
continuous and secure cyber network, free from material failure, interruption or
security breach;
•Food safety and food-borne illness concerns throughout the supply chain;
•The inability to hire, train, reward and retain restaurant team members;
•A failure to recruit, develop and retain effective leaders or the loss or
shortage of key personnel;
•Insufficient or ineffective response to legislation or government regulation
may impact our cost structure, operational efficiencies and talent availability;
•Litigation, including allegations of illegal, unfair or inconsistent employment
practices;
•Unfavorable publicity, or a failure to respond effectively to adverse
publicity;
•An inability or failure to recognize, respond to and effectively manage the
accelerated impact of social media;
•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;
•Labor and insurance costs;
•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;
•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;
•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 to open, close, relocate or remodel restaurants;
•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;
•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;
•The impact of shortages or interruptions in the delivery of food and other
products from third-party vendors and suppliers;
•Adverse weather conditions and natural disasters;
•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;
•Economic and business factors specific to the restaurant industry and other
general macroeconomic factors including energy prices and interest rates that
are largely out of our control;
•Disruptions in the financial markets that may impact consumer spending
patterns, affect the availability and cost of credit;
•Risks associated with doing business with franchisees and licensees;
•Risks associated with doing business with business partners and vendors in
foreign markets;
•Failure to protect our service marks or other intellectual property;
•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
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exchange rate, equity forward and commodity derivative instruments for other
than trading purposes (see Note 9 to our unaudited consolidated financial
statements in Part I, Item 1 of this report).
We use the variance/covariance method to measure value at risk, over time
horizons ranging from one week to one year, at the 95 percent confidence level.
As of February 28, 2021 , our potential losses in future net earnings resulting
from changes in equity forwards, commodity instruments and floating rate debt
interest rate exposures were approximately $33.7 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 $77.5
million . The fair value of our long-term fixed-rate debt outstanding as of
February 28, 2021 , averaged $996.09 million , with a high of $1.05 billion and a
low of $917.27 million during the first nine months of fiscal 2021. Our interest
rate risk management objective is to limit the impact of interest rate changes
on earnings and cash flows by targeting an appropriate mix of variable and
fixed-rate debt.
Item 4.Controls and Procedures
Under the supervision and with the participation of our management, including
our Chief Executive Officer and our Chief Financial Officer, we evaluated the
effectiveness of the design and operation of our disclosure controls and
procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of
1934, as amended (the Exchange Act)) as of February 28, 2021 , the end of the
period covered by this report. Based on that evaluation, the Chief Executive
Officer and Chief Financial Officer concluded that our disclosure controls and
procedures were effective as of February 28, 2021 .
During the fiscal quarter ended February 28, 2021 , 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.
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