DARDEN RESTAURANTS INC (DRI)

Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis below for Darden Restaurants, Inc. (Darden, the Company, we, us or our) should be read in conjunction with our consolidated financial statements and related financial statement notes included in Part II of this report under the caption “Item 8 - Financial Statements and Supplementary Data.” We operate on a 52/53-week fiscal year, which ends on the last Sunday in May. Fiscal 2024, which ended May 26, 2024, and fiscal 2023, which ended May 28, 2023, each consisted of 52 weeks.

OVERVIEW OF OPERATIONS

Our business operates in the full-service dining segment of the restaurant industry. At May 26, 2024, we owned and operated 2,031 restaurants through subsidiaries in the United States and Canada under the Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, Ruth’s Chris Steak House® (Ruth’s Chris), The Capital Grille®, Seasons 52®, Bahama Breeze®, Eddie V’s Prime Seafood® (Eddie V’s) and The Capital Burger® trademarks. We own and operate all of our restaurants in the United States and Canada, except for 2 joint venture restaurants managed by us, 4 restaurants managed by us under contractual agreements and 85 franchised restaurants. We also have 61 franchised restaurants in operation located in Canada, Latin America, the Caribbean, Asia and the Middle East. All intercompany balances and transactions have been eliminated in consolidation.

On June 14, 2023, we acquired 100 percent of the equity interest of Ruth’s Chris for $724.6 million in total consideration. As a result of the acquisition and related integration efforts, we incurred expenses of $51.8 million ($42.1 million, net of tax) during the twelve months ended May 26, 2024. As of May 26, 2024, all Ruth’s Chris operations have been fully integrated into Darden’s operations.

Fiscal 2024 Financial Highlights

•Total sales increased 8.6 percent to $11.39 billion in fiscal 2024 from $10.49 billion in fiscal 2023 driven by a blended same-restaurant sales increase of 1.6 percent and sales from the addition of 80 net company-owned Ruth's Chris restaurants and 37 other net new restaurants.

•Reported diluted net earnings per share from continuing operations increased to $8.53 in fiscal 2024 from $8.00 in fiscal 2023, a 6.6 percent increase.

•Net earnings from continuing operations increased to $1.03 billion in fiscal 2024 from $983.5 million in fiscal 2023, a 4.8 percent increase.

•Net loss from discontinued operations increased to $2.9 million ($0.02 per diluted share) in fiscal 2024, from $1.6 million ($0.01 per diluted share) in fiscal 2023. When combined with results from continuing operations, our diluted net earnings per share was $8.51 for fiscal 2024 and $7.99 for fiscal 2023.

Outlook

On July 17, 2024, we entered into an agreement to acquire all of the outstanding shares of Chuy’s Holdings, Inc.(Chuy’s Holdings), a Delaware corporation, for $37.50 per share in an all-cash transaction with an enterprise value of approximately $605 million. Chuy’s Holdings is the owner and operator of restaurants under the Chuy’s Fine Tex-Mex ® (Chuy’s) trademark. The transaction has been approved by our Board of Directors and is subject to the satisfaction of customary closing conditions, including, among others, the expiration or termination of the applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The acquisition is expected to be completed in the second quarter of fiscal 2025 and will be funded through one or more new debt issuances. The impacts of the planned acquisition of Chuy’s have not been included in our fiscal 2025 outlook below.

We expect fiscal 2025 sales from continuing operations to increase between 3.5 percent and 4.5 percent, driven by same-restaurant sales growth (1) of 1.0 percent to 2.0 percent, and sales from 45 to 50 new restaurant openings. In fiscal 2025, we expect our annual effective tax rate to be 13 percent and we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and technology initiatives to be between $550 million and $600 million.

(1) Excludes Ruth’s Chris as they will not be owned and operated by Darden for a 16-month period at the

beginning of fiscal 2025.

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RESULTS OF OPERATIONS FOR FISCAL 2024 AND 2023

To facilitate review of our results of operations, the following table sets forth our financial results for the periods indicated. All information is derived from the consolidated statements of earnings for the fiscal years ended May 26, 2024 and May 28, 2023:

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The following table details the number of company-owned restaurants currently reported in continuing operations, compared with the number open at the end of fiscal 2023:

SALES

The following table presents our company-owned restaurant sales, U.S. same-restaurant sales (SRS) and average annual sales per restaurant by segment for the periods indicated:

(1)Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants that have been open, and operated by Darden, for at least 16 months.

(2)Average annual sales are calculated as sales divided by total restaurant operating weeks multiplied by 52 weeks; excludes franchise locations.

Olive Garden’s sales increase for fiscal 2024 was primarily driven by a U.S. same-restaurant sales increase combined with revenue from new restaurants. The increase in U.S. same-restaurant sales in fiscal 2024 resulted from a 3.3 percent increase in average check, partially offset by a 1.7 percent decrease in same-restaurant guest counts.

LongHorn Steakhouse’s sales increase for fiscal 2024 was primarily driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2024 resulted from a 5.2 percent increase in average check, partially offset by a 0.4 percent decrease in same-restaurant guest counts.

Fine Dining’s sales increase for fiscal 2024 was driven by the acquisition of Ruth’s Chris, offset by same-restaurant sales decreases. The decrease in same-restaurant sales in fiscal 2024 resulted from a 6.9 percent decrease in same-restaurant guest counts offset by a 4.9 percent increase in average check.

Other Business’s sales increase for fiscal 2024 was driven by revenue from new restaurants offset by same-restaurant sales decreases. The decrease in same-restaurant sales in fiscal 2024 resulted from a 3.3 percent decrease in same-restaurant guest counts offset by a 2.6 percent increase in average check.

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COSTS AND EXPENSES

The following table sets forth selected operating data as a percent of sales from continuing operations for the periods indicated. This information is derived from the consolidated statements of earnings for the fiscal years ended May 26, 2024 and May 28, 2023.

Total operating costs and expenses from continuing operations were $10.08 billion in fiscal 2024 and $9.29 billion in fiscal 2023.

Fiscal 2024 Compared to Fiscal 2023:

•Food and beverage costs decreased as a percent of sales primarily due to a 1.3% impact from pricing leverage and a 0.2% impact from mix and other, partially offset by a 0.4% impact from inflation.

•Restaurant labor costs decreased as a percent of sales primarily due to a 1.0% impact from sales leverage, a 0.4% impact from productivity improvement and a 0.2% impact from brand mix, including Ruth’s Chris, partially offset by a 1.5% impact from inflation.

•Restaurant expenses decreased as a percent of sales primarily due to a 0.4% impact from sales leverage, and a 0.3% impact from other, partially offset by a 0.4% impact from inflation and a 0.2% impact from brand mix, including Ruth’s Chris.

•Marketing expenses increased as a percent of sales primarily due to increased marketing and media.

•General and administrative expenses increased as a percent of sales primarily due to a 0.4% impact from Ruth’s Chris acquisition and integration costs and 0.1% impacts from inflation, partially offset by a 0.1% impact from sales leverage.

•Depreciation and amortization expenses increased as a percent of sales primarily due to the acquisition of Ruth’s Chris as well as depreciation on brand assets.

•Impairments and disposal of assets, net increased as a percent of sales primarily due to restaurant closures, sale of properties and write offs of acquired Ruth’s Chris assets.

INCOME TAXES

The effective income tax rates for fiscal 2024 and 2023 for continuing operations were 12.3 percent and 12.2 percent, respectively. During fiscal 2024, we had income tax expense of $145.0 million on earnings before income tax of $1.18 billion compared to income tax expense of $137.0 million on earnings before income taxes of $1.12 billion in fiscal 2023. This change was primarily driven by the impact of state tax expense.

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 introduced a 15 percent corporate alternative minimum

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tax (CAMT) on adjusted financial statement income. The impact of the IRA excise tax and the CAMT are immaterial to our fiscal 2024 consolidated financial statements.

NET EARNINGS AND NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS

Net earnings from continuing operations for fiscal 2024 were $1.03 billion ($8.53 per diluted share) compared with net earnings from continuing operations for fiscal 2023 of $983.5 million ($8.00 per diluted share).

Net earnings from continuing operations for fiscal 2024 increased 4.8 percent and diluted net earnings per share from continuing operations increased 6.6 percent compared with fiscal 2023.

LOSS FROM DISCONTINUED OPERATIONS

On an after-tax basis, results from discontinued operations for fiscal 2024 were a net loss of $2.9 million ($0.02 per diluted share) compared with a net loss for fiscal 2023 of $1.6 million ($0.01 per diluted share).

SEGMENT RESULTS

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 the U.S. and Canada as operating segments. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. Our four reportable segments are: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business. See Note 6 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for further details.

Our management uses segment profit as the measure for assessing performance of our segments. The following table presents segment profit margin for the periods indicated:

The increase in the Olive Garden segment profit margin for fiscal 2024 was driven primarily by positive same-restaurant sales and lower food and beverage costs and restaurant expenses, partially offset by higher marketing costs. The increase in the LongHorn Steakhouse segment profit margin for fiscal 2024 was driven primarily by positive same-restaurant sales, as well as lower food and beverage costs, restaurant labor and restaurant expenses. The decrease in the Fine Dining segment profit margin for fiscal 2024 was driven primarily by negative same-restaurant sales and higher restaurant labor, restaurant expenses and marketing costs, partially offset by lower food and beverage costs. The increase in the Other Business segment profit margin for fiscal 2024 was driven primarily by increased franchise revenue with the addition of Ruth’s Chris and lower food and beverage costs, partially offset by negative same-restaurant sales and increased restaurant labor costs and marketing costs.

RESULTS OF OPERATIONS FOR FISCAL 2023 COMPARED TO FISCAL 2022

For a comparison of our results of operations for the fiscal years ended May 28, 2023 and May 29, 2022, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended May 28, 2023, filed with the SEC on July 21, 2023.

SEASONALITY

Our sales volumes have historically fluctuated seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. Holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the historical seasonality of our business and these other factors, results for any fiscal quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

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IMPACT OF INFLATION

We attempt to minimize the annual effects of inflation through appropriate planning, operating practices and menu price increases. We are currently operating in a period of higher than usual inflation, led by food and beverage cost and labor inflation. Food and beverage inflation is principally due to increased costs incurred by our vendors related to higher labor, transportation, packaging, and raw materials costs. Some of the impacts of the inflation have been offset by menu price increases and other adjustments made during the year. Whether we are able and/or choose to continue to offset the effects of inflation will determine to what extent, if any, inflation affects our restaurant profitability in future periods.

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

Our significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report). Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Leases

We evaluate our leases at their inception to estimate their expected term, which commences on the date when we have the right to control the use of the leased property and includes the non-cancelable base term plus all option periods we are reasonably certain to exercise. Our judgment in determining the appropriate expected term and discount rate for each lease affects our evaluation of:

•The classification and accounting for leases as operating versus finance;

•The rent holidays and escalation in payments that are included in the calculation of the lease liability and related right-of-use asset; and

•The term over which leasehold improvements for each restaurant facility are amortized.

These judgments may produce materially different amounts of lease liabilities and right-of-use assets recognized on our consolidated balance sheets, as well as depreciation, amortization, interest and rent expense recognized in our consolidated statements of earnings if different discount rates and expected lease terms were used.

Valuation of Long-Lived Assets

Land, buildings and equipment, operating lease right-of-use assets and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in the usage or operating performance. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. Based on a review of operating results for each of our restaurants, given the current operating environment, the amount of net book value associated with lower performing restaurants that would be deemed at risk for impairment is not material to our consolidated financial statements.

Valuation and Recoverability of Goodwill and Trademarks

We have ten reporting units, seven of which have goodwill and eight of which have trademarks. Goodwill and trademarks are not subject to amortization and have been assigned to reporting units for purposes of impairment testing. The reporting units are our restaurant brands. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. We review our goodwill and trademarks for impairment annually, as of the first day of our fourth fiscal quarter, or more frequently if indicators of impairment exist.

During fiscal 2024, we elected to perform a qualitative assessment for our annual review of goodwill and trademarks to determine whether or not indicators of impairment exist. In considering the qualitative approach related to goodwill, we evaluated

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factors including, but not limited to, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, results of prior impairment tests, operational stability, the overall financial performance of the reporting units and the impacts of discount rates. As it relates to trademarks, we evaluate similar factors from the goodwill assessment, in addition to impacts of royalty rates. As a result of the qualitative assessment, no indicators of impairment were identified, and no additional indicators of impairment were identified through the end of our fourth fiscal quarter that would require us to test further for impairment.

We evaluate the useful lives of our other intangible assets to determine if they are definite or indefinite-lived. A determination on useful life requires significant judgments and assumptions regarding the future effects of obsolescence, demand, competition, other economic factors (such as the stability of the industry, legislative action that results in an uncertain or changing regulatory environment and expected changes in distribution channels), the level of required maintenance expenditures and the expected lives of other related groups of assets.

If our assessment resulted in an impairment of our assets, including goodwill or trademarks, our financial position and results of operations would be adversely affected and our leverage ratio for purposes of our revolving credit agreement (Revolving Credit Agreement) would increase. A leverage ratio exceeding the maximum permitted under our Revolving Credit Agreement would be a default under our Revolving Credit Agreement. At May 26, 2024, additional write-downs of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $781.4 million would have been required to cause our leverage ratio to exceed the permitted maximum. As our leverage ratio is determined on a quarterly basis, and due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.

Unearned Revenues

Unearned revenues primarily represent our liability for gift cards that have been sold but not yet redeemed. The estimated value of gift cards expected to remain unused is recognized over the expected period of redemption as the remaining gift card values are redeemed, generally over a period of 12 years. Utilizing this method, we estimate both the amount of breakage and the time period of redemption. If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded. We update our estimates of our redemption period and our breakage rate periodically and apply that rate to gift card redemptions on a prospective basis. Changing our breakage-rate estimates by 50 basis points would have resulted in an adjustment in our breakage income of approximately $3.6 million for fiscal 2024.

Income Taxes

We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available.

Assessment of uncertain tax positions requires judgments relating to the amounts, timing and likelihood of resolution. As described in Note 13 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report), the $22.7 million balance of unrecognized tax benefits at May 26, 2024, includes $6.1 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. Of the $6.1 million, $3.9 million relates to items that would impact our effective income tax rate.

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.

We currently manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable costs. Our publicly issued long-term debt currently carries the following ratings:

•Moody’s Investors Service “Baa2”;

•Standard & Poor’s “BBB”; and

•Fitch “BBB”.

Our commercial paper has ratings of:

•Moody’s Investors Service “P-2”;

•Standard & Poor’s “A-2”; and

•Fitch “F-2”.

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These ratings are as of the date of the filing of this report and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.

On October 23, 2023, we entered into a $1.25 billion Revolving Credit Agreement (Revolving Credit Agreement) with Bank of America, N.A. (BOA), as administrative agent, and the lenders and other agents party thereto. The Revolving Credit Agreement replaced our prior $1.0 billion Revolving Credit Agreement (Prior Revolving Credit Agreement), dated as of September 10, 2021, and the Prior Revolving Credit Agreement was terminated concurrently with our entry into the Revolving Credit Agreement. 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, and consistent with our Prior Revolving Credit Agreement. As of May 26, 2024, we had no outstanding balances and were in compliance with all covenants under the Revolving Credit Agreement. As of May 26, 2024, $86.8 million of commercial paper was outstanding in addition to $0.6 million of letters of credit outstanding, which were both backed by this facility. After consideration of commercial paper and letters of credit backed by the Revolving Credit Agreement, as of May 26, 2024, we had $1.16 billion of credit available under the Revolving Credit Agreement.

Loans under the Revolving Credit Agreement bear interest at a rate of (a) Term SOFR (which is defined, for the applicable interest period, as the Term SOFR Screen Rate two U.S. Government Securities Business Days prior to the commencement of such interest period with a term equivalent to such interest period) plus a Term SOFR adjustment of 0.10 percent plus the relevant margin determined by reference to a ratings-based pricing grid (Applicable Margin), or (b) the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the Term SOFR plus 1.00 percent) plus the relevant Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement is 1.000 percent for Term SOFR loans and 0.000 percent for base rate loans.

The Revolving Credit Agreement matures on October 23, 2028, and the proceeds may be used for working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes.

On May 31, 2023, the Company also entered into a senior unsecured $600 million 3-year Term Loan Credit Agreement (Term Loan) with Bank of America, N.A., as administrative agent, the lenders and other agents party thereto, the material terms of which are consistent with the Revolving Credit Agreement, as amended. We borrowed $600 million under the Term Loan to fund a portion of the consideration paid in connection with the acquisition of Ruth’s Chris. The $600 million outstanding under the Term Loan was subsequently paid in full on October 10, 2023 with the $500 million proceeds from our 2033 Notes (as defined and discussed below) along with $100 million from cash on hand. The Term Loan was terminated on October 10, 2023 in connection with its payment in full and no amounts remain outstanding.

On October 10, 2023, the Company issued $500 million aggregate principal amount of our 6.300 percent Senior Notes due 2033 (the 2033 Notes) pursuant to the provisions of the Underwriting Agreement, dated October 4, 2023 (Underwriting Agreement), among the Company and BofA Securities, Inc., Truist Securities, Inc., U.S. Bancorp Investments, Inc. and Wells Fargo Securities, LLC, as representatives of the several underwriters named therein. The 2033 Notes were issued under the Company’s Indenture, dated as of January 1, 1996 (Base Indenture), between the Company and Computershare Trust Company, National Association (as successor to Wells Fargo Bank, National Association, successor to Wells Fargo Bank Minnesota, National Association, formerly known as Norwest Bank Minnesota, National Association), as trustee (Base Trustee), as amended and supplemented by the Second Supplemental Indenture, dated as of October 4, 2023 (Second Supplemental Indenture), among the Company, the Base Trustee and U.S. Bank Trust Company, National Association, as successor trustee with respect to the 2033 Notes. The 2033 Notes will mature on October 10, 2033. Interest on the 2033 Notes will be paid semiannually in arrears on April 10 and October 10 of each year, commencing on April 10, 2024, to holders of record on the preceding March 26 or September 25, as the case may be.

As of May 26, 2024, our outstanding long-term debt consisted principally of:

•$500.0 million of unsecured 3.850 percent senior notes due in May 2027;

•$500.0 million of unsecured 6.300 percent senior notes due October 2033;

•$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.

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The interest rate on our $42.8 million 6.800 percent senior notes due October 2037 is subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of May 26, 2024, no such adjustments are made to this rate.

Through our shelf registration statement on file with the SEC, depending on conditions prevailing in the public capital markets, we may from time to time issue equity securities or unsecured debt securities in one or more series, which may consist of notes, debentures or other evidences of indebtedness in one or more offerings.

From time to time, we or our affiliates, may repurchase our outstanding debt in privately negotiated transactions, open-market transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

From time to time, we enter into interest rate derivative instruments to manage interest rate risk inherent in our operations. See Note 8 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).

A summary of our contractual obligations and commercial commitments at May 26, 2024, is as follows:

(1)Includes interest payments associated with existing long-term debt. Excludes discount and issuance costs of $16.9 million.

(2)Includes non-cancelable future operating lease and finance lease commitments.

(3)Includes commitments for food and beverage items and supplies, capital projects, information technology and other miscellaneous items.

(4)Includes expected contributions associated with our supplemental defined benefit pension plan and payments associated with our postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2034.

(5)Includes interest on unrecognized income tax benefits of $3.2 million, $1.8 million of which relates to contingencies expected to be resolved within one year.

(6)Includes letters of credit for $79.5 million of workers’ compensation and general liabilities accrued in our consolidated financial statements and letters of credit for $16.8 million of surety bonds related to other payments.

(7)Consists solely of guarantees associated with leased properties that have been assigned to third parties and are primarily related to the disposition of Red Lobster in fiscal 2015.

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Our adjusted debt to adjusted total capital ratio was 66 percent and 62 percent as of May 26, 2024 and May 28, 2023, respectively. Based on these ratios, we believe our financial condition is strong. We include the lease-debt equivalent and contractual lease guarantees in our adjusted debt to adjusted total capital ratio reported to shareholders, as we believe its inclusion better represents the optimal capital structure that we target from period to period and because it is consistent with the calculation of the covenant under our Revolving Credit Agreement. For fiscal 2024 and fiscal 2023, the lease-debt equivalent includes 6.00 times the total annual minimum rent for consolidated lease obligations of $464.4 million and $424.3 million, respectively. The composition of our capital structure is shown in the following table:

Net cash flows provided by operating activities from continuing operations were $1.62 billion and $1.55 billion in fiscal 2024 and 2023, respectively. Net cash flows provided by operating activities include net earnings from continuing operations of $1.03 billion in fiscal 2024 and $983.5 million in fiscal 2023. Net cash flows provided by operating activities from continuing operations increased in fiscal 2024 primarily due to higher net earnings from continuing operations.

Net cash flows used in investing activities from continuing operations were $1.3 billion and $568.4 million in fiscal 2024 and 2023, respectively. Capital expenditures incurred principally for building new restaurants, remodeling existing restaurants, replacing equipment, and technology initiatives were $601.2 million in fiscal 2024, compared to $564.9 million in fiscal 2023. Net cash used in the acquisition of Ruth’s Chris was $701.1 million during fiscal 2024.

Net cash flows used in financing activities from continuing operations were $483.4 million and $1.03 billion in fiscal 2024 and 2023, respectively. Net cash flows used in financing activities in fiscal 2024 included dividend payments of $628.4 million and share repurchases of $453.9 million, partially offset by net proceeds from issuance of short term debt of $86.8 million, net proceeds from the 2033 Notes of $500.0 million and proceeds from the exercise of employee stock options. Net cash flows used in financing activities in fiscal 2023 included dividend payments of $589.8 million and share repurchases of $458.7 million, partially offset by proceeds from the exercise of employee stock options. Dividends declared by our Board of Directors totaled $5.24 and $4.84 per share for fiscal 2024 and 2023, respectively.

Our defined benefit and other postretirement benefit costs and liabilities are determined using various actuarial assumptions and methodologies prescribed under Financial Accounting Standards Board Accounting Standards Codification Topic 715, Compensation - Retirement Benefits and Topic 712, Compensation - Nonretirement Postemployment Benefits. We expect to contribute approximately $0.4 million to our supplemental defined benefit pension plan and approximately $1.3 million to our postretirement benefit plan during fiscal 2025.

Other than the planned acquisition of Chuy’s, which we intend to fund through one or more new debt issuances, we are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our internal cash-generating capabilities, the potential issuance of equity or unsecured debt securities under our shelf registration statement and

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short-term commercial paper or drawings under our Revolving Credit Agreement should be sufficient to finance our capital expenditures, debt maturities and other operating activities through fiscal 2025.

OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

FINANCIAL CONDITION

Our total current assets were $822.8 million at May 26, 2024, compared with $997.7 million at May 28, 2023. The decrease was primarily due to a decrease in cash and cash equivalents due to the use of cash to acquire Ruth’s Chris.

Our total current liabilities were $2.19 billion at May 26, 2024 and $1.94 billion at May 28, 2023. The increase was primarily due to increases in short-term debt as well as an increase in other current liabilities and unearned revenues associated with the acquisition of Ruth’s Chris.

APPLICATION OF NEW ACCOUNTING STANDARDS

See Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for a discussion of recently issued accounting standards.

Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis below for Darden Restaurants, Inc. (Darden, the Company, we, us or our) should be read in conjunction with our consolidated financial statements and related financial statement notes included in Part II of this report under the caption “Item 8 - Financial Statements and Supplementary Data.” We operate on a 52/53-week fiscal year, which ends on the last Sunday in May. Fiscal 2023, which ended May 28, 2023, and fiscal 2022, which ended May 29, 2022, each consisted of 52 weeks.

OVERVIEW OF OPERATIONS

Our business operates in the full-service dining segment of the restaurant industry. At May 28, 2023, we operated 1,914 restaurants through subsidiaries in the United States and Canada under the Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze®, Eddie V’s Prime Seafood®, and The Capital Burger®    trademarks. We own and operate all of our restaurants in the United States and Canada, except for 2 joint venture restaurants managed by us and 34 franchised restaurants. We also have 35 franchised restaurants in operation located in Latin America, Asia, the Middle East and the Caribbean. All intercompany balances and transactions have been eliminated in consolidation.

COVID-19 Pandemic and Other Impacts to our Operating Environment

During fiscal 2022, increases in the number of cases of COVID-19 throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, subjected some of our restaurants to COVID-19-related restrictions such as mask and/or vaccine requirements for team members, guests or both. Along with COVID-19, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and other cost of goods sold; these events further impacted the availability of team members needed to staff our restaurants and caused additional disruptions in our product supply chain.

The ongoing efforts to recover from the effects of the COVID-19 pandemic and its variants, along with other geopolitical and macroeconomic events, could impact our restaurants through wage inflation, staffing challenges, product cost inflation and disruptions in the supply chain that impact our restaurants’ ability to obtain the products needed to support their operations.

Fiscal 2023 Financial Highlights

•Total sales increased 8.9 percent to $10.49 billion in fiscal 2023 from $9.63 billion in fiscal 2022 driven by a blended same-restaurant sales increase of 6.8 percent and sales from 47 net new restaurants.

•Reported diluted net earnings per share from continuing operations increased to $8.00 in fiscal 2023 from $7.40 in fiscal 2022, a 8.1 percent increase.

•Net earnings from continuing operations increased to $983.5 million in fiscal 2023 from $954.7 million in fiscal 2022, a 3.0 percent increase.

•Net loss from discontinued operations decreased to $1.6 million ($0.01 per diluted share) in fiscal 2023, from $1.9 million ($0.01 per diluted share) in fiscal 2022. When combined with results from continuing operations, our diluted net earnings per share was $7.99 for fiscal 2023 and $7.39 for fiscal 2022.

Outlook

On June 14, 2023, we completed our acquisition of Ruth’s, a Delaware corporation, for $21.50 per share in cash. Ruth’s is the owner, operator and franchisor of Ruth’s Chris Steak House restaurants.

We expect fiscal 2024 sales from continuing operations to increase between 9.5 percent and 10.5 percent, driven by the addition of the Ruth’s Chris Steak House restaurants to our portfolio, Darden same-restaurant sales growth of 2.5 percent to 3.5 percent, and sales from approximately 50 new restaurant openings. In fiscal 2024, we expect our annual effective tax rate to be 12 percent to 12.5 percent and we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and technology initiatives to be between $550 million and $600 million.

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RESULTS OF OPERATIONS FOR FISCAL 2023 AND 2022

To facilitate review of our results of operations, the following table sets forth our financial results for the periods indicated. All information is derived from the consolidated statements of earnings for the fiscal years ended May 28, 2023 and May 29, 2022:

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The following table details the number of company-owned restaurants currently reported in continuing operations, compared with the number open at the end of fiscal 2022:

SALES

The following table presents our company-owned restaurant sales, U.S. same-restaurant sales (SRS) and average annual sales per restaurant by segment for the periods indicated:

(1)Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants that have been open, and operated by Darden, for at least 16 months.

(2)Average annual sales are calculated as sales divided by total restaurant operating weeks multiplied by 52 weeks; excludes franchise locations.

Olive Garden’s sales increase for fiscal 2023 was primarily driven by a U.S. same-restaurant sales increase combined with revenue from new restaurants. The increase in U.S. same-restaurant sales in fiscal 2023 resulted from an 8.4 percent increase in average check, partially offset by a 1.6 percent decrease in same-restaurant guest counts.

LongHorn Steakhouse’s sales increase for fiscal 2023 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2023 resulted from a 1.2 percent increase in same-restaurant guest counts combined with a 6.1 percent increase in average check.

Fine Dining’s sales increase for fiscal 2023 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2023 resulted from a 0.5 percent increase in same-restaurant guest counts combined with a 5.1 percent increase in average check.

Other Business’s sales increase for fiscal 2023 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2023 resulted from a 0.6 percent increase in same-restaurant guest counts combined with a 6.4 percent increase in average check.

COSTS AND EXPENSES

The following table sets forth selected operating data as a percent of sales from continuing operations for the periods indicated. This information is derived from the consolidated statements of earnings for the fiscal years ended May 28, 2023 and May 29, 2022.

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Total operating costs and expenses from continuing operations were $9.29 billion in fiscal 2023 and $8.47 billion in fiscal 2022.

Fiscal 2023 Compared to Fiscal 2022:

•Food and beverage costs increased as a percent of sales primarily due to a 3.0% impact from inflation and a 0.8% impact from menu mix, partially offset by a 2.3% impact from pricing and other changes.

•Restaurant labor costs decreased as a percent of sales primarily due to a 1.5% impact from sales leverage and a 1.2% impact from increased productivity, partially offset by a 2.3% impact from inflation.

•Restaurant expenses decreased as a percent of sales primarily due to a 1.0% impact from pricing leverage, partially offset by a 0.3% impact from utility cost inflation, 0.2% impact from repairs and maintenance inflation, and 0.3% of inflation on other restaurant expenses.

•Marketing expenses increased as a percent of sales primarily due to increased marketing and media.

•General and administrative expenses decreased as a percent of sales primarily due to a 0.3% impact from sales leverage.

•Depreciation and amortization expenses decreased as a percent of sales primarily due to sales leverage.

•Impairments and disposal of assets, net decreased as a percent of sales primarily due to gains recognized on the sale of five properties.

INCOME TAXES

The effective income tax rates for fiscal 2023 and 2022 for continuing operations were 12.2 percent and 12.7 percent, respectively. During fiscal 2023, we had income tax expense of $137.0 million on earnings before income tax of $1.12 billion compared to income tax expense of $138.8 million on earnings before income taxes of $1.09 billion in fiscal 2022. This change was primarily driven by the impact of federal tax credits.

The Inflation Reduction Act (IRA) was enacted on August 16, 2022. The IRA includes provisions imposing a 1 percent excise tax on share repurchases that occur after December 31, 2022 and introduces a 15 percent corporate alternative minimum tax (CAMT) on adjusted financial statement income. The IRA excise tax and the CAMT are immaterial to our financial statements.

NET EARNINGS AND NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS

Net earnings from continuing operations for fiscal 2023 were $983.5 million ($8.00 per diluted share) compared with net earnings from continuing operations for fiscal 2022 of $954.7 million ($7.40 per diluted share).

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Net earnings from continuing operations for fiscal 2023 increased 3.0 percent and diluted net earnings per share from continuing operations increased 8.1 percent compared with fiscal 2022.

LOSS FROM DISCONTINUED OPERATIONS

On an after-tax basis, results from discontinued operations for fiscal 2023 were a net loss of $1.6 million ($0.01 per diluted share) compared with a net loss for fiscal 2022 of $1.9 million ($0.01 per diluted share).

SEGMENT RESULTS

We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V’s and The Capital Burger in the U.S. and Canada as operating segments. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. Our four reportable segments are: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business. See Note 5 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for further details.

Our management uses segment profit as the measure for assessing performance of our segments. The following table presents segment profit margin for the periods indicated:

The decrease in the Olive Garden segment profit margin for fiscal 2023 was driven primarily by higher food and beverage and marketing costs, offset by lower restaurant expenses, restaurant labor, and positive same-restaurant sales. The decrease in the LongHorn Steakhouse segment profit margin for fiscal 2023 was driven primarily by higher food and beverage costs, partially offset by lower restaurant labor and positive same-restaurant sales. The decrease in the Fine Dining segment profit margin for fiscal 2023 was driven primarily by higher food and beverage costs, restaurant labor, and restaurant expenses, partially offset by positive same-restaurant sales. The decrease in the Other Business segment profit margin for fiscal 2023 was driven primarily by higher food and beverage costs and restaurant labor, partially offset by positive same-restaurant sales.

RESULTS OF OPERATIONS FOR FISCAL 2022 COMPARED TO FISCAL 2021

For a comparison of our results of operations for the fiscal years ended May 29, 2022 and May 30, 2021, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended May 29, 2022, filed with the SEC on July 22, 2022.

SEASONALITY

Our sales volumes have historically fluctuated seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. Holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the historical seasonality of our business and these other factors, results for any fiscal quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

IMPACT OF INFLATION

We attempt to minimize the annual effects of inflation through appropriate planning, operating practices and menu price increases. We are currently operating in a period of higher than usual inflation, led by food and beverage cost and labor inflation. Food and beverage inflation is principally due to increased costs incurred by our vendors related to higher labor, transportation, packaging, and raw materials costs. Some of the impacts of the inflation have been offset by menu price increases and other adjustments made during the year. Whether we are able and/or choose to continue to offset the effects of inflation will determine to what extent, if any, inflation affects our restaurant profitability in future periods.

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CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

Our significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report). Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Leases

We evaluate our leases at their inception to estimate their expected term, which commences on the date when we have the right to control the use of the leased property and includes the non-cancelable base term plus all option periods we are reasonably certain to exercise. Our judgment in determining the appropriate expected term and discount rate for each lease affects our evaluation of:

•The classification and accounting for leases as operating versus finance;

•The rent holidays and escalation in payments that are included in the calculation of the lease liability and related right-of-use asset; and

•The term over which leasehold improvements for each restaurant facility are amortized.

These judgments may produce materially different amounts of lease liabilities and right-of-use assets recognized on our consolidated balance sheets, as well as depreciation, amortization, interest and rent expense recognized in our consolidated statements of earnings if different discount rates and expected lease terms were used.

Valuation of Long-Lived Assets

Land, buildings and equipment, operating lease right-of-use assets and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in the usage or operating performance. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. Based on a review of operating results for each of our restaurants, given the current operating environment, the amount of net book value associated with lower performing restaurants that would be deemed at risk for impairment is not material to our consolidated financial statements.

Valuation and Recoverability of Goodwill and Trademarks

We have nine reporting units, six of which have goodwill and seven of which have trademarks. Goodwill and trademarks are not subject to amortization and goodwill has been assigned to reporting units for purposes of impairment testing. The reporting units are our restaurant brands. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. We review our goodwill and trademarks for impairment annually, as of the first day of our fourth fiscal quarter, or more frequently if indicators of impairment exist.

We estimate the fair value of each reporting unit using the best information available, including market information (also referred to as the market approach) and discounted cash flow projections (also referred to as the income approach). A market approach estimates fair value by applying sales or cash flow multiples to the reporting unit’s operating performance. The multiples are derived from observable market data of comparable publicly traded companies with similar operating and investment characteristics of the reporting units. The income approach uses a reporting unit’s projection of estimated operating cash flows which are based on a combination of historical and current trends, organic growth expectations, and residual growth rate assumptions. These cash flows are discounted using a weighted-average cost of capital (WACC) that reflects current market conditions. We recognize a goodwill impairment loss when the fair value of the reporting unit is less than its carrying value.

We estimate the fair value of trademarks using the relief-from-royalty method, which requires assumptions related to projected sales from the reporting unit’s projection of estimated operating cash flows; assumed royalty rates that could be payable

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if we did not own the trademarks; and a discount rate based on an adjusted estimated WACC for each business unit. We recognize an impairment loss when the estimated fair value of the trademark is less than its carrying value.

We performed our annual impairment test of our goodwill and trademarks as of February 27, 2023 which was the first day of our fiscal 2023 fourth quarter. As of February 27, 2023, no impairment of goodwill or trademarks was indicated based on our testing.

If our assessment resulted in an impairment of our assets, including goodwill or trademarks, our financial position and results of operations would be adversely affected and our leverage ratio for purposes of our revolving credit agreement (Revolving Credit Agreement) would increase. A leverage ratio exceeding the maximum permitted under our Revolving Credit Agreement would be a default under our Revolving Credit Agreement. At May 28, 2023, additional write-downs of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $1.01 billion would have been required to cause our leverage ratio to exceed the permitted maximum. As our leverage ratio is determined on a quarterly basis, and due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.

Unearned Revenues

Unearned revenues primarily represent our liability for gift cards that have been sold but not yet redeemed. The estimated value of gift cards expected to remain unused is recognized over the expected period of redemption as the remaining gift card values are redeemed, generally over a period of 12 years. Utilizing this method, we estimate both the amount of breakage and the time period of redemption. If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded. We update our estimates of our redemption period and our breakage rate periodically and apply that rate to gift card redemptions on a prospective basis. Changing our breakage-rate estimates by 50 basis points would have resulted in an adjustment in our breakage income of approximately $3.3 million for fiscal 2023.

Income Taxes

We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available.

Assessment of uncertain tax positions requires judgments relating to the amounts, timing and likelihood of resolution. As described in Note 12 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report), the $23.0 million balance of unrecognized tax benefits at May 28, 2023, includes $7.8 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. Of the $7.8 million, $5.7 million relates to items that would impact our effective income tax rate.

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.

We currently manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable costs. Our publicly issued long-term debt currently carries the following ratings:

•Moody’s Investors Service “Baa2”;

•Standard & Poor’s “BBB”; and

•Fitch “BBB”.

Our commercial paper has ratings of:

•Moody’s Investors Service “P-2”;

•Standard & Poor’s “A-2”; and

•Fitch “F-2”.

These ratings are as of the date of the filing of this report and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.

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On September 10, 2021, we entered into a $1 billion Revolving Credit Agreement (Revolving Credit Agreement) with Bank of America, N.A. (BOA), as administrative agent, and the lenders and other agents party thereto. The Revolving Credit Agreement is a senior unsecured credit commitment to the Company and contains customary representations and affirmative and negative covenants (including limitations on liens and subsidiary debt and a maximum consolidated lease adjusted total debt to total capitalization ratio of 0.75 to 1.00) and events of default usual for credit facilities of this type. The Revolving Credit Agreement replaced our prior $750.0 million revolving credit agreement, dated as of October 27, 2017 and amended as of March 25, 2020. As of May 28, 2023, we had no outstanding balances and we were in compliance with all covenants under the Revolving Credit Agreement.

The Revolving Credit Agreement matures on September 10, 2026, and the proceeds may be used for working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. During fiscal 2023, loans under the Revolving Credit Agreement bore interest at a rate of LIBOR plus a margin determined by reference to a ratings-based pricing grid (Applicable Margin), or the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the Eurodollar Rate plus 1.00 percent) plus the Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement would have been 1.000 percent for LIBOR loans and 0.000 percent for base rate loans.

Effective May 31, 2023, we entered into an amendment to the Revolving Credit Agreement (the “Amendment”.) Pursuant to the terms of the Amendment, the Company, the administrative agent and the lenders have agreed to replace the LIBOR-based interest rate applicable to borrowings under the Credit Agreement with a Term SOFR-based interest rate in advance of the cessation of LIBOR, and make certain other conforming changes. All other material terms and conditions of the Credit Agreement were unchanged. Effective May 31, 2023, loans under the Revolving Credit Agreement bear interest at a rate of (a) Term SOFR (which is defined, for the applicable interest period, as the Term SOFR Screen Rate two U.S. Government Securities Business Days prior to the commencement of such interest period with a term equivalent to such interest period) plus a Term SOFR adjustment of 0.10 percent plus the relevant margin determined by reference to a ratings-based pricing grid (Applicable Margin), or (b) the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the Term SOFR plus 1.00 percent) plus the relevant Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement will be 1.00 percent for Term SOFR loans and 0.00 percent for base rate loans.

Also on May 31, 2023, the Company entered into a senior unsecured $600 million 3-year Term Loan Credit Agreement (Term Loan Agreement) with Bank of America, N.A., as administrative agent, the lenders and other agents party thereto, the material terms of which are consistent with the Credit Agreement, as amended. The Term Loan Agreement provided for a single borrowing on any business day up to 90 days after May 31, 2023, and matures on the third anniversary of the funding date thereunder, June 14, 2023.

On June 14, 2023, we completed the acquisition of Ruth’s. We borrowed $600 million under the Term Loan Agreement to fund a portion of the approximately $715 million in consideration paid in connection with our acquisition of Ruth’s.

As of May 28, 2023, 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 6.800 percent senior notes due October 2037 is subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of May 28, 2023, no such adjustments are made to this rate.

Through our shelf registration statement on file with the SEC, depending on conditions prevailing in the public capital markets, we may from time to time issue equity securities or unsecured debt securities in one or more series, which may consist of notes, debentures or other evidences of indebtedness in one or more offerings.

From time to time, we or our affiliates, may repurchase our outstanding debt in privately negotiated transactions, open-market transactions or otherwise. Such repurchases, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material.

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From time to time, we enter into interest rate derivative instruments to manage interest rate risk inherent in our operations. See Note 7 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).

A summary of our contractual obligations and commercial commitments at May 28, 2023, is as follows:

(1)Includes interest payments associated with existing long-term debt. Excludes discount and issuance costs of $8.8 million.

(2)Includes non-cancelable future operating lease and finance lease commitments.

(3)Includes commitments for food and beverage items and supplies, capital projects, information technology and other miscellaneous items.

(4)Includes expected contributions associated with our supplemental defined benefit pension plan and payments associated with our postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2033.

(5)Includes interest on unrecognized income tax benefits of $2.7 million, $1.8 million of which relates to contingencies expected to be resolved within one year.

(6)Includes letters of credit for $85.3 million of workers’ compensation and general liabilities accrued in our consolidated financial statements and letters of credit for $15.2 million of surety bonds related to other payments.

(7)Consists solely of guarantees associated with leased properties that have been assigned to third parties and are primarily related to the disposition of Red Lobster in fiscal 2015.

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Our adjusted debt to adjusted total capital ratio was 62 percent and 61 percent as of May 28, 2023 and May 29, 2022, respectively. Based on these ratios, we believe our financial condition is strong. We include the lease-debt equivalent and contractual lease guarantees in our adjusted debt to adjusted total capital ratio reported to shareholders, as we believe its inclusion better represents the optimal capital structure that we target from period to period and because it is consistent with the calculation of the covenant under our Revolving Credit Agreement. For fiscal 2023 and fiscal 2022, the lease-debt equivalent includes 6.00 times the total annual minimum rent for consolidated lease obligations of $424.3 million and $409.8 million, respectively. The composition of our capital structure is shown in the following table:

Net cash flows provided by operating activities from continuing operations were $1.55 billion and $1.26 billion in fiscal 2023 and 2022, respectively. Net cash flows provided by operating activities include net earnings from continuing operations of $983.5 million in fiscal 2023 and $954.7 million in fiscal 2022. Net cash flows provided by operating activities from continuing operations increased in fiscal 2023 primarily due to changes in working capital and higher net earnings from continuing operations.

Net cash flows used in investing activities from continuing operations were $568.4 million and $389.0 million in fiscal 2023 and 2022, respectively. Capital expenditures incurred principally for building new restaurants, remodeling existing restaurants, replacing equipment, and technology initiatives were $564.9 million in fiscal 2023, compared to $376.9 million in fiscal 2022.

Net cash flows used in financing activities from continuing operations were $1.03 billion and $1.61 billion in fiscal 2023 and 2022, respectively. Net cash flows used in financing activities in fiscal 2023 included dividend payments of $589.8 million and share repurchases of $458.7 million, partially offset by proceeds from the exercise of employee stock options. Net cash flows used in financing activities in fiscal 2022 included dividend payments of $563.0 million and share repurchases of $1.07 billion, partially offset by proceeds from the exercise of employee stock options.

Our defined benefit and other postretirement benefit costs and liabilities are determined using various actuarial assumptions and methodologies prescribed under Financial Accounting Standards Board Accounting Standards Codification Topic 715, Compensation - Retirement Benefits and Topic 712, Compensation - Nonretirement Postemployment Benefits. We expect to contribute approximately $0.4 million to our supplemental defined benefit pension plan and approximately $1.6 million to our postretirement benefit plan during fiscal 2024.

We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our internal cash-generating capabilities, the potential issuance of equity or unsecured debt securities under our shelf registration statement and short-term commercial paper or drawings under our Revolving Credit Agreement should be sufficient to finance our capital expenditures, debt maturities and other operating activities through fiscal 2024.

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OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

FINANCIAL CONDITION

Our total current assets were $997.7 million at May 28, 2023, compared with $1.18 billion at May 29, 2022. The decrease was primarily due to decreases in prepaid income taxes and cash and cash equivalents.

Our total current liabilities were $1.94 billion at May 28, 2023 and $1.85 billion at May 29, 2022. The increase was primarily due to increases in accounts payable and other current liabilities.

APPLICATION OF NEW ACCOUNTING STANDARDS

See Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for a discussion of recently issued accounting standards.

Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis below for Darden Restaurants, Inc. (Darden, the Company, we, us or our) should be read in conjunction with our consolidated financial statements and related financial statement notes included in Part II of this report under the caption “Item 8 - Financial Statements and Supplementary Data.” We operate on a 52/53-week fiscal year, which ends on the last Sunday in May. Fiscal 2022, which ended May 29, 2022, and fiscal 2021, which ended May 30, 2021, each consisted of 52 weeks.

OVERVIEW OF OPERATIONS

Our business operates in the full-service dining segment of the restaurant industry. At May 29, 2022, we operated 1,867 restaurants through subsidiaries in the United States and Canada under the Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze® , Eddie V’s Prime Seafood® , and The Capital Burger®     trademarks. We own and operate all of our restaurants in the United States and Canada, except for 2 joint venture restaurants managed by us and 34 franchised restaurants. We also have 26 franchised restaurants in operation located in Latin America. All intercompany balances and transactions have been eliminated in consolidation.

COVID-19 Pandemic and Other Impacts to our Operating Environment

For much of fiscal 2021, the COVID-19 pandemic resulted in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as public health officials encouraged social distancing and required personal protective equipment. Also, some 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. Once COVID-19 vaccines were approved and moved into wider distribution in the United States in early 2021, public health conditions improved and almost all of the COVID-19 restrictions on businesses eased.

During fiscal 2022, increases in the number of cases of COVID-19 throughout the United States including the Omicron variant which significantly impacted our restaurants in the third quarter, mostly in January 2022, subjected some of our restaurants to other COVID-19-related restrictions such as mask and/or vaccine requirements for team members, guests or both. Exclusions and quarantines of restaurant team members or groups thereof disrupt an individual restaurant’s operations and often come with little or no notice to the local restaurant management. During fiscal 2022, along with COVID-19, our operating results were impacted by geopolitical and other macroeconomic events, leading to higher than usual inflation on wages and other cost of goods sold. These events further impacted the availability of team members needed to staff our restaurants and caused additional disruptions in our product supply chain.

The ongoing effects of COVID-19 and its variants, along with other geopolitical and macroeconomic events could lead to further capacity restrictions, mask and vaccination mandates, wage inflation, staffing challenges, product cost inflation and disruptions in the supply chain that impact our restaurants’ ability to obtain the products needed to support their operations.

Fiscal 2022 Financial Highlights

•Total sales increased 33.8% to $9.63 billion in 2022 from $7.20 billion in fiscal 2021 driven by a blended same-restaurant sales increase of 30.9% and sales from 33 net new restaurants.

•Reported diluted net earnings per share from continuing operations increased to $7.40 in 2022 from $4.80 in fiscal 2021, a 54.2 percent increase.

•Net earnings from continuing operations increased to $954.7 million in 2022 from $632.4 million in fiscal 2021, a 51.0 percent increase.

•Net loss from discontinued operations decreased to $1.9 million ($0.01 per diluted share) for fiscal 2022, from $3.1 million ($0.03 per diluted share) in fiscal 2021. When combined with results from continuing operations, our diluted net earnings per share was $7.39 for fiscal 2022 and diluted net earnings per share was $4.77 for fiscal 2021.

Outlook

We expect fiscal 2023 sales from continuing operations to increase between 6 percent and 8 percent, driven by Darden same-restaurant sales growth of 4 percent to 6 percent, as well as sales from approximately 55-60 new restaurants. In fiscal 2023, we expect our annual effective tax rate to be 13.5 percent and we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and technology initiatives to be between $500.0 million and $550.0 million.

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RESULTS OF OPERATIONS FOR FISCAL 2022 AND 2021

To facilitate review of our results of operations, the following table sets forth our financial results for the periods indicated. All information is derived from the consolidated statements of earnings for the fiscal years ended May 29, 2022 and May 30, 2021:

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The following table details the number of company-owned restaurants currently reported in continuing operations, compared with the number open at the end of fiscal 2021:

SALES

The following table presents our company-owned restaurant sales, U.S. same-restaurant sales (SRS) and average annual sales per restaurant by segment for the periods indicated:

(1)Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants open at least 16 months.

(2)Average annual sales are calculated as sales divided by total restaurant operating weeks multiplied by 52 weeks; excludes franchise locations.

(3)In the first quarter of fiscal 2022, we changed our internal management reporting to include The Capital Burger in the Other Business segment. Previously, The Capital Burger was included in the Fine Dining segment due to its adjacency with The Capital Grille brand and overall immateriality. Fiscal 2021 figures have been restated for comparability.

Olive Garden’s sales increase for fiscal 2022 was primarily driven by a U.S. same-restaurant sales increase combined with revenue from new restaurants. The increase in U.S. same-restaurant sales in fiscal 2022 resulted from a 18.9 percent increase in same-restaurant guest counts combined with a 4.4 percent increase in average check.

LongHorn Steakhouse’s sales increase for fiscal 2022 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2022 resulted from a 22.8 percent increase in same-restaurant guest counts combined with a 4.3 percent increase in average check.

Fine Dining’s sales increase for fiscal 2022 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2022 resulted from a 53.9 percent increase in same-restaurant guest counts combined with a 5.8 percent increase in average check.

Other Business’s sales increase for fiscal 2022 was driven by a same-restaurant sales increase combined with revenue from new restaurants. The increase in same-restaurant sales in fiscal 2022 resulted from a 30.4 percent increase in same-restaurant guest counts combined with a 9.3 percent increase in average check.

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COSTS AND EXPENSES

The following table sets forth selected operating data as a percent of sales from continuing operations for the periods indicated. This information is derived from the consolidated statements of earnings for the fiscal years ended May 29, 2022 and May 30, 2021.

Total operating costs and expenses from continuing operations were $8.47 billion in fiscal 2022 and $6.55 billion in fiscal 2021.

Fiscal 2022 Compared to Fiscal 2021:

•Food and beverage costs increased as a percent of sales primarily due to a 2.5% impact from inflation, partially offset by a 0.9% impact from pricing.

•Restaurant labor costs increased as a percent of sales primarily due to a 2.4% impact from decreased productivity and a 2.3% impact from inflation, partially offset by a 4.2% impact from sales and pricing leverage.

•Restaurant expenses decreased as a percent of sales primarily due to a 3.7% impact from sales and pricing leverage, partially offset by a 1.0% impact from higher repairs and maintenance expenses and utility costs and a 0.2% impact from higher credit card expense.

•Marketing expenses decreased as a percent of sales primarily due to sales leverage.

•General and administrative expenses decreased as a percent of sales primarily due to a 1.4% impact from sales leverage, and a 0.5% impact related to our corporate restructuring actions during the first quarter of fiscal 2021.

•Depreciation and amortization expenses decreased as a percent of sales primarily due to sales leverage.

INCOME TAXES

The effective income tax rates for fiscal 2022 and 2021 for continuing operations were 12.7 percent and (9.7) percent, respectively. During fiscal 2022, we had income tax expense of $138.8 million on earnings before income tax of $1.09 billion compared to an income tax benefit of $55.9 million on earnings before income taxes of $576.5 million in fiscal 2021. The change was driven primarily by an increase in earnings before income taxes in fiscal 2022, in addition to the generation of a net operating loss for tax purposes in fiscal 2021 that was carried back to the previous five tax years. An income tax benefit was generated due to the difference in federal tax rates between fiscal year 2021 and the years to which the federal net operating loss was carried back.

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NET EARNINGS AND NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS

Net earnings from continuing operations for fiscal 2022 were $954.7 million ($7.40 per diluted share) compared with net earnings from continuing operations for fiscal 2021 of $632.4 million ($4.80 per diluted share).

Net earnings from continuing operations for fiscal 2022 increased 51.0 percent and diluted net earnings per share from continuing operations increased 54.2 percent compared with fiscal 2021. In fiscal 2021, our diluted per share results from continuing operations were positively impacted by $0.76 due to a non-recurring income tax benefit, partially offset by $0.27 due to our corporate restructuring in the first quarter of fiscal 2021.

LOSS FROM DISCONTINUED OPERATIONS

On an after-tax basis, results from discontinued operations for fiscal 2022 were a net loss of $1.9 million ($0.01 per diluted share) compared with a net loss for fiscal 2021 of $3.1 million ($0.03 per diluted share).

SEGMENT RESULTS

We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze, Eddie V’s and The Capital Burger in the U.S. and Canada as operating segments. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. Our four reportable segments are: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business. In the first quarter of fiscal 2022, we changed our internal management reporting to include The Capital Burger in the Other Business segment. Previously, The Capital Burger was included in the Fine Dining segment due to its adjacency with The Capital Grille brand and overall immateriality. Fiscal 2021 figures have been restated for comparability. See Note 5 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for further details.

Our management uses segment profit as the measure for assessing performance of our segments. The following table presents segment profit margin for the periods indicated:

The decrease in the Olive Garden segment profit margin for fiscal 2022 was driven primarily by higher restaurant labor and food and beverage costs, offset by lower restaurant expenses. The decrease in the LongHorn Steakhouse segment profit margin for fiscal 2022 was driven primarily by higher food and beverage costs, offset by lower restaurant expenses. The increase in the Fine Dining segment profit margin for fiscal 2022 was driven primarily by lower restaurant expenses and restaurant labor, offset by higher food and beverage costs. The increase in the Other Business segment profit margin for fiscal 2022 was driven by lower restaurant expenses, offset by higher food and beverage costs.

RESULTS OF OPERATIONS FOR FISCAL 2021 COMPARED TO FISCAL 2020

For a comparison of our results of operations for the fiscal years ended May 30, 2021 and May 31, 2020, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended May 30, 2021, filed with the SEC on July 23, 2021.

SEASONALITY

Our sales volumes have historically fluctuated seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. Holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the historical seasonality of our business and these other factors, results for any fiscal quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

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IMPACT OF INFLATION

We attempt to minimize the annual effects of inflation through appropriate planning, operating practices and menu price increases. We are currently operating in a period of higher than usual inflation, led by food and beverage cost and labor inflation. Food and beverage inflation is principally due to increased costs incurred by our vendors related to higher labor, transportation, packaging, and raw materials costs. Some of the impacts of the inflation have been offset by menu price increases and other adjustments made during the year. Whether we are able and/or choose to continue to offset the effects of inflation will determine to what extent, if any, inflation affects our restaurant profitability in future periods.

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

Our significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report). Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Leases

We evaluate our leases at their inception to estimate their expected term, which commences on the date when we have the right to control the use of the leased property and includes the non-cancelable base term plus all option periods we are reasonably certain to exercise. Our judgment in determining the appropriate expected term and discount rate for each lease affects our evaluation of:

•The classification and accounting for leases as operating versus finance;

•The rent holidays and escalation in payments that are included in the calculation of the lease liability and related right-of-use asset; and

•The term over which leasehold improvements for each restaurant facility are amortized.

These judgments may produce materially different amounts of lease liabilities and right-of-use assets recognized on our consolidated balance sheets, as well as depreciation, amortization, interest and rent expense recognized in our consolidated statements of earnings if different discount rates and expected lease terms were used.

Valuation of Long-Lived Assets

Land, buildings and equipment, operating lease right-of-use assets and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in the usage or operating performance. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. Based on a review of operating results for each of our restaurants, given the current operating environment, the amount of net book value associated with lower performing restaurants that would be deemed at risk for impairment is not material to our consolidated financial statements.

Valuation and Recoverability of Goodwill and Trademarks

Goodwill and trademarks are not subject to amortization and goodwill has been assigned to reporting units for purposes of impairment testing. The reporting units are our restaurant brands. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. We review our goodwill and trademarks for impairment annually, as of the first day of our fourth fiscal quarter, or more frequently if indicators of impairment exist.

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During fiscal 2022, we elected to perform a qualitative assessment for our annual impairment review of goodwill and trademarks to determine whether or not indicators of impairment exist. In considering the qualitative approach related to goodwill, we evaluated factors including, but not limited to, COVID-19, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, results of prior impairment tests, operational stability, the overall financial performance of the reporting units and the impacts of discount rates. As it relates to trademarks, we evaluate similar factors from the goodwill assessment, in addition to impacts of royalty rates. Based on the results of the qualitative assessment which considered the improvements of each of our brands’ financial performance, as well as the improved overall operating environment, no indicators of impairment were identified. Changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management’s judgments and assumptions made in assessing the fair value of our goodwill and trademarks, could result in an impairment loss of a portion or all of our goodwill or trademarks.

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 (Revolving Credit Agreement) increases. A leverage ratio exceeding the maximum permitted under our Revolving Credit Agreement would be a default under our Revolving Credit Agreement.  At May 29, 2022, additional write-downs of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $1.03 billion would have been required to cause our leverage ratio to exceed the permitted maximum. As our leverage ratio is determined on a quarterly basis, and due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.

Unearned Revenues

Unearned revenues primarily represent our liability for gift cards that have been sold but not yet redeemed. The estimated value of gift cards expected to remain unused is recognized over the expected period of redemption as the remaining gift card values are redeemed, generally over a period of 12 years. Utilizing this method, we estimate both the amount of breakage and the time period of redemption. If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded. We update our estimates of our redemption period and our breakage rate periodically and apply that rate to gift card redemptions on a prospective basis. Changing our breakage-rate estimates by 50 basis points would have resulted in an adjustment in our breakage income of approximately $3.1 million for fiscal 2022.

Income Taxes

We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available.

Assessment of uncertain tax positions requires judgments relating to the amounts, timing and likelihood of resolution. As described in Note 12 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report), the $22.2 million balance of unrecognized tax benefits at May 29, 2022, includes $5.8 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. Of the $5.8 million, $3.7 million relates to items that would impact our effective income tax rate.

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.

We currently manage our business and financial ratios to target an investment-grade bond rating, which has historically allowed flexible access to financing at reasonable costs. Our publicly issued long-term debt currently carries the following ratings:

•Moody’s Investors Service “Baa2”;

•Standard & Poor’s “BBB”; and

•Fitch “BBB”.

Our commercial paper has ratings of:

•Moody’s Investors Service “P-2”;

•Standard & Poor’s “A-2”; and

•Fitch “F-2”.

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These ratings are as of the date of the filing of this report and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.

On September 10, 2021, we entered into a $1 billion Revolving Credit Agreement (Revolving Credit Agreement) with Bank of America, N.A. (BOA), as administrative agent, and the lenders and other agents party thereto. The Revolving Credit Agreement is a senior unsecured credit commitment to the Company and contains customary representations and affirmative and negative covenants (including limitations on liens and subsidiary debt and a maximum consolidated lease adjusted total debt to total capitalization ratio of 0.75 to 1.00) and events of default usual for credit facilities of this type. The Revolving Credit Agreement replaced our prior $750.0 million revolving credit agreement, dated as of October 27, 2017 and amended as of March 25, 2020. As of May 29, 2022, we had no outstanding balances and we were in compliance with all covenants under the Revolving Credit Agreement.

The Revolving Credit Agreement matures on September 10, 2026, and the proceeds may be used for working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. Loans under the Revolving Credit Agreement bear interest at a rate of LIBOR plus a margin determined by reference to a ratings-based pricing grid (Applicable Margin), or the base rate (which is defined as the highest of the BOA prime rate, the Federal Funds rate plus 0.500 percent, and the Eurodollar Rate plus 1.00 percent) plus the Applicable Margin. Assuming a “BBB” equivalent credit rating level, the Applicable Margin under the Revolving Credit Agreement will be 1.000 percent for LIBOR loans and 0.000 percent for base rate loans.

As of May 29, 2022, our outstanding long-term debt consisted principally of:

•$500.0 million of unsecured 3.850 percent senior notes due in May 2027;

•$96.3 million of unsecured 6.000 percent senior notes due in August 2035;

•$42.8 million of unsecured 6.800 percent senior notes due in October 2037; and

•$300.0 million of unsecured 4.550 percent senior notes due in February 2048.

The interest rate on our $42.8 million 6.800 percent senior notes due October 2037 is subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of May 29, 2022, no such adjustments are made to this rate.

Through our shelf registration statement on file with the SEC, depending on conditions prevailing in the public capital markets, we may issue equity securities or unsecured debt securities from time to time in one or more series, which may consist of notes, debentures or other evidences of indebtedness in one or more offerings.

From time to time, we may repurchase our 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 to manage interest rate risk inherent in our operations. See Note 7 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).

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A summary of our contractual obligations and commercial commitments at May 29, 2022, is as follows:

(1)Includes interest payments associated with existing long-term debt. Excludes discount and issuance costs of $10.1 million.

(2)Includes non-cancelable future operating lease and finance lease commitments.

(3)Includes commitments for food and beverage items and supplies, capital projects, information technology and other miscellaneous items.

(4)Includes expected contributions associated with our supplemental defined benefit pension plan and payments associated with our postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2032.

(5)Includes interest on unrecognized income tax benefits of $2.2 million, $1.4 million of which relates to contingencies expected to be resolved within one year.

(6)Includes letters of credit for $104.8 million of workers’ compensation and general liabilities accrued in our consolidated financial statements and letters of credit for $18.8 million of surety bonds related to other payments.

(7)Consists solely of guarantees associated with leased properties that have been assigned to third parties and are primarily related to the disposition of Red Lobster in fiscal 2015.

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Our adjusted debt to adjusted total capital ratio was 61 percent and 55 percent as of May 29, 2022 and May 30, 2021, respectively. Based on these ratios, we believe our financial condition is strong. We include the lease-debt equivalent and contractual lease guarantees in our adjusted debt to adjusted total capital ratio reported to shareholders, as we believe its inclusion better represents the optimal capital structure that we target from period to period and because it is consistent with the calculation of the covenant under our Revolving Credit Agreement. For fiscal 2022 and fiscal 2021, the lease-debt equivalent includes 6.00 times the total annual minimum rent for consolidated lease obligations of $409.8 million and $385.7 million, respectively. The composition of our capital structure is shown in the following table:

Net cash flows provided by operating activities from continuing operations were $1.26 billion and $1.19 billion in fiscal 2022 and 2021, respectively. Net cash flows provided by operating activities include net earnings from continuing operations of $954.7 million in fiscal 2022 and $632.4 million in fiscal 2021. Net cash flows provided by operating activities from continuing operations increased in fiscal 2022 primarily due to higher net earnings from continuing operations.

Net cash flows used in investing activities from continuing operations were $389.0 million and $263.7 million in fiscal 2022 and 2021, respectively. Capital expenditures incurred principally for building new restaurants, remodeling existing restaurants, replacing equipment, and technology initiatives were $376.9 million in fiscal 2022, compared to $254.9 million in fiscal 2021.

Net cash flows used in financing activities from continuing operations were $1.61 billion and $478.9 million in fiscal 2022 and 2021, respectively. Net cash flows used in financing activities in fiscal 2022 included dividend payments of $563.0 million and share repurchases of $1.07 billion, partially offset by proceeds from the exercise of employee stock options. Net cash flows used in financing activities in fiscal 2021 included repayment of $270.0 million from a 364-day term loan, dividend payments of $202.6 million and share repurchases of $45.4 million, partially offset by proceeds from the exercise of employee stock options.

Our defined benefit and other postretirement benefit costs and liabilities are determined using various actuarial assumptions and methodologies prescribed under Financial Accounting Standards Board Accounting Standards Codification Topic 715, Compensation - Retirement Benefits and Topic 712, Compensation - Nonretirement Postemployment Benefits. We expect to contribute approximately $0.4 million to our supplemental defined benefit pension plan and approximately $1.9 million to our postretirement benefit plan during fiscal 2023.

We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our internal cash-generating capabilities, the potential issuance of equity or unsecured debt securities under our shelf registration statement and short-term commercial paper or drawings under our Revolving Credit Agreement should be sufficient to finance our capital expenditures, debt maturities and other operating activities through fiscal 2023.

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OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

FINANCIAL CONDITION

Our total current assets were $1.18 billion at May 29, 2022, compared with $1.87 billion at May 30, 2021. The decrease was primarily due to a decrease in cash and cash equivalents driven by increased share repurchases in fiscal 2022.

Our total current liabilities were $1.85 billion at May 29, 2022 and May 30, 2021. Decreases in other current liabilities were offset by increases in accounts payable and unearned revenues associated with gift card sales in excess of gift card redemptions.

APPLICATION OF NEW ACCOUNTING STANDARDS

See Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for a discussion of recently issued accounting standards.

Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This discussion and analysis below for Darden Restaurants, Inc. (Darden, the Company, we, us or our) should be read in conjunction with our consolidated financial statements and related financial statement notes included in Part II of this report under the caption “Item 8 - Financial Statements and Supplementary Data.” We operate on a 52/53-week fiscal year, which ends on the last Sunday in May. Fiscal 2021, which ended May 30, 2021, consisted of 52 weeks and fiscal 2020, which ended May 31, 2020, consisted of 53 weeks.

OVERVIEW OF OPERATIONS

Our business operates in the full-service dining segment of the restaurant industry. At May 30, 2021, we operated 1,834 restaurants through subsidiaries in the United States and Canada under the Olive Garden®, LongHorn Steakhouse®, Cheddar’s Scratch Kitchen®, Yard House®, The Capital Grille®, Seasons 52®, Bahama Breeze® and Eddie V’s Prime Seafood® trademarks. We own and operate all of our restaurants in the United States and Canada, except for 2 joint venture restaurants managed by us and 33 franchised restaurants. We also have 24 franchised restaurants in operation located in Latin America. All intercompany balances and transactions have been eliminated in consolidation.

COVID-19 Pandemic

For much of fiscal 2021, the COVID-19 pandemic resulted in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as public health officials encouraged social distancing and required personal protective equipment and state and local governments mandated restrictions including suspension of dine-in operations, reduced restaurant seating capacity, table spacing requirements, bar closures and additional physical barriers. Beginning in late March 2020, we operated with all of our dining rooms closed and served our guests in a To Go only or To Go and delivery format. In late April 2020, state and local governments began to allow us to open dining rooms at limited capacities, along with other operating restrictions.

As a result, we began fiscal 2021 with significant limitations on our operations, which over the course of the fiscal year varied widely from time to time, state to state and city to city. During November 2020, rising case rates resulted in certain jurisdictions implementing restrictions that again reduced dining room capacity or mandated the re-closure of dining rooms. Once COVID-19 vaccines were approved and moved into wider distribution in the United States in early 2021, public health conditions improved and almost all of the COVID-19 restrictions on businesses have eased. As of the date of this report, all of our restaurants were able to open their dining rooms to some extent and few capacity restrictions or other COVID-19 restrictions remained in place in the United States. However, it is possible additional outbreaks could require us to again reduce our capacity or limit or suspend our in-restaurant dining operations.

As we navigated through the pandemic, we took significant steps to adapt our business model to allow us to continue to serve guests and support our team members, including investing in our team members through enhanced pay and benefits, streamlining our restaurant processes, simplifying our menus, and accelerating the rollout of technology to all of our brands to enhance the off-premise and in-restaurant guest experience. As our dining rooms have returned to full or close-to-full capacity, we are focused on continuing to provide a safe environment for our team members and guests, and maintaining many of the operating efficiencies established during fiscal 2021.

Fiscal 2021 Financial Highlights

Our sales from continuing operations were $7.20 billion in fiscal 2021 compared to $7.81 billion in fiscal 2020. The 7.8 percent decrease in sales from continuing operations was primarily driven by negative combined Darden same-restaurant sales of 7.8 percent and one less week of operations in fiscal 2021, partially offset by revenue from the addition of 30 net new company-owned restaurants. The decrease in same-restaurant sales was driven by the impact of COVID-19.

Net earnings from continuing operations for fiscal 2021 was $632.4 million ($4.80 per diluted share) compared with a net loss from continuing operations for fiscal 2020 of $49.2 million ($0.40 per diluted share). Our results from continuing operations for fiscal 2021 increased compared to fiscal 2020 primarily due to the economic impacts of COVID-19 which had a material adverse effect specifically on the fourth quarter of fiscal 2020, including $390.0 million of impairments.

Our net loss from discontinued operations was $3.1 million ($0.03 per diluted share) for fiscal 2021, compared with a net loss from discontinued operations of $3.2 million ($0.03 per diluted share) for fiscal 2020. When combined with results from

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continuing operations, our diluted net earnings per share was $4.77 for fiscal 2021 and diluted net loss per share was $0.43 for fiscal 2020.

Outlook

We expect fiscal 2022 sales from continuing operations to increase between 28 percent and 32 percent, driven by Darden same-restaurant sales growth of 25 percent to 29 percent and approximately 35-40 new restaurants. In fiscal 2022, we expect our annual effective tax rate to be between 13.0 percent and 14.0 percent and we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and technology initiatives to be between $375.0 million and $425.0 million.

RESULTS OF OPERATIONS FOR FISCAL 2021 AND 2020

To facilitate review of our results of operations, the following table sets forth our financial results for the periods indicated. All information is derived from the consolidated statements of earnings for the fiscal years ended May 30, 2021 and May 31, 2020:

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The following table details the number of company-owned restaurants currently reported in continuing operations, compared with the number open at the end of fiscal 2020:

(1)Includes three The Capital Burger restaurants in fiscal 2021 and two in fiscal 2020.

SALES

The following table presents our company-owned restaurant sales, U.S. same-restaurant sales (SRS) and average annual sales per restaurant by segment for the periods indicated:

(1)Same-restaurant sales is a year-over-year comparison of each period’s sales volumes for a 52-week year and is limited to restaurants open at least 16 months.

(2)Average annual sales are calculated as sales divided by total restaurant operating weeks multiplied by 52 weeks; excludes franchise locations.

Olive Garden’s sales decrease for fiscal 2021 was primarily driven by a U.S. same-restaurant sales decrease and one less week of operations, partially offset by revenue from new restaurants. The decrease in U.S. same-restaurant sales in fiscal 2021 was driven by the impact of COVID-19 and resulted from a 12.8 percent decrease in same-restaurant guest counts offset by a 2.9 percent increase in average check.

LongHorn Steakhouse’s sales increase for fiscal 2021 was driven by a same-restaurant sales increase combined with revenue from new restaurants, partially offset by one less week of operations. The increase in same-restaurant sales in fiscal 2021 resulted from a 3.3 percent increase in same-restaurant guest counts combined with a 2.2 percent increase in average check.

Fine Dining’s sales decrease for fiscal 2021 was driven by a same-restaurant sales decrease and one less week of operations, partially offset by revenue from new restaurants. The decrease in same-restaurant sales in fiscal 2021 was driven by the impact of COVID-19 and resulted from a 20.7 percent decrease in same-restaurant guest counts offset by a 1.5 percent increase in average check.

Other Business’s sales decrease for fiscal 2021 was driven by a same-restaurant sales decrease and one less week of operations, partially offset by revenue from new restaurants. The decrease in same-restaurant sales in fiscal 2021 was driven by the impact of COVID-19 and resulted from a 15.5 percent decrease in same-restaurant guest counts offset by a 2.0 percent increase in average check.

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COSTS AND EXPENSES

The following table sets forth selected operating data as a percent of sales from continuing operations for the periods indicated. This information is derived from the consolidated statements of earnings for the fiscal years ended May 30, 2021 and May 31, 2020.

Total operating costs and expenses from continuing operations were $6.55 billion in fiscal 2021 and $7.76 billion in fiscal 2020.

Fiscal 2021 Compared to Fiscal 2020:

•Food and beverage costs increased as a percent of sales primarily due to a 0.7% impact from inflation and 0.4% impact from investments in food quality, partially offset by a 0.6% impact from pricing leverage and 0.4% impact from menu mix.

•Restaurant labor costs decreased as a percent of sales primarily due to a 4.0% impact from productivity improvement driven by operational simplification and a 0.7% impact from pricing, partially offset by a 1.7% impact from sales deleverage and a 0.5% impact from inflation.

•Restaurant expenses decreased as a percent of sales primarily due to a 1.4% impact from lower repairs and maintenance expenses, utility costs, and rent expense, and a 0.4% impact from pricing, partially offset by a 1.6% impact from sales deleverage.

•Marketing expenses decreased as a percent of sales primarily due to a 2.0% impact from lower media spending at Olive Garden and LongHorn Steakhouse, partially offset by a 0.3% impact from sales deleverage.

•General and administrative expenses increased as a percent of sales primarily due to a 0.6% impact related to our corporate restructuring actions during the first quarter of fiscal 2021, a 0.4% impact from the mark to market of our deferred compensation plans, and a 0.4% impact due to sales deleverage, partially offset by a 0.6% impact from cost savings initiatives and a 0.2% impact from a legal recovery.

•Depreciation and amortization expenses increased as a percent of sales primarily due to sales deleverage.

•Impairments and disposal of assets, net decreased as a percent of sales due to the economic impact of the COVID-19 pandemic on fiscal 2020. During the fourth quarter of fiscal 2020, we recorded non-cash impairment charges of $220.8 million related to a portion of our other indefinite-lived intangible assets, restaurant-level and other assets.

•Goodwill impairment decreased as a percent of sales due to the economic impact of COVID-19 on fiscal 2020. During the fourth quarter of fiscal 2020, we recorded a non-cash impairment charge of $169.2 million related to a portion of our goodwill.

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INCOME TAXES

During fiscal 2021, we had an income tax benefit of $55.9 million ((9.7) percent effective tax rate) compared to an income tax benefit of $111.8 million (69.4 percent effective tax rate) in fiscal 2020. The significant change was driven primarily by the fact that we had $576.5 million in earnings before taxes in fiscal 2021, compared to a net loss before taxes $161.0 million in fiscal 2020. For fiscal 2021, our effective tax rate was also impacted by the generation of a net operating loss for tax purposes that will be carried back to the previous five tax years. We generated a net operating loss for tax purposes due to several factors, including the impact of COVID-19, accelerated tax depreciation, increased tax deductions for equity vestings and exercises, tax accounting method changes and various other tax planning initiatives. An income tax benefit is generated due to the difference in federal tax rates between fiscal year 2021 and the years to which the federal net operating loss will be carried back.

NET EARNINGS AND NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS

Net earnings from continuing operations for fiscal 2021 were $632.4 million ($4.80 per diluted share) compared with net loss from continuing operations for fiscal 2020 of $49.2 million ($0.40 per diluted share).

Our results from continuing operations for fiscal 2021 increased compared with fiscal 2020 primarily due to the economic impacts of COVID-19 which had a material adverse effect on the fourth quarter of fiscal 2020 including $390.0 million of asset impairments during the fourth quarter. In fiscal 2021, our diluted per share results from continuing operations were positively impacted by $0.76 due to a non-recurring income tax benefit, partially offset by $0.27 due to our corporate restructuring in the first quarter of fiscal 2021. In fiscal 2020, our diluted per share results from continuing operations were negatively impacted by approximately $2.19 due to non-cash goodwill and trademark impairments, approximately $0.29 due to non-cash restaurant-level impairments and approximately $0.18 due to inventory and note receivable write-downs. Additionally, our diluted per share results from continuing operations for fiscal 2020 were adversely impacted by approximately $0.89 due to a pension settlement charge and approximately $0.02 due to an international structure simplification from the second quarter of fiscal 2020.

LOSS FROM DISCONTINUED OPERATIONS

On an after-tax basis, results from discontinued operations for fiscal 2021 were a net loss of $3.1 million ($0.03 per diluted share) compared with a net loss for fiscal 2020 of $3.2 million ($0.03 per diluted share).

SEGMENT RESULTS

We manage our restaurant brands, Olive Garden, LongHorn Steakhouse, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s in the U.S. and Canada as operating segments. We aggregate our operating segments into reportable segments based on a combination of the size, economic characteristics and sub-segment of full-service dining within which each brand operates. Our four reportable segments are: (1) Olive Garden, (2) LongHorn Steakhouse, (3) Fine Dining and (4) Other Business. See Note 5 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for further details.

Our management uses segment profit as the measure for assessing performance of our segments. The following table presents segment profit margin for the periods indicated:

The increase in the Olive Garden segment profit margin for fiscal 2021 was driven primarily by lower restaurant labor as well as lower marketing expenses. The increase in the LongHorn Steakhouse segment profit margin for fiscal 2021 was driven by leveraging positive same-restaurant sales as well as lower marketing expenses. The increase in in the Fine Dining segment profit margin for 2021 was driven by lower marketing expenses and lower food and beverage costs. The increase in the Other Business segment profit margin for 2021 was driven by lower restaurant labor and lower marketing expenses.

RESULTS OF OPERATIONS FOR FISCAL 2020 COMPARED TO 2019

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For a comparison of our results of operations for the fiscal years ended May 31, 2020 and May 26, 2019, see “Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our annual report on Form 10-K for the fiscal year ended May 31, 2020, filed with the SEC on July 24, 2020.

SEASONALITY

Our sales volumes have historically fluctuated seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. However, throughout fiscal 2021, a variety of factors, including the impacts of COVID-19 on our business, government actions taken to respond to COVID-19 and to stimulate the United States’ recovery from COVID-19, and changing consumer preferences caused fluctuations in our sales volumes that were different than our typical seasonality. Additionally, holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the historical seasonality of our business and these other factors, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.

IMPACT OF INFLATION

We attempt to minimize the annual effects of inflation through appropriate planning, operating practices and menu price increases. We do not believe inflation had a significant overall effect on our annual results of operations during fiscal 2021 or 2020.

CRITICAL ACCOUNTING ESTIMATES

We prepare our consolidated financial statements in conformity with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Actual results could differ from those estimates.

Our significant accounting policies are more fully described in Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report). Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. We consider the following estimates to be most critical in understanding the judgments that are involved in preparing our consolidated financial statements.

Leases

We evaluate our leases at their inception to estimate their expected term, which commences on the date when we have the right to control the use of the leased property and includes the non-cancelable base term plus all option periods we are reasonably certain to exercise. Our judgment in determining the appropriate expected term and discount rate for each lease affects our evaluation of:

•The classification and accounting for leases as operating versus finance;

•The rent holidays and escalation in payments that are included in the calculation of the lease liability and related right-of-use asset; and

•The term over which leasehold improvements for each restaurant facility are amortized.

These judgments may produce materially different amounts of lease liabilities and right-of-use assets recognized on our consolidated balance sheets, as well as depreciation, amortization, interest and rent expense recognized in our consolidated statements of earnings if different discount rates and expected lease terms were used.

Valuation of Long-Lived Assets

Land, buildings and equipment, operating lease right-of-use assets and certain other assets, including definite-lived intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; changes in expected useful life; unanticipated competition; slower growth rates, ongoing maintenance and improvements of the assets, or changes in the usage or operating performance. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. Based on a review of operating results for each of our restaurants, the amount of net book value associated with lower performing restaurants that would be deemed at risk for impairment is not material to our consolidated financial statements.

Valuation and Recoverability of Goodwill and Trademarks

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We have eight reporting units, six of which had goodwill and seven of which had trademarks. Goodwill and trademarks are not subject to amortization and goodwill has been assigned to reporting units for purposes of impairment testing. The reporting units are our restaurant brands. A significant amount of judgment is involved in determining if an indicator of impairment has occurred. Such indicators may include, among others: a significant decline in our expected future cash flows; a sustained, significant decline in our stock price and market capitalization; a significant adverse change in legal factors or in the business climate; unanticipated competition; the testing for recoverability of a significant asset group within a reporting unit; and slower growth rates. Any adverse change in these factors could have a significant impact on the recoverability of these assets and could have a material impact on our consolidated financial statements. We review our goodwill and trademarks for impairment annually, as of the first day of our fourth fiscal quarter, or more frequently if indicators of impairment exist.

During fiscal 2021, we elected to perform a qualitative assessment for our annual impairment review of goodwill and trademarks to determine whether or not indicators of impairment exist. In considering the qualitative approach related to goodwill, we evaluated factors including, but not limited to, COVID-19, macro-economic conditions, market and industry conditions, commodity cost fluctuations, competitive environment, share price performance, results of prior impairment tests, operational stability, the overall financial performance of the reporting units and the impacts of discount rates. As it relates to trademarks, we evaluate similar factors from the goodwill assessment, in addition to impacts of royalty rates. Based on the results of the qualitative assessment which considered the improvements of each of our brands’ financial performance, as well as the improved overall operating environment, no indicators of impairment were identified. Changes in circumstances existing at the measurement date or at other times in the future, or in the numerous estimates associated with management’s judgments and assumptions made in assessing the fair value of our goodwill and trademarks, could result in an impairment loss of a portion or all of our goodwill or trademarks.

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 (Revolving Credit Agreement) increases. A leverage ratio exceeding the maximum permitted under our Revolving Credit Agreement would be a default under our Revolving Credit Agreement.  At May 30, 2021, additional write-downs of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $1.69 billion would have been required to cause our leverage ratio to exceed the permitted maximum. As our leverage ratio is determined on a quarterly basis, and due to the seasonal nature of our business, a lesser amount of impairment in future quarters could cause our leverage ratio to exceed the permitted maximum.

Unearned Revenues

Unearned revenues primarily represent our liability for gift cards that have been sold but not yet redeemed. The estimated value of gift cards expected to remain unused is recognized over the expected period of redemption as the remaining gift card values are redeemed, generally over a period of 12 years. Utilizing this method, we estimate both the amount of breakage and the time period of redemption. If actual redemption patterns vary from our estimates, actual gift card breakage income may differ from the amounts recorded. We update our estimates of our redemption period and our breakage rate periodically and apply that rate to gift card redemptions on a prospective basis. Changing our breakage-rate estimates by 50 basis points would have resulted in an adjustment in our breakage income of approximately $2.4 million for fiscal 2021.

Income Taxes

We estimate certain components of our provision for income taxes. These estimates include, among other items, depreciation and amortization expense allowable for tax purposes, allowable tax credits for items such as taxes paid on reported employee tip income, effective rates for state and local income taxes and the tax deductibility of certain other items. We adjust our annual effective income tax rate as additional information on outcomes or events becomes available.

Assessment of uncertain tax positions requires judgments relating to the amounts, timing and likelihood of resolution. As described in Note 12 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report), the $51.8 million balance of unrecognized tax benefits at May 30, 2021, includes $35.9 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. Of the $35.9 million, $18.0 million relates to items that would impact our effective income tax rate.

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, during the fourth quarter of fiscal 2020, all of our restaurants began operating at reduced capacities due to COVID-19 and initially were not able to generate sufficient cash from operations to cover all of our projected expenditures while

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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 improved, and during fiscal 2021 we generated positive operating cash flows and fully repaid our $270.0 million 364-day term loan prior to maturity. Additionally, our Board of Directors declared a cash dividend of $1.10 per share to be paid on August 2, 2021 to all shareholders of record as of the close of business on July 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 report and have been obtained with the understanding that Moody’s Investors Service, Standard & Poor’s and Fitch will continue to monitor our credit and make future adjustments to these ratings to the extent warranted. The ratings are not a recommendation to buy, sell or hold our securities, may be changed, superseded or withdrawn at any time and should be evaluated independently of any other rating.

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 May 30, 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 May 30, 2021, we had no outstanding balances under the Revolving Credit Agreement.

At May 30, 2021, our 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 6.800 percent senior notes due October 2037 is subject to adjustment from time to time if the debt rating assigned to such series of notes is downgraded below a certain rating level (or subsequently upgraded). The maximum adjustment is 2.000 percent above the initial interest rate and the interest rate cannot be reduced below the initial interest rate. As of May 30, 2021, no such adjustments are made to this rate.

Through our shelf registration statement on file with the SEC, depending on conditions prevailing in the public capital markets, we may issue equity securities or unsecured debt securities from time to time in one or more series, which may consist of notes, debentures or other evidences of indebtedness in one or more offerings.

From time to time, we may repurchase our 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 to manage interest rate risk inherent in our operations. See Note 7 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report).

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A summary of our contractual obligations and commercial commitments at May 30, 2021, is as follows:

(1)Includes interest payments associated with existing long-term debt. Excludes discount and issuance costs of $9.1 million.

(2)Includes non-cancelable future operating lease and finance lease commitments.

(3)Includes commitments for food and beverage items and supplies, capital projects, information technology and other miscellaneous commitments.

(4)Includes expected contributions associated with our supplemental defined benefit pension plan and payments associated with our postretirement benefit plan and our non-qualified deferred compensation plan through fiscal 2031.

(5)Includes interest on unrecognized income tax benefits of $2.3 million, $1.4 million of which relates to contingencies expected to be resolved within one year.

(6)Includes letters of credit for $70.5 million of workers’ compensation and general liabilities accrued in our consolidated financial statements and letters of credit for $28.9 million of surety bonds related to other payments.

(7)Consists solely of guarantees associated with leased properties that have been assigned to third parties and are primarily related to the disposition of Red Lobster.

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Our adjusted debt to adjusted total capital ratio was 55 percent and 61 percent as of May 30, 2021 and May 31, 2020, respectively. Based on these ratios, we believe our financial condition is strong. We include the lease-debt equivalent and contractual lease guarantees in our adjusted debt to adjusted total capital ratio reported to shareholders, as we believe its inclusion better represents the optimal capital structure that we target from period to period and because it is consistent with the calculation of the covenant under our Revolving Credit Agreement. For fiscal 2021 and fiscal 2020, the lease-debt equivalent includes 6.00 times the total annual minimum rent for consolidated lease obligations of $385.7 million and $392.6 million, respectively. The composition of our capital structure is shown in the following table:

Net cash flows provided by operating activities from continuing operations were $1.19 billion and $717.4 million in fiscal 2021 and 2020, respectively. Net cash flows provided by operating activities include net earnings from continuing operations of $632.4 million in fiscal 2021 and net loss from continuing operations of $49.2 million in fiscal 2020. Net cash flows provided by operating activities from continuing operations increased in fiscal 2021 primarily due to higher net earnings from continuing operations.

Net cash flows used in investing activities from continuing operations were $263.7 million in fiscal 2021 compared to net cash flows used in investing activities from continuing operations of $544.0 million in fiscal 2020. Capital expenditures incurred principally for building new restaurants, remodeling existing restaurants, replacing equipment, and technology initiatives were $254.9 million in fiscal 2021, compared to $459.9 million in fiscal 2020. The reduction in capital expenditures during fiscal 2021 was due to COVID-19. Net cash flows used in investing activities for fiscal 2020 also reflect net cash used of $55.8 million in the acquisition of Cheddar’s Scratch Kitchen restaurants from existing franchisees.

Net cash flows used in financing activities from continuing operations were $478.9 million in fiscal 2021, compared to net cash flows provided by financing activities from continuing operations of $138.7 million in fiscal 2020. Net cash flows used in financing activities in fiscal 2021 included repayment of $270.0 million from a 364-day term loan, dividend payments of $202.6 million and share repurchases of $45.4 million, partially offset by proceeds from the exercise of employee stock options. Net cash flows providing by financing activities in fiscal 2020 included proceeds of $750.0 million from drawing on our Revolving Credit Agreement, net proceeds of $505.1 million from a follow-on common stock offering, proceeds of $270.0 million from a 364-day term loan and proceeds from the exercise of employee stock options, partially offset by repayment of the $750.0 million drawn from our Revolving Credit Agreement, dividend payments of $322.3 million and share repurchases of $330.3 million.

Our defined benefit and other postretirement benefit costs and liabilities are determined using various actuarial assumptions and methodologies prescribed under Financial Accounting Standards Board Accounting Standards Codification Topic 715, Compensation - Retirement Benefits and Topic 712, Compensation - Nonretirement Postemployment Benefits. In April 2018, our Benefit Plans Committee approved the termination of our primary non-contributory defined benefit pension plan (the Retirement Income Plan for Darden Restaurants, Inc.).  Plan participants who had not yet begun receiving their benefit payments were provided the opportunity to receive their full accrued benefits from plan assets by either (i) electing immediate lump sum

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distributions or annuities or (ii) deferring commencement of their benefits to a later date. During fiscal 2020, we made a funding contribution of approximately $12.7 million to fully fund the benefit obligation. As of May 31, 2020, all of the plan assets were either (i) distributed to settle the benefits for participants who selected the lump sum option or (ii) transferred to a third-party annuity provider for all other eligible participants. The settlement of the benefit obligation to plan participants in fiscal 2020 resulted in a pre-tax pension settlement charge of $145.5 million recorded in other (income) expense, net in our consolidated statement of earnings. We expect to contribute approximately $0.4 million to our supplemental defined benefit pension plan and approximately $2.0 million to our postretirement benefit plan during fiscal 2022.

We are not aware of any trends or events that would materially affect our capital requirements or liquidity. We believe that our internal cash-generating capabilities, the potential issuance of equity or unsecured debt securities under our shelf registration statement and short-term commercial paper or drawings under our Revolving Credit Agreement should be sufficient to finance our capital expenditures, debt maturities and other operating activities through fiscal 2022.

OFF-BALANCE SHEET ARRANGEMENTS

We are not a party to any off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources.

FINANCIAL CONDITION

Our total current assets were $1.87 billion at May 30, 2021, compared with $1.10 billion at May 31, 2020. The increase was primarily due to an increase in cash and cash equivalents driven by cash from operations as well as an increase in prepaid income taxes.

Our total current liabilities were $1.85 billion at May 30, 2021, compared with $1.79 billion at May 31, 2020. The increase was primarily due to an increase in other current liabilities and accounts payable, partially offset by the repayment of our $270 million term loan in fiscal 2021.

APPLICATION OF NEW ACCOUNTING STANDARDS

See Note 1 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for a discussion of recently issued accounting standards.