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 2020, which ended May 31, 2020, consisted of 53 weeks and fiscal 2019, which ended May 26, 2019, consisted of 52 weeks.

OVERVIEW OF OPERATIONS

Our business operates in the full-service dining segment of the restaurant industry. At May 31, 2020, we operated 1,804 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 3 joint venture restaurants managed by us and 30 franchised restaurants. We also have 32 franchised restaurants in operation located in Latin America and the Middle East. All intercompany balances and transactions have been eliminated in consolidation.

COVID-19 Pandemic

In March 2020, the COVID-19 outbreak was declared a national public health emergency resulting in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as public health officials encouraged social distancing and state and local governments mandated restrictions including suspension of dine-in operations, reduced restaurant seating capacity, table spacing requirements, bar closures and additional physical barriers. Through the first three quarters of fiscal 2020, our financial results were strong as sales from continuing operations for the first nine months of fiscal 2020 were $6.54 billion, an increase of 4.1 percent over the prior year period. The COVID-19 pandemic negatively impacted this strong performance, and for most of the fourth quarter of fiscal 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. Our sales for the fourth quarter of fiscal 2020 declined 43.0 percent from the fourth quarter of fiscal 2019. As we continue to navigate through the pandemic, we have taken significant steps to adapt our business to allow us to continue to serve guests, support our team members and secure our liquidity position to provide financial flexibility, including:

•	Modifying our business operations in order to continue serving guests at our restaurants as safely and effectively as possible, including, initially transitioning all restaurant locations to a To Go only or To Go and delivery model;

•	Reducing or eliminating fixed costs in our restaurants and restaurant support center as well as eliminating or delaying most nonessential capital spending;

•	Furloughing a substantial number of hourly restaurant employees as a result of the closure of our dining rooms and reduction in sales;

•	Protecting our team members’ safety and wellbeing, including sourcing additional sanitation supplies and personal protective equipment, implementing paid sick leave for all hourly restaurant team members, providing a $75.0 million emergency pay program and covering $4.1 million of health and welfare insurance premiums for furloughed team members;

•	Suspending the quarterly cash dividend, with the intention of reviewing our dividend policy as developments warrant;

•	Fully drawing on our $750.0 million Revolving Credit Agreement, which was subsequently repaid in May 2020;

•	Securing a $270.0 million term loan;

•	Raising $505.1 million in net proceeds from a follow-on equity offering;

•	Suspending our share repurchase activity; and

•	Implementing a careful, phased reopening of our dining rooms where permitted by local regulations.

The impact on our operating results as well as the operational and financial measures we have implemented in response to the COVID-19 pandemic have been included throughout this document. As a result of the economic impact of the COVID-19 pandemic, during the fourth quarter of fiscal 2020, we recorded non-cash impairment charges of $390.0 million related to a portion of our goodwill, other indefinite-lived intangible assets, and other assets. See Note 1 and Note 3 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for additional information. Additionally, on March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (CARES Act) was signed into law in the United States. The provisions of the CARES Act provide for, among other items, refundable employee retention tax credits for which we intend to claim $39.2 million related to our emergency pay program mentioned above. See Note 12 of the Notes to Consolidated Financial Statements (Part II, Item 8 of this report) for additional information.

In late April 2020, state and local governments began to allow us to open dining rooms at limited capacities, along with other operating restrictions, and as of the date of filing this report, 89.0 percent of our restaurants were able to open their dining

rooms to some extent. While increasing our in-restaurant dining capacity is subject to the ordinances in the jurisdictions we operate, we are focused on increasing capacity where possible, continuing to provide a safe environment for our team members and guests, and maintaining many of the efficiencies established over these past few months. For most of the fourth quarter of fiscal 2020, our cash flows from operations were negative, but by the end of the quarter, with the increasing dining room capacity, we were back to near break-even cash flow levels. Although we expect our restaurants’ dining room capacity to increase as public health conditions improve and restrictions are eased, it is possible additional outbreaks could require us to reduce our capacity or further suspend our in-restaurant dining operations.

We believe that capable operators of strong, multi-unit brands have the opportunity to increase their share of the restaurant industry’s full-service segment. Generally, the restaurant industry is considered to be comprised of three segments: quick service, fast casual, and full service. All of our restaurants fall within the full-service segment, which is highly fragmented and includes many independent operators and small chains. We believe we have strong brands and that the breadth and depth of our experience and expertise sets us apart in the full-service segment of the restaurant industry. This collective capability is the product of investments over many years in areas that are critical to success in our business, including restaurant operations excellence, brand management excellence, supply chain, talent management and information technology, among other things.

Although the fourth quarter of fiscal 2020 required us to focus on adapting our business to account for the impacts of COVID-19, our long-term operating philosophy remains focused on strengthening the core operational fundamentals of the business by providing an outstanding guest experience rooted in culinary innovation, attentive service, engaging atmosphere, and integrated marketing. The Darden support structure enables our brands to achieve their ultimate potential through: (1) driving advantages in supply chain and general and administrative support; (2) applying insights collected from our significant guest and transactional databases to enhance guest relationships and identify new opportunities to drive sales growth; (3) relentlessly driving operating efficiencies and continuous improvement, operating with a sense of urgency and inspiring a performance-driven culture; and (4) our commitment to rigorous strategic planning.

We seek to increase profits by leveraging our fixed and semi-fixed costs with sales from new restaurants and increased guest traffic and sales at existing restaurants. To evaluate our operations and assess our financial performance, we monitor a number of operating measures, with a special focus on two key factors:

•	Same-restaurant sales – which is a year-over-year 52-week comparison of each period’s sales volumes for restaurants open at least 16 months; and

•	Segment profit – which is restaurant sales, less food and beverage costs, restaurant labor costs, restaurant expenses and marketing expenses (sometimes referred to as restaurant-level earnings).

Increasing same-restaurant sales can improve segment profit because these incremental sales provide better leverage of our fixed and semi-fixed restaurant-level costs. A restaurant brand can generate same-restaurant sales increases through increases in guest traffic, increases in the average guest check, or a combination of the two. The average guest check can be impacted by menu price changes and by the mix of menu items sold. For each restaurant brand, we gather daily sales data and regularly analyze the guest traffic counts and the mix of menu items sold to aid in developing menu pricing, product offerings and promotional strategies. We focus on balancing our pricing and product offerings with other initiatives to produce sustainable same-restaurant sales growth. We compute same-restaurant sales using restaurants open at least 16 months because this period is generally required for new restaurant sales levels to normalize. Sales at newly opened restaurants generally do not make a significant contribution to profitability in their initial months of operation due to operating or integration inefficiencies. Our sales and expenses can be impacted significantly by the number and timing of new restaurant openings and closings, and relocations and remodeling of existing restaurants. Pre-opening expenses each period reflect the costs associated with opening new restaurants in current and future periods.

Fiscal 2020 Financial Highlights

Our sales from continuing operations were $7.81 billion in fiscal 2020 compared to $8.51 billion in fiscal 2019. The 8.3 percent decrease in sales from continuing operations was primarily driven by negative combined Darden same-restaurant sales of 11.0 percent partially offset by revenue from the addition of 19 net new company-owned restaurants. The decrease in sales was driven by the impact of COVID-19 on our fourth quarter results in fiscal 2020 which declined 43.0 percent from the fourth quarter of fiscal 2019.

Net loss from continuing operations for fiscal 2020 was $49.2 million ($0.40 per diluted share) compared with net earnings from continuing operations for fiscal 2019 of $718.6 million ($5.73 per diluted share). Our results from continuing operations for fiscal 2020 decreased compared to fiscal 2019 primarily due to the economic impacts of COVID-19 which had a material adverse effect on the fourth quarter of fiscal 2020.

Our net loss from discontinued operations was $3.2 million ($0.03 per diluted share) for fiscal 2020, compared with a net loss from discontinued operations of $5.2 million ($0.04 per diluted share) for fiscal 2019. When combined with results from

continuing operations, our diluted net loss per share was $0.43 for fiscal 2020 and diluted net earnings per share was $5.69 for fiscal 2019.

Outlook

While it is our normal practice to provide an annual financial outlook, given the level of volatility and uncertainty surrounding the future impact of the COVID-19 outbreak, measures taken to control its spread, the broader U.S. economy and any specific impact on our financial results, we are providing only a limited outlook for fiscal 2021.

In fiscal 2021, we expect to open 35-40 net new restaurants and we expect capital expenditures incurred to build new restaurants, remodel and maintain existing restaurants and technology initiatives to be between $250.0 million and $300.0 million.

RESULTS OF OPERATIONS FOR FISCAL 2020 AND 2019

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 31, 2020 and May 26, 2019:

	Fiscal Year Ended								Percent Change
(in millions)	May 31, 2020				May 26, 2019				2020 vs 2019
Sales	$	7,806.9			$	8,510.4			(8.3	)%
Costs and expenses:
Food and beverage	2,240.8				2,412.5				(7.1	)%
Restaurant labor	2,682.6				2,771.1				(3.2	)%
Restaurant expenses	1,475.1				1,477.8				(0.2	)%
Marketing expenses	238.0				255.3				(6.8	)%
General and administrative expenses	376.4				405.5				(7.2	)%
Depreciation and amortization	355.9				336.7				5.7	%
Impairments and disposal of assets, net	221.0				19.0				NM
Goodwill impairment	169.2				—				NM
Total operating costs and expenses	$	7,759.0			$	7,677.9			1.1	%
Operating income	47.9				832.5				(94.2	)%
Interest, net	57.3				50.2				14.1	%
Other (income) expense, net	151.6				—				NM
Earnings (loss) before income taxes	(161.0		)		782.3				NM
Income tax expense (benefit) (1)	(111.8		)		63.7				NM
Earnings (loss) from continuing operations	$	(49.2	)		$	718.6			NM
Losses from discontinued operations, net of tax	(3.2		)		(5.2		)		NM
Net earnings (loss)	$	(52.4	)		$	713.4			NM
(1) Effective tax rate	69.4		%		8.1		%
NM- Percentage change not considered meaningful.

The following table details the number of company-owned restaurants currently reported in continuing operations, compared with the number open at the end of fiscal 2019:

		May 31, 2020			May 26, 2019
Olive Garden		868			866
LongHorn Steakhouse		522			514
Cheddar’s Scratch Kitchen (1)		165			161
Yard House		81			79
The Capital Grille (2)		60			58
Seasons 52		44			44
Bahama Breeze		41			42
Eddie V’s		23			21
Total		1,804			1,785

(1)	Includes seven franchised locations acquired in fiscal 2020.

(2)	Includes two The Capital Burger restaurants in fiscal 2020 and one in fiscal 2019.

SALES

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

	Total Sales														Average Annual Sales per Restaurant (2)
	Fiscal Year Ended								Percent Change						Fiscal Year Ended
(in millions)	May 31, 2020				May 26, 2019				SRS (1)			May 31, 2020				May 26, 2019
Olive Garden	$	4,013.8			$	4,287.3			(6.4	)%		(8.6	)%		$	4.5			$	5.0
LongHorn Steakhouse	$	1,701.1			$	1,810.6			(6.0	)%		(8.8	)%		$	3.2			$	3.6
Cheddar’s Scratch Kitchen	$	584.2			$	664.0			(12.0	)%		(17.1	)%		$	3.5			$	4.2
Yard House	$	528.3			$	609.5			(13.3	)%		(17.3	)%		$	6.6			$	8.1
The Capital Grille	$	405.0			$	461.4			(12.2	)%		(13.6	)%		$	6.8			$	8.0
Seasons 52	$	215.1			$	253.2			(15.0	)%		(18.7	)%		$	4.7			$	5.9
Bahama Breeze	$	201.3			$	246.5			(18.3	)%		(20.1	)%		$	4.7			$	6.0
Eddie V’s	$	136.1			$	144.5			(5.8	)%		(15.2	)%		$	6.0			$	7.4

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

(2)	Average annual sales are calculated as net sales divided by total restaurant operating weeks multiplied by 52 weeks.

Olive Garden’s sales decrease for fiscal 2020 was primarily driven by a U.S. same-restaurant sales decrease primarily driven by the impact of COVID-19, partially offset by revenue from new restaurants. The decrease in U.S. same-restaurant sales in fiscal 2020 resulted from a 10.0 percent decrease in same-restaurant guest counts offset by a 1.4 percent increase in average check.

LongHorn Steakhouse’s sales decrease for fiscal 2020 was driven by a same-restaurant sales decrease primarily driven by the impact of COVID-19, partially offset by revenue from new restaurants. The decrease in same-restaurant sales in fiscal 2020 resulted from a 10.4 percent decrease in same-restaurant guest counts offset by a 1.6 percent increase in average check.

In total, Cheddar’s Scratch Kitchen, Yard House, The Capital Grille, Seasons 52, Bahama Breeze and Eddie V’s generated sales in fiscal 2020 that were 13.0 percent below fiscal 2019. The sales decrease for fiscal 2020 was primarily driven by same-restaurant sales decreases driven by the impact of COVID-19, partially offset by incremental sales from new restaurants.

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 31, 2020 and May 26, 2019.

	Fiscal Year Ended
	May 31, 2020			May 26, 2019
Sales	100.0	%		100.0	%
Costs and expenses:
Food and beverage	28.7			28.3
Restaurant labor	34.4			32.6
Restaurant expenses	18.9			17.4
Marketing expenses	3.0			3.0
General and administrative expenses	4.8			4.8
Depreciation and amortization	4.6			4.0
Impairments and disposal of assets, net	2.8			0.2
Goodwill impairment	2.2			—
Total operating costs and expenses	99.4	%		90.2	%
Operating income	0.6			9.8
Interest, net	0.7			0.6
Other (income) expense, net	1.9			—
Earnings (loss) before income taxes	(2.1	)		9.2
Income tax expense (benefit)	(1.4	)		0.7
Earnings (loss) from continuing operations	(0.6	)		8.4

Total operating costs and expenses from continuing operations were $7.76 billion in fiscal 2020 and $7.68 billion in fiscal 2019.

Fiscal 2020 Compared to Fiscal 2019*:*

•	Food and beverage costs increased as a percent of sales primarily due to a 1.0% impact from unfavorable menu mix and inflation partially offset by a 0.4% impact from pricing and a 0.3% impact related to cost savings initiatives.

•	Restaurant labor costs increased as a percent of sales primarily due to a 1.3% impact from inflation and a 1.4% impact from sales deleverage and decreased productivity, partially offset by a 0.8% impact from pricing leverage.

•	Restaurant expenses increased as a percent of sales primarily due to sales deleverage.

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

•	Impairments and disposal of assets, net increased as a percent of sales due to the economic impact of the COVID-19 pandemic. 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 and other assets.

•	Goodwill impairment increased as a percent of sales due to the economic impact of the COVID-19 pandemic. 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.

INCOME TAXES

The effective income tax rates for fiscal 2020 and 2019 for continuing operations were 69.4 percent and 8.1 percent, respectively. During fiscal 2020, we had an income tax benefit of $111.8 million compared to income tax expense of $63.7 million in fiscal 2019. The significant change was driven primarily by our net loss from continuing operations in fiscal 2020, compared to fiscal 2019 net earnings from continuing operations and the impact of certain tax credits on our lower earnings before income taxes.

NET EARNINGS AND NET EARNINGS PER SHARE FROM CONTINUING OPERATIONS

Net loss from continuing operations for fiscal 2020 was $49.2 million ($0.40 per diluted share) compared with net earnings from continuing operations for fiscal 2019 of $718.6 million ($5.73 per diluted share).

Our results from continuing operations for fiscal 2020 decreased compared with fiscal 2019 primarily due to the economic impacts of COVID-19 which had a material adverse effect on the fourth quarter of fiscal 2020. Our diluted per share results from continuing operations were negatively impacted by approximately $2.19 in fiscal 2020 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 2020 were a net loss of $3.2 million ($0.03 per diluted share) compared with a net loss for fiscal 2019 of $5.2 million ($0.04 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:

		Fiscal Year Ended				Change
Segment		May 31, 2020		May 26, 2019		2020 vs 2019
Olive Garden		18.3%		20.5%		(220	)	BP
LongHorn Steakhouse		15.4%		18.2%		(280	)	BP
Fine Dining		16.3%		20.6%		(430	)	BP
Other Business		8.9%		14.7%		(580	)	BP

The decrease in the Olive Garden, LongHorn Steakhouse, Fine Dining and Other Business’ segment profit margins for fiscal 2020 was driven primarily by negative same-restaurant sales during the fourth quarter of fiscal 2020, resulting from the economic impact of COVID-19.

RESULTS OF OPERATIONS FOR FISCAL 2019 COMPARED TO 2018

For a comparison of our results of operations for the fiscal years ended May 26, 2019 and May 27, 2018, 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 26, 2019, filed with the SEC on July 19, 2019.

SEASONALITY

Our sales volumes fluctuate seasonally. Typically, our average sales per restaurant are highest in the winter and spring, followed by the summer, and lowest in the fall. Holidays, changes in the economy, severe weather and similar conditions may impact sales volumes seasonally in some operating regions. Because of the seasonality of our business, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year. We are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business.

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 2020 or 2019.

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; 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.

During the fourth quarter of fiscal 2020, we identified indicators of impairment of our long-lived assets due to COVID-19, including but not limited to significant decline in cash flows, significant decline in sales, and overall challenging environment for the restaurant industry due to the mandated suspension of dine-in operations and other restrictions such as table spacing requirements. Due to the indicators that were present throughout our fourth quarter, we deemed it more likely than not that an impairment may have occurred in our long-lived assets and performed impairment testing as of May 31, 2020. As a result of our impairment test, we recorded pre-tax non-cash impairment charges of $47.0 million in the fourth quarter of fiscal 2020 related to 11 underperforming restaurants we permanently closed during the quarter and 9 other restaurants whose projected cash flows were not sufficient to cover their respective carrying values.

Significant judgment was used in estimating both the recoverability of the carrying value and fair value of the long-lived assets:

•	Recoverability was determined by our ability to recognize undiscounted cash flows over the carrying value of the assets.

•	Cash flow assumptions were based on forecasted sales and expenses utilizing historical and current trends factoring in the estimated impact of COVID-19, and estimated useful life of the assets.

•	Fair value was determined based on discounted cash flows, sales prices of comparable assets, or third-party appraisals which included market, growth and discount rates.

Valuation and Recoverability of Goodwill and Trademarks

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.

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 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 results and cash flows that are discounted using a weighted-average cost of capital 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 our annual long-range plan; assumed royalty rates that could be payable if we did not own the trademarks; and a discount rate. 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 24, 2020 which was the first day of our fiscal 2020 fourth quarter. As of February 24, 2020, no impairment of goodwill or trademarks was indicated based on our testing. However, subsequent to our annual test date, we identified indicators of impairment due to the COVID-19 pandemic, including but not limited to stock price volatility in general, the volatility of our stock price as well as our competitors, the significant decline in our market capitalization, declining sales at our restaurants and the challenging environment for the restaurant industry due to the mandated suspension of dine-in operations and other restrictions such as table spacing requirements. Due to the indicators that were present throughout our fourth quarter, we deemed it more likely than not that an impairment may have occurred in both our goodwill and trademark balances and performed impairment testing as of May 31, 2020 to determine if the fair values were less than their carrying values. Due to the economic impact of COVID-19 on Darden’s overall market capitalization and the impact on Cheddar’s Scratch Kitchen’s projected sales and cash flows, we determined that both the estimated fair values of the trademark and the reporting unit for Cheddar’s Scratch Kitchen were less than their respective carrying values. As a result, we recorded in our fiscal 2020 fourth quarter pre-tax non-cash impairment charges of $145.0 million and $169.2 million related to the Cheddar’s Scratch Kitchen trademark and goodwill balances, respectively. The fair value of our remaining reporting units exceeded their carrying values by at least 30 percent and the trademark fair value of our remaining reporting units exceeded their carrying values by at least 40 percent.

Significant judgment was used when performing our impairment testing of goodwill and trademarks including the following estimates:

•	Future sales, operating results and cash flows: The projected performance for each reporting unit was based on a combination of historical and current trends, organic growth expectations, residual growth rate assumptions and considerations from the impact of COVID-19.

•	Royalty rate: The royalty rates were determined based on internal assumptions combined with observed market participant data. The royalty rates used ranged from 2.75 percent to 4.0 percent.

•	Discount rate: The discount rate was on an adjusted estimated weighted average cost of capital (WACC) for each business unit. The cost of equity estimate utilized both external and internal assumptions including perceived risk attributable to each reporting unit specifically.

•	Market multiples and control premiums: Both market multiples and control premiums were estimated using observable market data.

A key assumption in our goodwill impairment test was the WACC utilized for discounting our estimated future cash flows to estimate the fair value of our reporting units under the income approach. A key assumption in our trademark impairment test was the discount rate utilized in the relief-from-royalty method. The following table illustrates the sensitivity to a one-percentage-

point change in the WACC and discount rate assumptions for goodwill and trademark valuation models for our material reporting unit balances.

		Goodwill Sensitivity											Trademark Sensitivity
(dollars in millions)		WACC			Amount by Which Fair Value Exceeded Carrying Value				Impact to Fair Value from a One-Percentage-Point Increase in WACC				Discount Rate			Amount by Which Fair Value Exceeded Carrying Value				Impact to Fair Value from a One-Percentage-Point Increase in the Discount Rate
LongHorn Steakhouse		10.5	%		$	2,266.2			$	(190.0	)		11.5	%		$	502.0			$	(90.0	)
The Capital Grille		11.0	%		$	382.5			$	(65.0	)		12.0	%		$	63.0			$	(20.0	)
Yard House		11.0	%		$	176.4			$	(65.0	)		12.0	%		$	141.0			$	(30.0	)
Cheddar’s Scratch Kitchen		11.5	%		$	—			$	(55.0	)		12.5	%		$	—			$	(20.0	)

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 31, 2020, additional write-downs of goodwill, other indefinite-lived intangible assets, or any other assets in excess of approximately $1.10 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 2020.

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 $21.6 million balance of unrecognized tax benefits at May 31, 2020, includes $6.2 million related to tax positions for which it is reasonably possible that the total amounts could change during the next 12 months based on the outcome of examinations. The $6.2 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 the COVID-19 outbreak and may not be able to generate sufficient cash from operations to cover all of our projected expenditures while operating at these reduced capacities. Accordingly, in response to the current conditions, we have suspended our dividend until further notice and suspended our share repurchase activity. To secure our liquidity position and provide financial flexibility, during the fourth quarter of fiscal 2020 we drew the full $750.0 million from our Revolving Credit Agreement, secured $270 million through a Term Loan Agreement and received $505.1 million in net proceeds in a follow-on equity offering. We subsequently fully repaid the $750.0 million drawn from our Revolving Credit Agreement (see below for additional information).

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 31, 2020, 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 noted above, on March 17, 2020, we borrowed the full $750.0 million available under the Revolving Credit Agreement and fully repaid the borrowing on May 5, 2020. As of May 31, 2020, we had no outstanding balances under the Revolving Credit Agreement.

On April 6, 2020, we entered into a $270.0 million 364-day Term Loan Credit Agreement (the Term Loan Agreement) with BOA, as administrative agent, and the lenders and other agents party thereto. The Term Loan Agreement is a senior unsecured obligation of the Company and contains customary representations and affirmative and negative covenants (including limitations on liens and subsidiary debt and a maximum consolidated total debt to total capitalization ratio of 0.75 to 1.00). The Term Loan Agreement also contains events of default customary for credit agreements of this type.

The Term Loan Agreement was fully drawn on April 6, 2020 and matures on April 5, 2021, and the proceeds may be used for working capital and capital expenditures, the refinancing of certain indebtedness, certain acquisitions and general corporate purposes. The Term Loan Agreement includes a covenant that we will not use the proceeds to pay any cash dividends to shareholders or to repurchase our common stock. The Term Loan Agreement also contains a provision that allows existing lenders to increase their loans, and additional lenders to join the Term Loan Agreement after the April 6, 2020 closing date and to make

additional loans, up to a total principal amount of $370.0 million. No such increases or additional loans have been made as of the date of the filing of this report. Interest rates on borrowings under the Term Loan Agreement will be based on prevailing interest rates as described in the Term Loan Agreement and, in part, upon our credit ratings. Applicable interest rates under the Term Loan Agreement may be modified in the event of a change in the rating of our long-term senior unsecured debt. The applicable interest rate for this loan at May 31, 2020 was 3.750 percent.

At May 31, 2020, 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 31, 2020, 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).

A summary of our contractual obligations and commercial commitments at May 31, 2020, is as follows:

(in millions)		Payments Due by Period
Contractual Obligations		Total				Less Than 1 Year				1-3 Years				3-5 Years				More Than 5 Years
Short-term debt		$	278.7			$	278.7			$	—			$	—			$	—
Long-term debt (1)		1,596.4				41.6				83.2				83.2				1,388.4
Leases (2)		3,263.0				399.0				743.3				613.1				1,507.6
Purchase obligations (3)		456.9				445.7				11.2				—				—
Benefit obligations (4)		341.0				25.5				56.4				63.8				195.3
Unrecognized income tax benefits (5)		23.7				7.3				3.1				13.3				—
Total contractual obligations		$	5,959.7			$	1,197.8			$	897.2			$	773.4			$	3,091.3
(in millions)		Amount of Commitment Expiration per Period
Other Commercial Commitments		Total Amounts Committed				Less Than 1 Year				1-3 Years				3-5 Years				More Than 5 Years
Standby letters of credit (6)		$	109.3			$	109.3			$	—			$	—			$	—
Guarantees (7)		151.5				39.4				63.6				32.1				16.4
Total commercial commitments		$	260.8			$	148.7			$	63.6			$	32.1			$	16.4

(1)	Includes interest payments associated with existing long-term debt. Excludes discount and issuance costs of $10.3 million.

(2)	Includes noncancelable 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 2030.

(5)	Includes interest on unrecognized income tax benefits of $2.1 million, $1.1 million of which relates to contingencies expected to be resolved within one year.

(6)	Includes letters of credit for $65.2 million of workers’ compensation and general liabilities accrued in our consolidated financial statements and letters of credit for $44.0 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. We believe the likelihood of the third parties defaulting on the assignment agreements is remote.

Our adjusted debt to adjusted total capital ratio was 61 percent and 58 percent as of May 31, 2020 and May 26, 2019, 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.

In fiscal 2020, we amended our Revolving Credit Agreement to update certain terms in the definition of the lease-debt equivalent made obsolete due to our adoption of Financial Accounting Standards Board Accounting Standards Codification Topic 842, Leases in the first quarter of fiscal 2020. The amendment has not resulted in a material change in our financial covenant under the Revolving Credit Agreement nor in our compliance with that covenant. For fiscal 2020, the lease-debt equivalent includes 6.00 times the total annual minimum rent for consolidated lease obligations of $392.6 million. For fiscal 2019 the lease-debt equivalent includes 6.00 times the combined total annual minimum rent for operating leases and annual minimum lease payments for financing leases on a consolidated basis of $359.5 million. The composition of our capital structure is shown in the following table:

(in millions, except ratios)		May 31, 2020				May 26, 2019
CAPITAL STRUCTURE
Short-term debt		$	270.0			$	—
Long-term debt, excluding unamortized discount and issuance costs		939.1				939.1
Capital lease obligations		—				84.0
Total debt		$	1,209.1			$	1,023.1
Stockholders’ equity		2,331.2				2,392.6
Total capital		$	3,540.3			$	3,415.7
CALCULATION OF ADJUSTED CAPITAL
Total debt		$	1,209.1			$	1,023.1
Lease-debt equivalent		2,355.4				2,157.0
Guarantees		151.5				151.6
Adjusted debt		$	3,716.0			$	3,331.7
Stockholders’ equity		2,331.2				2,392.6
Adjusted total capital		$	6,047.2			$	5,724.3
CAPITAL STRUCTURE RATIOS
Debt to total capital ratio		34		%		30		%
Adjusted debt to adjusted total capital ratio		61		%		58		%

Net cash flows provided by operating activities from continuing operations were $717.4 million and $1.27 billion in fiscal 2020 and 2019, respectively. Net cash flows provided by operating activities include net loss from continuing operations of $49.2 million in fiscal 2020 and net earnings from continuing operations of $718.6 million in fiscal 2019. Net cash flows provided by operating activities from continuing operations decreased in fiscal 2020 primarily due to a net loss from continuing operations driven by the impact of COVID-19 during the fourth quarter of fiscal 2020.

Net cash flows used in investing activities from continuing operations were $544.0 million in fiscal 2020 compared to net cash flows used in investing activities from continuing operations of $462.6 million in fiscal 2019. Capital expenditures incurred principally for building new restaurants, remodeling existing restaurants, replacing equipment, and technology initiatives were $459.9 million in fiscal 2020, compared to $452.0 million in fiscal 2019. 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 provided by financing activities from continuing operations were $138.7 million in fiscal 2020, compared to net cash flows used in financing activities from continuing operations of $484.2 million in fiscal 2019. Net cash flows provided 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. Net cash flows used in financing activities in fiscal 2019 included dividend payments of $370.8 million and share repurchases of $207.5 million, partially offset by proceeds from the exercise of employee stock options and proceeds from financing lease obligations.

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 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 $1.3 million to our postretirement benefit plan during fiscal 2021.

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 2021. Due to the impacts of COVID-19 on our financial position, we have currently suspended dividends and share repurchases, however, we intend to review our dividend policy and share repurchases as conditions warrant, potentially during fiscal 2021.

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 $1.10 billion at May 31, 2020, compared with $892.6 million at May 26, 2019. The increase was primarily due to an increase in cash and cash equivalents driven by net proceeds from the issuance of short-term debt and proceeds from a follow-on equity offering, offset by repurchases of common stock and dividends paid and lower cash from operations due to the economic impact of COVID-19.

Our total current liabilities were $1.79 billion at May 31, 2020, compared with $1.47 billion at May 26, 2019. The increase was primarily due to an increase in short term debt as well as an increase in other current liabilities due to the operating lease liability recorded as a result of the adoption of the new lease accounting guidance.

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.