NOVEL CORONAVIRUS PANDEMIC

9 Months Ended

Mar. 25, 2020

Novel Coronavirus Pandemic [Abstract]

In March 2020, the impact from the spreading of a novel strain of coronavirus (“COVID-19”) pandemic was declared a National Public Health Emergency and resulted in a significant reduction in guest traffic at our restaurants due to changes in consumer behavior as social distancing practices, dining room closures and other restrictions as have been mandated or encouraged by federal, state and local governments. As of March 25, 2020, we have closed all of our dining and banquet rooms and have moved to an off-premise model. We have not experienced any shortages or service disruptions in our supply chain or the availability of labor to operate restaurants.

Our third quarter of fiscal 2020 results included the impact from the COVID-19 pandemic. Both Chili’s and Maggiano’s are able to serve our guests in this current off-premise model due to our strategic decision to enhance off-premise business over the last three years including online ordering, mobile app, curbside service and third-party delivery. We have been carefully assessing the effect of COVID-19 on our business as conditions continue to evolve throughout the communities we serve. In the third quarter of fiscal 2020, we experienced a decline in Company sales compared to the third quarter of fiscal 2019 primarily due to decreased restaurant traffic as a result of the COVID-19 pandemic.

We expect the decreased traffic and temporary dining and banquet room closures to continue through most of the fourth quarter of fiscal 2020 for the majority of our Company-owned restaurants. Where dining and banquet rooms are closed, we expect our restaurants will continue offering off-premise options, except for 10 restaurants that have been temporarily closed due to their location within a closed structure or other local regulations. Our strategic decision to enhance our off-premise business has enabled us to conveniently serve a significantly higher volume of off-premise guests during this pandemic. In response to this impact, due to the uncertainty in the economy and to preserve liquidity, we have taken proactive measures to reduce costs and paused non-critical projects that do not significantly impact our current operations. These measures included:


•	Significantly reduced capital expenditures to essential spend only, including suspending the Chili’s remodel program and delaying construction of new restaurants;


•	Reduced pay for corporate leadership and team members, as well as above-restaurant level leadership;


•	Reduced marketing, general and administrative and restaurant expenses not related to supporting the off-premise only business model;


•	Suspended the quarterly cash dividend and all share repurchase activity; and


•	Engaged in discussions with our landlords, vendors and other business partners to reduce or defer our lease and other contractual payments and obtain other concessions.

At this time, the duration and extent of COVID-19’s impact is not reasonably possible to estimate due to the uncertainty about the spread of the virus. This could lead to lower sales, further restaurant closures, delays in our supply chain, or ability to staff accordingly which could adversely impact our financial results.

Valuation of Goodwill and Indefinite-Lived Intangibles

Despite the significant excess fair value identified in our goodwill impairment assessment performed at the end of the second quarter of fiscal 2020, we determined that the reduced cash flow projections and the significant decline in our market capitalization as a result of the COVID-19 pandemic could indicate that an impairment loss may have been incurred. Therefore, we evaluated the US GAAP Accounting Standards Codifications (“ASC”) 350-20-35 - Intangible Assets - Goodwill and Other - Goodwill and assessed whether it was more likely than not that the goodwill and indefinite-lived intangible assets were impaired as of March 25, 2020. We reviewed our previous forecasts and assumptions based on our current projections that are subject to various risks and uncertainties, including: (1) forecasted revenues, expenses and cash flows, including the duration and extent of impact to our restaurants from the COVID-19 pandemic, (2) current discount rates, (3) the reduction in our market capitalization, (4) observable market transactions, and (5) changes to the regulatory environment.

Based on our interim impairment assessment as of March 25, 2020, we have determined that our goodwill and indefinite-lived intangible assets are not impaired. These analyses are predicated on our ability to operate dining and banquet

rooms at our restaurants. Management’s judgment about the short and long term impacts of the pandemic could change as additional facts become known and therefore affect these conclusions. We will continue to monitor and evaluate our results to rigorously evaluate the likelihood of any potential impairment charges at our restaurants and reporting units.

Valuation of Long-lived Assets

Our Net property and equipment and Operating lease assets have recorded values of $832.1 million and $1,159.9 million, respectively, as of March 25, 2020 in the Consolidated Balance Sheets (Unaudited). We review these assets for impairment losses semi-annually, which was last regularly performed at the end of the second quarter of fiscal 2020. As part of the negative effect on our business from the COVID-19 pandemic, as described above, we evaluated ASC 360-10-40 - Property, Plant, and Equipment - Impairment or Disposal of Long-Lived Assets, and determined as of March 25, 2020, there was no impairment related to long-lived and operating lease assets.

As we obtain greater clarity about the duration and extent of regulatory requirements related to the COVID-19 pandemic, including when our dining rooms will reopen, what operational restrictions may be imposed, our ability to staff reopened dining rooms, and whether customers will re-engage with our brands, we will continue to evaluate our long-lived assets for potential impairment.

Rent Concessions

In response to the pandemic, subsequent to the third quarter of fiscal 2020, certain landlords have provided temporary rent concessions. These concessions primarily relate to the deferral of certain fourth quarter of fiscal 2020 rent payments until future periods. We intend to consider recent FASB staff guidance to account for these lease agreements. Additionally, for locations that rent concessions have not yet been received, we have taken measures to reduce rent payments and are in the process of contacting these landlords for further discussion on the remaining payable due.

COVID-19 Related Charges

Certain charges related to the COVID-19 pandemic were recorded in Other (gains) and charges in the Consolidated Statements of Comprehensive Income for the periods presented. In the thirteen and thirty-nine week periods ended March 25, 2020, these charges included:


•	Employee assistance - $15.5 million related to both Chili’s and Maggiano’s employee assistance payments for the team members that experienced reduced shifts during this pandemic, who would have otherwise not received such payment under our normal compensation practices; and

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Inventory spoilage - $0.6 million due to the unexpected decline in traffic and dining room closures.