Darden Restaurants, Inc.'s (Darden; NYSE: DRI) announcement today that
all 12 of Starboard Value LP's (Starboard) nominated directors have been
elected (by a preliminary count) to Darden's Board of Directors (BOD),
will not result in any immediate rating actions, according to Fitch
Ratings.
Fitch currently rates Darden's Long-term and Short-term ratings
'BBB-/F3'. A full list of Darden's ratings follows at the end of this
press release.
Fitch views Darden's newly elected board as highly qualified and
recognizes Starboards public intent to maintain and strengthen Darden's
investment-grade rating and dividend. However, Fitch is concerned about
Starboard's previous push to monetize Darden's real estate. In
particular, any increase in rent expense due to leasing versus owning
property would have a negative impact on Darden's rent-adjusted leverage
metrics. Future rating actions will incorporate Fitch's review of the
ultimate strategic and financial plan outlined by Darden's new BOD and
executive leadership, given the firm's search for a new CEO.
Darden's ratings are predicated on the company's commitment to
maintaining an investment grade rating and Fitch's expectations
regarding credit metrics. Fitch's current baseline projection is that
total adjusted debt-to-operating EBITDAR (rent-adjusted leverage) will
decline to the 3.0x - 3.5x range and annual free cash flow (FCF -
defined as cash flow from operations less capex and dividends) will
approximate $100 million within the next 12 months. For the latest
twelve month (LTM) period ended the first quarter of fiscal 2015 or Aug.
24, 2014, total adjusted debt-to-operating EBITDAR was 3.7x and FCF was
$59 million for Darden's continuing operations excluding Red Lobster.
Near-term evidence that same-restaurant sales (SRS) can improve on a
sustainable basis and margin stabilization are also required. Olive
Garden's SRS increased 0.6% in the month of September, after being
negative for three consecutive years. Meanwhile, Darden is in the midst
of a cost savings initiative that resulted in selling, general, and
administrative expenses as a percentage of sales declining by 80 basis
points to 10% during the latest quarter.
Fitch currently rates Darden as follows:
-- Long-term Issuer Default Rating (IDR) 'BBB-';
-- Bank credit facilities 'BBB-';
-- Senior Unsecured Notes 'BBB-';
-- Short-term IDR 'F3';
-- Commercial Paper (CP) 'F3'.
The Rating Outlook is Stable. At Aug. 24, 2014, Darden had $1.6 billion
of total debt, none of which was CP, and $414 million of cash and
equivalents.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research
-- 'Corporate Rating Methodology' (May 2014);
-- 'Darden Restaurants Update' (August 2014);
-- 'Fitch Affirms Darden's IDRs at 'BB-/F3'; Removed from Negative
Watch; Outlook Stable' (May 2014);
-- '2014 Outlook: U.S. Restaurants - Shareholder Demands to Rise, Even
as Market Share Battle and Cost Pressures Continue' (December 2013);
-- 'Fitch Places Darden's Ratings on Negative Watch' (December 2013)
-- 'Fitch Downgrades Darden's IDRS to 'BBB-/F3'; Outlook Stable'
(October 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393
Darden Restaurants, Inc.
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=753114
2014 Outlook: U.S. Restaurants (Shareholder Demands to Rise, Even as
Market Share Battle and Cost Pressures Continue)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=724335
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