Correction: Fitch Affirms Darden's IDRs at 'BBB/F2'; Outlook Negative
CHICAGO -- June 27, 2013
(This is a correction of a release originally issued June 26, 2013. It
clarifies that Darden's 7.125% 2016 and 6% 2035 notes do not include change of
Fitch Ratings has affirmed the ratings of Darden Restaurants, Inc. (Darden;
NYSE:DRI) as follows:
--Long-term Issuer Default Rating (IDR) at 'BBB';
--Bank credit facilities at 'BBB';
--Senior unsecured notes at 'BBB';
--Short-term IDR at 'F2';
--Commercial Paper (CP) at 'F2'.
The Rating Outlook is Negative.
At May 26, 2013 Darden had approximately $2.7 billion of total debt.
KEY RATING DRIVERS:
Darden's ratings reflect its moderate leverage, substantial operating cash
flow, and the diversification provided by its portfolio of leading restaurant
chains. At the fiscal year ended May 26, 2013, Darden had 2,138 mainly
U.S.-based company-operated units. Olive Garden, Red Lobster, and LongHorn
Steakhouse (LongHorn) represented 92% of these units while the remaining 8%
consisted of the firm's Specialty Restaurant Group (SRG), which includes The
Capital Grille, Yard House, Bahama Breeze, Seasons 52, and Eddie V's.
The Negative Outlook is due to the fact that Darden's leverage is high for
current ratings and the firm's weak but improving free cash flow (FCF -
defined as operating cash flow less capital expenditures and dividends).
Additionally, same-restaurant sales (SRS) were negative and margins
deteriorated considerably in fiscal 2013 while at the same time Darden
continued to increase its dividend. Darden has doubled its annual dividend
since 2010 to about $290 million for fiscal 2014. Fitch views the firm's
current payout as aggressive.
At May 26, 2013, total debt-to-operating EBITDA was 2.5x and total adjusted
debt-to-operating EBITDAR (defined as total debt plus 8 times (x) gross rent
to operating EBITDA plus gross rent) was approximately 3.2x. For the
comparable period last year, these ratios were 1.9x and 2.6x, respectively.
Cash flow from operations for the latest fiscal year totaled $950 million,
growing at a 4% compound annual growth since 2008. FCF improved to $5.7
million, after being negative $101.4 million in fiscal 2012. Darden's cash
flow priorities include investing in its business, paying a competitive
dividend, and reducing debt.
Darden's Outlook could be revised to Stable with several quarters of better
SRS results, evidence of stabilizing margins, and further improvements in FCF.
Fitch projects that total adjusted debt-to-operating EBITDAR can approximate
3.0x in fiscal 2014 and 2.8x in fiscal 2015. Drivers include low single-digit
SRS and mid-single digit EBITDA growth. Fitch anticipates FCF of at least $100
million annually beginning in fiscal 2014.
Darden's ratings and Outlook consider the competitiveness and economic
sensitivity of the U.S. restaurant industry. These external factors are
balanced against the strong brand awareness enjoyed by Darden's chains and the
fact that Darden's restaurant margin remains among the highest in the casual
dining industry at over 17.6% for the fiscal year ended May 26, 2013.
Management's historical ability to grow traffic and outperform the broader
industry is also a consideration.
Fitch views Darden's financial strategy as the biggest driver of the firm's
credit profile. Total debt increased to $2.7 billion at May 26, 2013 from $1.7
billion at the end of fiscal 2010 to help finance share repurchases and the
acquisition of Yard House, Inc. In addition to aggressively increasing
dividends, as mentioned earlier, annual capital expenditures rose 59% to $686
million over the past three years. Over 50% of this spending has been for new
In order to improve its leverage ratios, Darden has pulled back on capital
expenditures, with $600 million - $650 million projected for fiscal 2014, and
plans to use excess cash for debt reduction in lieu of share repurchases. The
firm's target rent-adjusted leverage range is 2.0x - 2.5x based on 6.25x
minimum rents. Fitch believes Darden leverage can approximate the top end of
this range by the end of fiscal 2015 via a combination of cash flow growth and
Same-Restaurant Sales and Margins
During the fourth quarter ended May 26, 2013, blended SRS at Olive Garden, Red
Lobster, and LongHorn grew 2.2%, after being negative for four consecutive
quarters. SRS at each of these core brands was positive in the latest quarter
with traffic increasing 3.2% on a blended basis. Darden remains focused on
driving traffic as it continues to emphasize menu affordability, maintain the
quality of its food, and refine the guest experience.
Fiscal 2014 guidance, which Fitch views as achievable, includes blended SRS of
0% to +2% for Darden's three primary brands. Operating income is expected to
be negatively affected by accruing annual management incentives at a normal
level in 2014, costs associated with implementation of the Affordable Care
Act, and approximately 2% to 2.5% of net food cost inflation. Margin pressure
is projected to continue in fiscal 2014 but at a slower rate versus fiscal
2013 due mainly to improved SRS and more effective promotional activity.
Liquidity, Maturities and Financial Covenants
At May 26, 2013, Darden had $88.2 million of cash and an undrawn $750 million
revolver. The revolving facility, which serves as backup to the company's
commercial paper program, expires Oct. 3, 2016. Significant maturities over
the next three fiscal years are limited to $100 million of 7.125% senior
unsecured notes due Feb. 1, 2016 and modest term loan amortization payments.
Darden's $300 million term loan amortizes annually at 5% of principal or $15
million beginning in August 2014 until maturity on Aug. 22, 2017.
Darden's revolver, term loan, 3.79% senior notes due Aug. 28, 2019, and 4.52%
senior notes due Aug. 28, 2024 subject the firm to a maximum consolidated
lease adjusted total debt to capitalization ratio of 0.75 to 1.00. Darden has
remained in compliance with this covenant. At May 26, 2013, the ratio was 65%.
All of Darden's publicly traded notes, excluding the 7.125% 2016 and 6% 2035
notes, include change of control provisions while the firm's 6.2% senior notes
due Oct. 15, 2017 and 6.8% notes due Oct. 15, 2037 are subject to coupon step
ups if ratings fall below investment grade.
Future developments that may individually or collectively lead to a positive
rating action include:
--Darden's Outlook could be revised to Stable after several quarters of
improved SRS performance, evidence of stabilizing margins, improving FCF, and
a bias towards debt reduction over share repurchases;
--An upgrade of Darden's IDRs is not anticipated in the near-to-intermediate
Future developments that may individually or collectively lead to a negative
rating action include:
--A material decline in operating cash flow due to persistent SRS declines or
significant additional margin contraction;
--FCF that is significantly below Fitch's expectations;
--A continued increase in total adjusted debt-to-operating EBITDA; such that
total adjusted debt-to-operating EBITDA is materially above 3.0x for a
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Short-Term Ratings Criteria for Non-Financial Corporates' (April 2, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Short-Term Ratings Criteria for Non-Financial Corporates
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Carla Norfleet Taylor, CFA
Fitch Ratings, Inc.
70 W. Madison Street
Chicago, IL 60602
Wesley E. Moultrie II, CPA
Brian Bertsch, New York, +1 212-908-0549
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