Oct 1 - Fitch Ratings has assigned a 'BBB' rating to Darden Restaurants,
Inc.'s (Darden; NYSE: DRI) proposed $300 million senior unsecured notes
due 2022. At Aug. 26, 2012, Darden had approximately $2.1 billion of total debt.
The Rating Outlook is Negative.
Net proceeds from the issuance, which may be upsized, will be used for general
corporate purposes, including toward the repayment of $350 million of 5.625%
senior unsecured notes due Oct. 15, 2012. The proposed notes are being issued
under Darden's indenture dated Jan. 1, 1996 and rank equally with the company's
existing senior unsecured indebtedness.
Terms do not include financial covenants but contain a Change of Control
Triggering Event provision. Upon the occurrence of both a change of control and
ratings downgrades below investment grade, Darden is required, unless the
company exercises its option to redeem the notes, to repurchase the notes at a
price equal to 101% of the principal amount plus accrued and unpaid interest.
Rating Rationale and Negative Outlook:
Darden's ratings reflect its significant operating cash flow, leading market
share positions in the U.S. casual dining industry, and strong operating
capabilities. Darden's cash flow from operations has averaged approximately $750
million annually since 2007 and its consolidated restaurant margin is among the
highest in the casual dining industry at over 18% for the fiscal year ended May
Essentially all of Darden's over 2,000 restaurants are in North America and are
company-operated. Olive Garden, Red Lobster and LongHorn Steakhouse (LongHorn)
are Darden's core restaurant chains comprising 94% of the firm's units. The
Capital Grille, Bahama Breeze, Seasons 52, and Eddie V's are smaller niche
brands in the firm's Specialty Restaurant Group (SRG), representing the
remaining 6% of total units. On Aug. 29, 2012, Darden added Yard House USA, Inc.
(Yard House) - a small upscale chain of 39 casual dining restaurants serving
contemporary American cuisine and 130 plus taps of imported, craft, and
specialty beer - to its SRG.
The Negative Outlook is due to the fact that Darden's rent-adjusted leverage,
pro forma for its Aug. 29, 2012 acquisition of Yard House, is at the high end of
the range acceptable for current ratings. Darden's leverage has also increased
recently due to heightened share repurchases. Pro forma rent-adjusted leverage
(defined as total debt plus 8 times gross rents-to-operating EBITDA plus gross
rent) is approximately 3.0x. Furthermore, during the fiscal year ended May 27,
2012, Darden's FCF (defined as cash flow from operations less capital
expenditures and dividends) was materially negative at $101.9 million. FCF
during the latest twelve month period ended Aug. 26, 2012 improved to
approximately $15 million but remains significantly lower than the firm's
long-term historical annual average of $200 million.
Liquidity, Covenants, and Maturities:
Darden's liquidity remains adequate. At Aug. 26, 2012, Darden had $51.5 million
of cash and $495.8 million of availability under its undrawn $750 million
revolver expiring Oct. 3, 2016. At Aug. 26, 2012, $245.7 million of commercial
paper and $8.5 million of letters of credit were backed by the revolver.
Darden's credit agreements subject the firm to a maximum consolidated lease
adjusted total debt to total capitalization ratio of 0.75 to 1.00. As of Aug.
26, 2012, Darden was in compliance with this covenant. Following the repayment
of the $350 million of 5.625% senior unsecured notes due Oct. 15, 2012, Darden
has no other maturities until 2016.
Recent Operating Performance:
During the first quarter ended Aug. 26, 2012, sales increased 4.8% to $2.0
billion and operating income increased 3.3% to $174.2 million. Net new unit
development and blended same-restaurant sales (SRS) growth of 2.2% for The
Capital Grille, Bahama Breeze, and Seasons 52 drove the sales increase. Blended
SRS for Darden's core brands declined 0.3% as SRS grew 3.6% for LongHorn, were
up 0.3% for Olive Garden, and declined 2.6% at Red Lobster. Operating profit
benefited from lower food and beverage expenses as a percentage of sales at
Olive Garden and Red Lobster and lower restaurant labor and other expenses as a
percentage of sales at all three core brands.
Over the next several quarters, Darden is implementing a phased introduction of
core menu changes at Olive Garden and Red Lobster and has several initiatives to
further differentiate LongHorn. Fitch views Darden's combined Olive Garden, Red
Lobster, and LongHorn SRS guidance of approximately 1% to 2% as achievable
because these changes should broaden the brands' appeal by providing consumers
with more value and incremental menu variety.
What Could Trigger A Rating Action
Future developments that may, individually or collectively, lead to negative
rating action include:
--Rent-adjusted leverage consistently above 3.0x due to weaker than expected SRS
and operating earnings; and/or
--Multiple years of negative FCF due to weaker than expected operating cash
flow, heightened capital spending, or large additional increases in the firm's
Darden's Rating Outlook could be revised to Stable if:
--Rent-adjusted leverage is maintained in the 2.5x - 3.0x range due to operating
income growth and/or debt reduction; and
--Darden's FCF generation improves meaningfully due to growth in operating cash
Fitch currently rates Darden's debt as follows:
--Long-term Issuer Default Rating (IDR) 'BBB';
--Bank credit facility 'BBB';
--Senior unsecured debt 'BBB';
--Short-term IDR 'F2';
--Commercial paper 'F2'.
Carla Norfleet Taylor, CFA
70 W. Madison Street
Chicago, IL 60602
Judi M. Rossetti, CFA, CPA
David E. Peterson
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:
Additional information is available at 'www.fitchratings.com'. The ratings above
were solicited by, or on behalf of, the issuer, and therefore, Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Short-term Ratings Criteria for Non-Financial Corporates' (Aug. 9, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Fitch Affirms Darden's IDRs at 'BBB/F2'; Outlook Revised to Negative on
Acquisition' (July 13, 2012).
Applicable Criteria and Related Research:
Short-Term Ratings Criteria for Non-Financial Corporates
Corporate Rating Methodology
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