OREANDA-NEWS. Fitch Ratings views Darden Restaurants, Inc.'s (Darden; NYSE: DRI) strategic real estate plan as neutral to current ratings. Proposed actions result from Darden's comprehensive review of its real estate and are consistent with the firm's previously announced intention to use proceeds to repay debt to support its credit profile. Darden's Issuer Default Ratings are 'BBB-/F3'. The Rating Outlook is Positive. A full list of ratings is at the end of this release.

Darden plans to separate a portion of its owned real estate through a combination of select sale leaseback transactions and a publicly-traded REIT. Under the plan being pursued, to date, Darden has listed 75 properties for individual sale leasebacks and will transfer approximately 430 of its owned and ground-leased real estate properties to the REIT. At the end of fiscal 2015, the company had 1,534 restaurants of which an estimated 586 were on owned sites and 948 were on leased sites.

Darden expects to complete the real estate separation by the end of calendar 2015. Upon completion, the company intends to retire approximately \$1 billion of its \$1.5 billion of total debt with proceeds from the transactions, effectively eliminating all debt maturities until 2035.

Fitch recognizes that Darden's gross rental expense will increase by about \$135 million as a result of the real estate monetization. However, the targeted debt reduction is substantial and should neutralize the negative impact on Darden's lease-adjusted leverage. For the fiscal year ended May 31, 2015, total adjusted debt-to-EBITDAR (defined as total debt plus 8x gross rent-to-operating EBITDA) was in line with Fitch's projection of 3.0x and down from 3.3x in fiscal 2013.

Darden's ratings and outlook reflect its declining leverage, improving free cash flow (FCF) and Fitch's view that turnaround efforts at Olive Garden are gaining traction. FCF (defined as cash flow from operations less capex and dividends) totaled \$299 million in fiscal 2015 versus \$67 million generated from continuing operations in fiscal 2014. Fitch expects lower capex and interest expense from debt pay down to help support FCF in the near term. Darden expects capex of \$230 million - \$255 million in fiscal 2016, a reduction from \$297 million in 2015, and about \$45 million of annual interest savings from debt repayment.

Same-restaurant sales (SRS) at Olive Garden have been positive for 10 consecutive months. The brand reported an increase of 1.3% and 3.4% for the full year and fourth quarter ended May 31, 2015, respectively, due mainly to price, mix and less negative traffic. Blended SRS was 2.4% and 3.8% for the full year and fourth quarter ended May 31, 2015. At the end of fiscal 2015, Olive Garden, LongHorn Steakhouse, and the Specialty Restaurant Group (SRG) represented 55%, 31%, and 14% of Darden's 1,534 units, respectively. SRG includes Yard House, The Capital Grille, Bahama Breeze, Seasons 52, and Eddie V's.

Fitch remains concerned that the U.S. casual dining segment has been in a secular decline but believes Darden can sustain 2%-3% SRS on a blended basis, given increasing visibility of 1%-2% SRS at Olive Garden. Management has intensified efforts around brand operations, menu strategy, and the guest experience. Increased hourly wages and U.S. discretionary income is also providing a tailwind. For fiscal 2016, Darden expects blended SRS growth of 2%-2.5% and 1.5%-2.5% at Olive Garden. Pricing of approximately 1.5% should offset inflation which Darden expects to be 1.5%-2%.

RATING SENSITIVITIES

Future developments that may, individually or collectively, lead to a positive rating action include:

--Total adjusted debt-to-operating EBITDAR (defined as total debt plus 8x gross rent-to-operating EBITDA plus gross rent) maintained below 3.0x;

--Consistently positive SRS performance, particularly at Olive Garden, with traffic trends at least in-line with the industry;

--Sustained annual FCF approximating \$200 million or a FCF margin of roughly 3%.

Future developments that may, individually or collectively, lead to a negative rating action include:

--Total adjusted debt-to-operating EBITDAR sustained above 3.5x due to lower than expected operating income or increased debt;

--Persistent SRS declines and market share loss, particularly at Olive Garden.

--Negligible or negative FCF due to weaker than expected operating performance and/or significantly higher capex.

Fitch currently rates Darden as follows:

--Long-term IDR 'BBB-';
--Bank credit facilities 'BBB-';
--Senior unsecured notes 'BBB-';
--Short-term IDR 'F3'.

The Rating Outlook is Positive.