Darden Restaurants (DRI) Ratngs Downgraded to 'BBB' by S&P

April 15, 2016 2:12 PM EDT

Standard & Poor's Ratings Services today raised its ratings on Darden Restaurants Inc. (NYSE: DRI), including the corporate credit rating, to 'BBB' from 'BBB-' . The outlook is stable. At the same time, we also raised the short-term rating on the company to 'A-2' from 'A-3'.

"The upgrade reflects our expectation that continued good operating performance in all brands will result in leverage in the low-2x area in fiscal 2016 and 2017," said credit analyst Helena Song. "It also reflects our belief that the company will maintain financial policies that support credit metrics in line with an investment-grade rating. We think aggressive departure from its current business strategy (spinning off key businesses, for example) are now unlikely in the near to intermediate term, especially with activist Jeff Smith's recent exit from the board, reduced holdings from Starboard, and a growing track record of favorable performance."

The stable outlook reflects our expectation that operating performance will remain good for the remainder of fiscal 2016 and in fiscal 2017, including at the company's key brand Olive Garden, reflecting the company's on-going operating initiatives. We also expect the company's financial policy will continue to support credit metrics around current levels.

We could lower the ratings if Darden's sales and profitability meaningfully underperform our expectation, resulting leverage near 3x. Such a scenario could occur if sales decline 5% and operating margins contract 200 basis points (bps). We could also lower the ratings if there is a meaningful shift in the company's financial and/or operating strategies, causing us to reassess the company's business or financial risk profiles unfavorably.

An upgrade is unlikely in the near term. Still, we could raise the ratings if Darden can continue to improve operating performance with consistent sales and profit growth, especially at its largest brand, Olive Garden, while improving debt leverage to the mid- to high-1x range on a sustained basis, and the company's financial policy supports this trend. We would also need to believe the company is unlikely to make any significant strategic shift that will cause us to view the Darden's business less favorably.

Serious News for Serious Traders! Try Premium Free!

You May Also Be Interested In

Related Categories

Credit Ratings

Related Entities

Standard & Poor's