Darden Restaurants Repurchases Debt, Retains FY15 View - Analyst Blog

Darden Restaurants, Inc. ( DRI ) recently completed the repurchase of debt and provided quarterly and annual financial outlook for fiscal 2015. Out of the previously announced $1.0 billion debt retirement, the company repurchased debt worth $900 million while the balance $100 million will be redeemed later in Aug 2014. Post redemption, the company will have $1.6 billion debt left on its balance sheet.

On Jul 31, 2014, the company had also announced a $500 million Accelerated Stock Buyback (ASB) program. As previously announced, both these purposes will be solved with the after-tax proceeds from the sale of the Red Lobster business. (Read More: Darden to Sell Off Red Lobster ). The company completed the sale of Red Lobster on Jul 28, 2014.

The current $900 million debt retirement would curtail interest expenses of the company by approximately $49 million on an annual basis. It would result in an interest expense reduction of $38 million in fiscal 2015 and also benefit second, third and fourth quarter 2015 results.

Besides, the company reaffirmed its outlook for fiscal 2015. On an adjusted basis, the company expects earnings from continuing operations in the range of $2.22 to $2.30 per share. This excludes the costs incurred related to the sale of Red Lobster and the execution of the strategic action plan that was announced in Dec 2013 and debt breakage costs.

The Zacks Consensus Estimate for the current year is $2.23 per share. Earnings from continuing operations are expected in the range of $1.81 to $1.90 per share.

The earnings guidance reflects comps growth of flat to 1% for Olive Garden, 1% to 2% for LongHorn Steakhouse and more than 2% for Specialty Restaurants. Also, it includes the impact of the opening of 37 net new restaurants.

On a quarterly basis, adjusted earnings from continuing operations are expected in the range of a respective 28 to 30 cents per share, 24 to 28 cents per share, 80 to 84 cents per share and 87 to 91 cents per share in the first, second, third and fourth quarters of fiscal 2015.

Darden has been experiencing ups and down over the past few quarters. Underperformance at its Red Lobster and Olive Garden segments has dampened the performance of the company. As a result, the company decided to sell its Red Lobster restaurant.

However, costs related to the spinoff will continue to hurt the profits of the company over the near term. Meanwhile, the company is working hard to improve operations at the casual Italian chain Olive Garden. (Read: Will the Olive Garden Revamp Boost Darden? ), However, its efforts are yet to pay off.

Meanwhile, costs related to the strategic action plan and debt retirement would also hurt profitability of this Zacks Rank #5 (Strong Sell) company.

Other Stocks to Consider

Some better-ranked stocks currently worth considering in the restaurant industry include BJ's Restaurants, Inc. ( BJRI ), Chipotle Mexican Grill, Inc. ( CMG ) and Jamba, Inc. ( JMBA ). All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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