Shares of Darden Restaurants, Inc. DRI hit a new 52-week high of $73.40 on Jun 23 after the company announced a new real estate investment trust (REIT) plan targeted at lowering its debt. Meanwhile, the company posted better-than-expected fiscal fourth quarter and fiscal 2015 results and provided a strong earnings guidance for fiscal 2016. This further boosted investors’ confidence. The company’s shares have gained approximately 21% year to date.
Strategic Real Estate Plan to Pay Debt
Darden’s board of directors has approved a strategic real estate plan for the separation of a portion of the company's real estate assets. The separation would take place through a combination of selected sale leaseback transactions and the transfer of a portion of its remaining real estate assets to a new real estate investment trust (REIT). Real estate assets will be converted to a new REIT either through a spin-off, split-off or similar transaction, resulting in the REIT becoming an independent, publicly-traded company. Under the plan, Darden will transfer approximately 430 of its owned restaurant properties to the REIT, with substantially all of the REIT's initial assets being leased back to the company.
The company expects the REIT transaction to be completed by the end of calendar year 2015. Per the market analysts, the plan is an effort by the company to generate cash and tax benefits. REITs have to pay little or no tax on their earnings as long as they distribute the bulk of their profits to investors through dividends. REITs are also an effective diversifier against stock market risk. Therefore, per the modern portfolio theory, their inclusion in a portfolio helps to lower volatility and does not hurt returns. These factors can possibly boost the share price.
Of late, the company has been marketing some properties for individual sale leasebacks. To date, the company has listed 75 properties and more than 30 of these have been sold or are under contract. The company expects to close most of these transactions by the end of Aug 2015. Also, the company is planning to sell and lease back its Orlando Restaurant Support Center property and buildings under a long-term contract with multiple renewal options, which it will exercise whenever it deems necessary.
The company intends to use the proceeds generated from the strategic real estate plan to retire its debt of approximately $1.0 billion over time.
Fourth Quarter Earnings & Revenues Beat
Including the 53rd week of operations, adjusted earnings per share in the fourth quarter came in at $1.08 per share, beating the Zacks Consensus Estimate of 93 cents by 16.1% and increasing 100% year over year. Excluding the 53rd week of operations adjusted earnings per share in the fourth quarter were $1.01 per share, up 87% year over year. The upside in earnings reflects higher revenues, positive comps and lower interest expenses.
Total revenue of $1.88 billion beat the Zacks Consensus Estimate of $1.87 billion by 0.3% and also increased 13.8% year over year attributable to revenues from new restaurants and comps growth at all its segments.
Fiscal 2016 Earnings Guidance Strong
Earnings per share in fiscal 2016 are expected in the range of $3.05 to $3.20, up 20% to 25% year over year. The guided range is higher than the Zacks Consensus Estimate of $2.85 per share.
The company expects comps growth in the range of 2% to 2.5% in 2016.
Darden presently has a Zacks Rank #2 (Buy).
Other Stocks to Consider
Stocks worth considering in the restaurant industry include Dave & Buster's Entertainment, Inc. PLAY, Zoe's Kitchen, Inc. ZOES and BJ's Restaurants, Inc. BJRI. While Dave & Buster's Entertainment and Zoe's Kitchen sport a Zacks Rank #1 (Strong Buy), BJ's Restaurants carries a Zacks Rank #2 (Buy).
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