Fitch recently revised its outlook on Darden Restaurants Inc. (DRI) to “Stable” from “Negative”. The rating agency believes that the company is well positioned in the casual dining segment, which is still recuperating from the economic turmoil, plagued by rising unemployment and weak consumer spending.

The revision in outlook reflects Darden’s competitive edge and its ability to generate significant cash flow. The company’s same-store sales fell 1.4% in fiscal 2009 compared to the estimated 5.6% decline for the Knapp-Track benchmark of US comps for casual dining chains. Moreover, Darden’s cash flow from operations increased 2.2% to $783.5 million during the year.

Moderating food costs coupled with the company’s cost-control measures and synergies from its RARE Hospitality International acquisition should facilitate cash flow generation. Free cash flow totaled $138 million at the end of fiscal 2009.

Darden’s “Stable” outlook also incorporates prudent capital management and cash returns to shareholders in form of steady dividend and share buybacks in the current credit-constrained market. The company maintains substantial liquidity with $502.6 million available under its $750 million revolving credit facility due Sept. 20, 2012, and $62.9 million in cash.

Despite the challenging sales environment, Darden has fared better than other casual dining chains due to its strong restaurant concepts and guest loyalty. Sales increased 8.9% year over year to $7,217.5 million in fiscal 2009.

Fitch maintained Darden’s long-term issuer default rating, bank credit facility and senior unsecured debt ratings at “BBB”.

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