Investors Pressing Darden Restaurants To Reconsider Red Lobster Spin Off
By Megan Zielinski, contributing writer
Activist investor, Starboard and Barington Capital Group, is advising Darden Restaurants to slow down the spin-off of Red Lobster from the brands under the company. In December, Darden Restaurants, which owns Red Lobster, Longhorn Steakhouse, Bahama Breeze, Olive Garden, Yard House, Capital Grille, Seasons 52, Eddie V’s, and Wildfish Seafood Grille, decided to finalize the sale of Red Lobster by the first quarter of 2015.
Starboard, a New York hedge fund, wrote a letter addressed to Darden Restaurant CEO, Clarence Otis, regarding its concerns if Darden sells Red Lobster instead of exploring other options. Cutting off ties with Red Lobster will hurt shareholders, including Starboard — the largest shareholder of the company, owning 5.5 percent of Darden’s common stock. The letter states that the selling of Red Lobster will impair the value of Darden’s real estate. Also, Red Lobster real estate will be less valuable than it is today due to its credit-worthiness, to Darden or any new company that would take on Red Lobster.
The letter mentions that Darden’s proposed plan is a “hurried, reactive attempt, in the face of shareholder pressure, to do the bare minimum to appease shareholders and distract from the Company’s underlying problems.” The extended record of disappointing operating performances, poor capital allocation, and missed expectations are also noted in the letter. Starboard suggests Darden evaluate the company as a whole, improving management and putting all restaurants on the same performance level Starboard also advises creating a mainstream casual dining chain of Red Lobster, Olive Garden, and Longhorn Steakhouse and a high-end growth of the five smaller brand restaurants;. Starboard says refranchising existing restaurants in markets where Darden has operational deficiencies should be a focus for improving performance and returns on capital.
Red Lobster reportedly had negative same store sales during six out of seven quarters. After the chain separates, Darden is expecting to have positive same-store sale outcomes combined of the other restaurants. During fiscal year 2013, Red Lobster contributed 31 percent of Darden’s restaurant sales. Out of all the restaurant brands under the company’s umbrella, Red Lobster was the only one to experience a decline in sales. Same store sales were down 2.2 percent compared to fiscal year 2012. Darden plans for 2014 include: separation from Red Lobster, changes in management payments and incentive plans, optimizing labor costs, improving operating cost effectiveness, and changes in capital allocation.
The company will focus on perfecting existing restaurants to enhance customer experience and loyalty. Some examples include advertising in Spanish to draw in Hispanic customers and building a single digital technology platform for all of the restaurants.