By Lisa Baertlein and Aditi Shrivastava
Dec 19 Darden Restaurants Inc said it
would spin off or sell its floundering Red Lobster chain, bowing
to pressure from hedge fund Barington Capital Group, and warned
that earnings would fall more than expected this year due to
Barington, which represents shareholders who own more than 2
percent of Darden, and some Wall Street analysts contended that
Darden's move was not aggressive enough.
"While today's announcement is a first step toward improving
focus and operating execution at Red Lobster and Olive Garden,
we view the plan Darden announced today as incomplete and
inadequate," James Mitarotonda, chairman and chief executive of
Barington, said in a statement.
New York-based Barington says Darden has become too large
and complex to compete with direct rivals such as Cheesecake
Factory and Brinker International's Chili's
Grill & Bar. The company also is under pressure from popular
limited-service chains like Chipotle Mexican Grill,
which have been stealing customers.
Barington has been pushing the company for months to split
in two: one company to operate its mature Olive Garden and Red
Lobster chains, and another for growing brands such as LongHorn
Steakhouse, Seasons 52, Capital Grille and three others.
The hedge fund also has urged Darden, the largest U.S.
full-service restaurant operator, to explore creating a publicly
traded real estate investment trust (REIT) to "unlock the value"
of its property holdings.
Barington said those actions could push Darden's stock to
between $71 and $80. The shares were down 4.9 percent to $50.34
in midday trading on the New York Stock Exchange.
Asked on a conference call with investment analysts why the
company was keeping Olive Garden, Darden Chief Executive
Clarence Otis said the chain contributes strong cash flow and is
a significant part of the company. Olive Garden has historically
contributed about half of Darden's total revenue but of late has
struggled to grow sales at established restaurants.
Otis said Darden had reviewed the potential for a REIT and
determined that substantial costs and other factors did not make
this a viable option.
"That is not something that we think makes sense going
forward. We think the plan that we've outlined is a plan that
best creates shareholder value," he said.
Janney Capital Markets analyst Mark Kalinowski gave the plan
a mixed review.
"While we to some degree applaud this unexpected move ...
we are somewhat puzzled that what will be left behind is still a
seven-brand company in an industry in which succeeding over the
long term with one brand can prove challenging," he said.
Orlando-based Darden forecast a year-over-year drop in
earnings per share of 15 to 20 percent for its fiscal year
ending May 2014, due in part to a significant deterioration in
Red Lobster's business in the latest quarter. It previously
called for a decline of 3 to 5 percent.
Darden expects to close a tax-free spinoff of Red Lobster in
early fiscal 2015 but said it also would consider a sale of the
seafood chain, which accounts for an estimated 30 percent of
A sale of Red Lobster could bring in $2.0 billion to $2.5
billion, Miller Tabak & Co analyst Stephen Anderson told
Same-restaurant sales at Red Lobster declined a
steeper-than-expected 4.5 percent in the second quarter that
ended Nov. 24 and have fallen in four of the last five quarters.
Many U.S. restaurant chains are fighting to increase sales
and traffic amid intense competition that has taught
budget-conscious diners to shop around for deals.
"Red Lobster has almost (been) forgotten as a place to eat
by U.S. families as they perceive the brand as not offering the
most value per plate," said Brian Sozzi, chief executive of
Belus Capital Advisors.
While Darden has attracted younger and higher-income diners
to Olive Garden, LongHorn Steakhouse and its other chains, the
company has not replicated that success at Red Lobster.
"The spinoff will transform Darden into two independent
public companies that can each focus on their different
opportunities," Otis said.
Restaurant operators ranging from Darden direct rival
Brinker to McDonald's Corp have used that same strategy
in recent years to focus on their core operations and improve
Darden's announcement on Thursday also outlined fewer new
restaurant openings and other cost savings, proposed changes to
executive compensation and plans to revive Olive Garden.
Some analysts cheered Darden's vow to put a halt to
acquisitions after a multi-year buying spree that most recently
added Eddie V's and Yard House to its holdings.
"It's about time," Kalinowski said.
Darden said its proposed cost-savings plans are expected to
save $60 million annually. The company said it plans to use the
freed-up cash to support dividends, share buybacks and to
strengthen its credit profile.
Darden, whose market value is $6.9 billion, also said
second-quarter net income fell 41 percent to $19.8 million, or
15 cents per share.
Goldman Sachs & Co is financial adviser to Darden, while
Latham & Watkins will be its legal counsel. Wachtell, Lipton,
Rosen & Katz is the legal adviser to Darden's board.