Darden's shares (DRI) have traded in a tight range
between $45 and $55 for most of the past three years; they closed
Friday at $53.33.
The company's poor
performance has frustrated shareholders, including Barington
Capital, which formed a small group of investors holding more than
2% of the stock to push for changes. The group thinks Darden could
be worth as much as $76 a share.
takes activist positions, but tends to work with corporate
managers to create change, rather than launching proxy contests or
speaking publicly. In the case of Darden, news of its efforts
leaked, prompting the firm to publicize a letter it sent the board
in late September.
Barington proposes in
the letter that Darden split into two restaurant companies, one
for the legacy brands and one for the higher-growth chains.
Similar spinoffs have propelled the shares of
McDonald's (MCD) and
Brinker International (EAT), it notes.
Brinker's stock more
than tripled after the company sold its On the Border Mexican
Grill & Cantina chain 2010. "The market makes managing a portfolio
much more difficult," former CEO Doug Brooks said at the time.
McDonald's has more
than doubled since spinning off
Chipotle Mexican Grill (CMG) in 2006. Chipotle, in
turn, has soared 2,200%.
general, and administrative expenses have averaged 9.6% of revenue
in the past decade, versus 6.7% for peers, says Barington.
Operating profit margins trail competitors such as
Cheesecake Factory (CAKE) and
DineEquity (DIN), the owner of IHOP and Applebee's.
ANNOUNCED IN September that cost cuts could save it $50
million annually. Barington wants the company to aim for $100
million to $150 million in reductions. Barington also thinks
Darden ought to convert its real-estate holdings into a
real-estate investment trust, or REIT.
warned earlier this year that if Darden's management didn't speed
its turnaround plan, an activist investor might swoop in and force
Darden Fix the Menu?" March 25, 2013).
commented on Barington's proposal, save to say it "welcomes input
toward the goal of enhancing shareholder value." The company
reportedly has hired
Goldman Sachs Group (GS) to advise it. Darden declined
Darden needs shaking
up, and a split could be a logical move. Management has been
unable to reverse years of declines at the company's key
restaurants. Net income rose just 1% between the fiscal years
ended in May 2010 and May 2013. In that span, Darden added more
than 300 new restaurants, ending the latest fiscal year with a
total of 2,138.
Barington's group may
need to amass a larger stake to force change. But Darden's
weakness makes the company vulnerable. In a case like this, the
presence of an activist can help the stock, even if Barington
doesn't achieve all its goals. It could be a good time for
investors to load up their plates.
Chico's FAS (CHS) has all the makings of a strong
turnaround story, and it now has an activist in its corner with a
record of spurring change.
Chico's stock has
fallen 1% in 2013, as same-store sales have slipped. Earnings are
expected to drop to 99 cents a share from $1.09 last year, before
rebounding to $1.18 next year.
Blue Harbour, which
works with companies only on friendly terms, owns about 6% of the
shares. It has urged management to use a portion of cash flow,
which topped $200 million last year, to buy back stock. Chico's
has $250 million in cash, and no debt.
Robbins, the firm's
CEO, has never run a proxy contest or publicized differences with
corporate managers. That can make it difficult to discern whether
companies implement his suggestions. In Chico's case, though,
Robbins appears to have made a difference.
Since Blue Harbour
began amassing a stake in late 2011, Chico's has more than doubled
the rate at which it repurchases shares. The company announced a
new $300 million buyback program earlier this year, which could
cut its share count by more than 10%.
Blue Harbour also has
advocated for an expansion of Chico's fast-growing lingerie chain,
Soma Intimates, which operates 235 stores and targets women over
30. Intimate apparel is a $10 billion market, and Soma's sales are
about $265 million a year, versus $2.5 billion for Victoria's
Secret, Robbins says. He thinks the company can expand to more
than 600 units.
Chico's CEO, David
Dyer, who turned around Lands' End, is on board. He wants to lift
the total store base of 1,470 by more than 120 stores a year.
Chico's didn't respond to requests for comment.
Chico's is "a growth
stock trading like a value stock," says Robbins. The shares fetch
about 16 times expected earnings, a discount to their five-year
average price/earnings multiple of 38. Tagging along with Blue
Harbour looks like a smart idea.
Robbins, Blue Harbour Group
Conn.-based firm was founded in 2004 and targets companies with
market values of $1 billion to $5 billion. It avoids aggressive
tactics and works on a friendly basis to help companies improve
balance sheets, reorganize operations, and arrange mergers or
acquisitions. "A private-equity fund pays a 30% to 50% premium to
buy a company," says Robbins, a former private-equity investor.
"We can convince companies to make changes without paying that
return on 13D activist positions: 37%
returns (gross):2012: 20%; 2013: 30%
Jack in the Box (JACK) to turn more of its stores into
franchises and buy back shares. Stock rose 75% while Blue Harbour
was an investor.
Disappointment:Blue Harbour lost about 23% on its
investment in CSK Auto, an auto-parts retailer.
Chico's FAS (CHS),
Progressive Waste Solutions (BIN),
CACI International (CACI)
Marcato Capital Management
A protégé of Bill
Ackman's, McGuire invests primarily in mid-cap companies, and is
known for doing the same kind of hands-on research. He
Lear (LEA) this year to buy back shares and add a new
board member, and ran a campaign to spur change at
DineEquity (DIN). Marcato posted a 29% gain in 2012,
far outpacing other hedge funds. Institutional Investor named
McGuire the 2013 Emerging Hedge Fund Manager of the Year.
return on 13D activist positions:43%
returns (net):2012: 29%; 2013: 19.6%*
Disappointment: Became a director of Border's after his
then-boss, Ackman, launched an activist campaign. McGuire later
became chairman of the bookseller, which filed for bankruptcy
protection in 2011, and subsequently liquidated.
Starboard, spun out
of Cowen Group in 2011, mostly takes activist positions in
small-cap companies, and has waged more proxy battles than any
other activist. It isn't hard to see why some managements resist
Smith's overtures; Starboard has been urging
Wausau Paper (WPP), for instance, to change its name
and move its headquarters to another state. Wausau's shares have
rallied 74% since Starboard first filed a 13D in 2011 disclosing a
6.3% stake in the company. It now owns 15.2%.
return on 13D activist positions: 26%
Office Depot (ODP) merged with OfficeMax and cut costs
after Starboard sought changes last year and won three board
seats. Shares have nearly tripled.
Disappointments: Shares of
Regis (RGS), a hair-salon chain, have trailed the S&P
500 by 38 percentage points since Starboard filed a 13D in 2011
positions: Wausau Paper,
Whitworth worked for
T. Boone Pickens in the 1980s, lobbying for shareholder rights. He
formed Relational in 1996 with David Batchelder, and has taken
about 130 activist positions since then, sometimes buying only 1%
to 2% of a target company's shares.
The firm helped to
Home Depot's (HD) former chairman and CEO Robert
Nardelli in 2007, when the chain was struggling. Its shares have
nearly doubled since. Whitworth joined
Hewlett-Packard's (HPQ) board in 2011 after buying 1%
of the shares, and is now its chairman. "People have sometimes
called us the quiet activist, because a Google search would reveal
about a dozen projects out of all we have done," he says.
Whitworth and CalSTRS, the California teachers' retirement fund,
successfully agitated for change at
Timken (TKR), convincing the ball-bearing maker to spin
off its steel unit.
return on 13D activist positions: 62%
returns (gross):2012: 13%; 2013: 34%
Sprint (S); Whitworth joined the board and helped oust
the CEO, but failed to get the company to sell or spin off Nextel.
Taxin started his
career as a lawyer at Wachtell Lipton, the most prominent law firm
defending corporations from activist interventions. After a stint
as an investment banker, he co-founded Glass Lewis, a proxy
advisory service that gave independent advice to big investors. In
2009 he joined Clinton. Having once fought activists, he's now
become one: "I've gone all the way to the other side," he says.
In most of the 31
cases Clinton has worked on in the past four years, Taxin has
convinced companies to make changes without proxy fights. The fund
typically buys less than 5% of a company, which means it doesn't
have to file 13D reports with the Securities and Exchange
Commission. It has filed 13Ds on just three of its 11 current
campaigns. Consequently, the activist returns below provide an
incomplete measure of performance, he says. Taxin says Clinton's
activist fund has returned about 30% annualized in the past two
return on 13D activist positions:-6.8%
returns (gross): 2012: 15.7%; 2013:
Clinton Group won a board seat at
Nutrisystem (NTRI) and helped get the CEO removed. The
company has begun distributing weight-loss kits at
Wal-Mart Stores (WMT). Clinton now wants Nutrisystem to
increase its dividend. Shares are up 141% this year.
Disappointments: Clinton got four directors elected at
Wet Seal (WTSL) last fall. Shares of the teen-apparel
retailer have risen 6% since, but fell 13% in the past three
ValueVision Media (VVTV)
Note: 13D performance
figures reflect only positions that qualified for 13D filings.
Barron's was unable to obtain gross returns for all funds;
net returns are generally net of expenses and fees.
Sources: 13D Monitor, SEC filings, company reports,