Darden Restaurants (DRI)
has long frustrated investors. Its flagship brand, Olive Garden, has seen
traffic dip as all-you-can-eat salad and breadsticks no longer entice
budget diners as they once did, and widespread discounting has
pummeled profits. Even worse for Darden management, those discounts
have largely failed to boost sales.
Is there a fix?
Barington Capital Group, a hedge fund that owns about 2.8 percent of
Darden’s shares, is pushing for a split of the company into three units:
the mature chains, Red Lobster and Olive Garden; a growth unit that
consists of the LongHorn Steakhouse, Bahama Breeze, Yard House, Capital
Grille, Seasons 52, and Eddie V’s brands; and a publicly traded investment
trust with Darden’s extensive real estate holdings. The Orlando-based
company owns more real estate than most of its restaurant competitors;
Barington estimates that Darden’s land and property holdings are worth
more than $4 billion.
Barington argues that
Darden’s portfolio has become too complex to compete in the industry, as
it added five of its eight restaurant brands since 2007. “As a result of
these acquisitions, Darden has become a complex business, managing eight
restaurant brands that target different customer segments, have different
marketing needs, serve vastly different menus with different price points
and require different culinary and customer experience innovations,”
Barington said in a
presentation (PDF) it released today, ahead of the company’s Dec. 19
quarterly earnings call.
In an e-mailed
statement, Darden said its board “will take the time necessary to
thoroughly evaluate Barington’s suggestions, just as the company does for
any of its shareholders.” Olive Garden and Red Lobster accounted for
almost three-quarters of the company’s $8.7 billion in revenue over the
past year. The company has more than 2,100 restaurants total.
Barington contends that
its plan would send Darden shares as high as $80. At its current price of
around $52, the stock has gained 16 percent this year—including 13 percent
since Barington revealed its breakup plans in October—trailing rivals such
Brinker International (EAT)
Cheesecake Factory (CAKE)
Del Frisco’s Restaurant Group (DFRG)
(35 percent), and
(24 percent), the parent of the Applebee’s and IHOP chains.
Wall Street analysts
aren’t persuaded, for the most part, that splitting Darden would help all
that much. Analysts have generally been more keen on a broad $50 million
cost-cutting plan the chain introduced this fall. Darden spends
significantly more than rivals on advertising, primarily for its two
flagship chains, and it’s far from clear that those ubiquitous TV ads are
helping the company much. For Darden, the “biggest value enhancer” would
be a turnaround at Olive Garden, Oppenheimer analyst Brian Bittner wrote
in a client note today, although he’s not optimistic that will begin in
the current quarter. In October, Telsey Advisory Group analyst Peter Saleh
predicted that Darden directors would not split the company but begin
focusing on free cash flow and less on expansion.
Barington said its
recommendations had been subject to an independent review by Houlihan
Lokey, an investment bank the hedge fund hired to assess the plan. “Their
work not only confirms the opportunities we identified to improve
long-term shareholder value at Darden, it also adds practical strategies
to execute our recommendations and mitigate implementation costs,”
Barington’s founder and chief executive, James Mitarotonda, said in a
Bachman is an associate editor for Businessweek.com.
This Forum program was open, free of charge,
to anyone concerned with investor interests in the
development of marketplace standards for expanded access to
information for securities valuation and shareholder voting
decisions. As stated
in the posted
Conditions of Participation, the purpose of this public
Forum's program was to provide decision-makers with access to
information and a free exchange of views on the issues
presented in the program's Forum
participant was expected to make independent use of
information obtained through the Forum, subject to the
privacy rights of other participants. It is a Forum
rule that participants will not be identified or quoted
without their explicit permission.
This Forum program was initiated in 2012 in
collaboration with The Conference Board and with
Thomson Reuters support of communication technologies to address
issues and objectives defined by participants in the 2010 "E-Meetings"
program relevant to broad public interests in marketplace
practices. The website is being maintained to provide
continuing reports of the issues addressed in the program,
as summarized in the
January 5, 2015 Forum Report of Conclusions.
The information provided to
Forum participants is intended for their private reference,
and permission has not been granted for the republishing of
any copyrighted material. The material presented on this web
site is the responsibility of
Gary Lutin, as chairman of the Shareholder Forum.
is a trademark owned by The Shareholder Forum, Inc., for the
programs conducted since 1999 to support investor access to
decision-making information. It should be noted that we have
no responsibility for the services that Broadridge Financial
Solutions, Inc., introduced for review in the Forum's
2010 "E-Meetings" program and has since been offering
with the “Shareholder Forum” name, and we have asked
Broadridge to use a different name that does not suggest our
support or endorsement.