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.
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