The Sharks Are Circling Red Lobster
If Darden Restaurants thought that by agreeing to spin off or sell its Red Lobster brand it would reel in restive shareholders who've been angling for it to carve up its different chains, it must be disappointed they didn't take the bait.
With a 2% stake in Darden, Barington Capital had been the biggest fish calling for change, but the hedge fund operator said the restaurant chain's proposal didn't go far enough because it excluded the struggling Olive Garden chain that needs to be part of any restructuring. Bloomberg News reported last week that Barington claimed Darden's offer "fails to address significant opportunities to enhance long-term shareholder value."
Compared to growth restaurants like Yard House, Eddie V's, and Capital Grille, which Darden added to its portfolio over the past year or so, Red Lobster and Olive Garden are more mature concepts that have been experiencing declining foot traffic and same-store sales. LongHorn Steakhouse has been the happy exception.
Now the sharks smell blood in the water, and Starboard Capital Partners announced last week that it acquired a 5.6% position in Darden, saying "the plan outlined by management falls significantly short of the actions required to maximize shareholder value." This could build to a feeding frenzy if additional investors begin pushing for more dramatic change.
It's not so much that Red Lobster is a damaged brand, but rather that its results reflect all too closely the trends seen all across the casual-dining sector. Releasing it back into the wild on its own may only cause the restaurant chain to fail.
According to the market researchers at NPD Group, casual dining has not had a single quarter of foot traffic increases since the second quarter of 2008. Last quarter it managed to merely be flat from the year-ago period, which was heralded as a major improvement. Similar fallout is sprawled across the industry.
Ruby Tuesday suffered an 11.4% drop in comps at its company-owned restaurants last quarter and an 8.4% decline from franchisees. Same-restaurant sales at owned and franchised restaurants were off 1% and 2%, respectively, for all of fiscal 2013. Brinker International is witnessing the same trend at its Chili's concept, as is DineEquity at Applebee's.
Most of the sales increases Darden's realized over the last two years have come primarily from adding new restaurants and bolting on new concepts. In late 2011 it acquired Eddie V's, a leading luxury seafood restaurant, and followed that up the following August with the acquisition of Yard House, which serves contemporary American fare. It's the growth potential of Darden's speciality restaurant group that has activist shareholders licking their chops.
It's clear Red Lobster can't compete on its own yet, and until it can find a way to bring diners back to the restaurant, it would be foolhardy to cast it off.
But Darden is reluctant to attach Olive Garden because it believes there's still growth to be found in the Italian restaurant chain. While it's put a turnaround plan in place, the results thus far have hardly been inspiring, and both Olive Garden and Red Lobster are still dragging Darden's performance down. Bloomberg says that with its enterprise value trading at 7.4 times trailing earnings before interest, taxes, depreciation, and amortization, Darden trails behind 86% of its casual-dining peers.
Whether hooking Olive Garden to Red Lobster serves as a life preserver or just another anchor is tough to say at this point, but with two private equity investors circling the restaurant operator, it looks like Darden only managed to chum the waters and we can expect to see more sharks roil the waters for the chain.
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The article The Sharks Are Circling Red Lobster originally appeared on Fool.com.Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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