Olive Garden and Red Lobster Need More Than a Split
Shares of Darden Restaurants soared 7% yesterday, fueled by an activist investor proposing to shake up the meandering casual dining dinosaur.
The Wall Street Journal reported that Barington Capital took a 2.8% stake in the parent company of Olive Garden, Red Lobster, and LongHorn Steakhouse. A source says that Barington's been in communication with Darden's top brass, suggesting that it split into two different entities.
Darden and Barington confirmed that they have been talking, but neither party is ready to divulge what has been discussed or if the restaurateur will act on the request.
Before digging any deeper, let's make it clear that the plan isn't to send Red Lobster and Olive Garden into different corners. The proposed makeover reportedly would keep together the two flagship chains that accounted for 71% of Darden's revenue in its latest quarter, spinning off the company's smaller and lately more successful concepts.
Darden has a ton of restaurants, including Bahama Breeze, Capital Grille, and Yard House. Barington's thinking would seem to be that these concepts that are earlier in their growth cycle would command a greater multiple than Darden does at the moment.
That's fair, but how excited will the market be?
Two of this year's hottest IPOs are restaurants. Noodles and Potbelly have more than doubled since going public in recent months. However, the allure here is that they are part of the growing trend of fast-casual. Guests order at counters when they visit Noodles and Potbelly. Their orders are prepared quickly. We're talking about higher-quality meals than fast-food joints offered at the same convenient pace. Prices are also typically lower than you will find at sit-down casual restaurants.
Darden has plenty of concepts. Seasons 52 and Eddie V's round out the roster beyond the establishments mentioned earlier. However, they are all table-service dinosaurs. Some are holding up better than others, but none of the chains have been setting the world on fire. Bulls will argue that Darden's specialty restaurants group posted a 73% surge in sales in its latest quarter -- a sharp contrast to the negative sales and comps at Olive Garden and Red Lobster -- but most of that resulted from acquiring what was then the 40-unit Yard House chain.
No one is going to treat a Darden spinoff the way that they would Noodles and Potbelly. Noodles has a surprisingly differentiated concept of serving a wide variety of noodles. Potbelly isn't as unique. There are plenty of places to grab a quality toasted sandwich. However, both concepts are growing and have clear paths to keep expanding for years. A collection of Darden's smaller casual- and fine-dining concepts wouldn't attract the same kind of sizzle.
Splitting up Darden isn't the solution. Getting the operator to either embrace the fast-casual trend that's siphoning customers away from fast-food and casual dining, or to actually turn Olive Garden and Red Lobster around, are the ideal fixes that will translate into greater shareholder value. As it stands, Darden's parts may not be more valuable than its current sum.
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The article Olive Garden and Red Lobster Need More Than a Split originally appeared on Fool.com.Longtime Fool contributor Rick Munarriz 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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