Could This Restaurant's Break-Up Unlock Shareholder Value?

Activist investors, after buying a good percentage of a certain business, will request that the company restructure to unlock potential value for its existing shareholders. Recently, Barington Capital, which owns around a 2.8% stake in Darden Restaurants , has asked the full-service restaurant chain to break up its business into two separate companies. One company will own the declining chains Olive Garden and Red Lobster, while the other company will hold chains with much higher growth, including Capital Grille.

Fighting against the decline of Olive Garden and Red Lobster
Olive Garden and Red Lobster  have restrained Darden's overall growth. In the first quarter of fiscal 2014, Olive Garden experienced a 4% decline in same-restaurant sales, trailing its industry estimate by 200 basis points. Red Lobster's same-restaurant sales also dropped by 5.2% , trailing the industry estimate by 320 basis points.

On the other hand, Longhorn Steakhouse enjoyed 3.2% year-over-year growth in same-restaurant sales, 520 basis points higher than the industry estimate. 

Interestingly, Darden's management has taken several strategic actions to fight against the decline in the business performance of Olive Garden and Red Lobster. For Olive Garden, the company has been expanding the small plates section, including the recent introduction of Taste of Italy.

Moreover, it intends to expand its remodel program for all non-Tuscan farmhouse restaurants in the latter part of 2014. It will shift the focus on existing guests and reduce the number of new restaurants opened. For Red Lobster, Darden mentioned that the Seaside Mix & Match and Four Course Seafood Feast did not deliver the results expected, but the Endless Shrimp promotions have helped the business increase its guest count.

Looking forward, Darden will concentrate on supporting the lower-performing restaurants by controlling their costs and execution, as well as reshaping their core menu.

Mixed results of its competitors
With the same disappointing momentum, restaurant chain Ruby Tuesday , reported as much as an 11.4% decline in its same-restaurant sales for the first quarter of fiscal 2014. Many investors had hoped for a turnaround under new CEO J.J. Buettgen, a former executive of Darden Restaurants. After more than 10 months of the brand repositioning and strategic turnaround execution, Ruby Tuesday realized that it would take longer for the business to improve.

Looking forward, Ruby Tuesday's management is confident that the business performance will be improved by introducing new products, enhancing overall guest experience , and having a stronger media plan. However, the future also depends on management's execution in a fast-changing, competitive environment.

Despite the increased competition, DineEquity seems to be the most profitable company here, and enjoys good growth to boot. At the end of July this year, the company reported positive same restaurant sales growth in both of its restaurant concepts: International House of Pancakes (IHOP) and Applebee's Neighborhood Grill & Bar (Applebee's). In the second quarter of fiscal 2013, while IHOP experienced a nearly 2% growth in its same restaurant sales, Applebee's domestic same restaurant sales were up 1.3% during the same period. DineEquity will keep up its momentum by focusing on the value proposition, TV advertisement for menu items, menu innovation and guest preferences. 

My Foolish take
It would be an interesting move to split Darden Restaurants into two businesses. The business separation will allow management of each business to tackle each business' issues more efficiently. The declining restaurant chains' focus will be a business turnaround, and the higher growth restaurant chain's focus will be keeping that growth intact. Consequently, shareholder value will be unlocked by the break up.

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Anh HOANG 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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