Olive Garden Will Have a Lot to Prove on Friday

An Olive Garden casual dining chain restaurant.
Kristoffer Tripplaar/Alamy
There may be too many mouths for Darden Restaurants (DRI) to feed this week. The parent company of Olive Garden and LongHorn Steakhouse is holding its annual shareholder meeting on Friday morning, and it has a proxy battle on its hands. An activist investor is threatening to reshape Darden's board of directors in a vote that will determine if stakeholders still have faith in its current leadership.

The fight between Darden and Starboard Value began several months ago. Starboard -- armed with an 8.8 percent stake in the meandering casual-dining giant -- voiced its displeasure at Darden's move to unload Red Lobster at what it deemed was a fire-sale price. It then kicked its activism up a notch, nominating its own slate of independent directors. It also called out Darden's shortcomings by putting out a 294-slide presentation, showcasing what it would do to turn around Darden's two biggest chains.

One observer says Starboard's plan is actually simple: Split Darden into two pieces, one owning the real estate and the other running the restaurants. Starboard, David Dayen speculates on Salon, would make big money by charging high rents.

Remember that report last month about Olive Garden being too generous with its breadsticks and salad dressing? That was Starboard's handiwork. It also took Olive Garden and LongHorn to task for having menus that were too complex, and food prep processes that were too complicated.

Bread Baskets

Darden has been trying to plead its case in the days leading up to Friday's critical vote. It has issued several press releases from advisory firms suggesting that shareholders vote for Darden's hand-selected board members instead of Starboard's slate of seasoned industry and turnaround vets.

On Thursday, it revealed that sales at Olive Garden had improved during September. Darden issued a news release detailing how same-restaurant sales at domestic Olive Garden locations rose 0.6 percent last month relative to September of last year. After five consecutive quarters of year-over-year declines in same-restaurant sales, this is noteworthy.

However, there's no disguising that the news release -- issued just eight days before the shareholder meeting -- is all about winning favor with the investing public. After all, Darden hadn't put out these monthly reports before, and it's unlikely to continue doing so in the coming months.

Darden's desperate to paint itself in a favorable light. If it could produce an infomercial to sing its praises, it probably would. However, since most shareholders have likely already cast their votes ahead of Friday's meeting, it may as well save its money.

Darden My Heart

One good month isn't likely going to be enough to save Darden's board. It wasn't necessarily that impressive a month, for starters. The 0.6 percent increase in sales at the individual unit level doesn't mean that customers have returned.

We don't have to look very far for proof. Darden pointed out in its most recent quarterly report that Olive Garden's same-restaurant sales had climbed 0.9 percent in August, but that was entirely the result of higher pricing and menu changes. Traffic at the average established Olive Garden location slipped 2.3 percent in August.

Another thing working against Darden is that as hard as it's been trying to push out positive releases, the news hasn't been a one-way street. Starboard has been vocal in calling for change, and it certainly didn't help matters last week when the Institute for Policy Studies reported that departing CEO Clarence Otis will be receiving nearly $36 million in severance compensation when he steps down in the coming months. Most of that is in the form of options and stock awards that he already owns, but the headline number is rattling support for Darden's board at the worst possible time.

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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