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Must-know: 4 key points from Darden’s ambitious new plan

Xun Yao Chen

Despite displeased investors, Darden may have made the best decision (Part 6 of 10)

(Continued from Part 5)

Critical notes on Darden’s plan

After extensive internal review, Darden’s board had decided to change the company’s structure, incentive programs, capital structure, and cost initiatives. These are important steps that management needs to undertake in order to make the company as a whole more competitive.

Spinning off Red Lobster

The first point of the change would involve separating Red Lobster. Note that Red Lobster has been the worst performer within Darden’s portfolio, posting substantial negative same-store sales year-to-year. This would likely occur in a tax-free spinoff in early fiscal 2015—late summer next year.

Darden says no more focus on new units

The second point relates to reduction in capital expenditure and support for return of value to shareholders. This would primarily be done by suspending new restaurant growth at Olive Garden, limiting new unit growth at LongHorn, and continuing expansions for brands under the Specialty Restaurant Group like Season 52, the Capital Grille, and Eddie V’s at a more modest pace. Further acquisitions would halt.

Changes to compensation structure

The third point involves changes to management compensation, which would support the second point. Many Wall Street analysts have noted that Darden should be cutting back expenditures on its more mature brands like Olive Garden, Red Lobster, and even LongHorn Steakhouse, according to JP Morgan. Analysts have mentioned in the past that management’s compensation plan was mostly tied to earnings growth rather than metrics on same-store sales growth. This meant management was incentivized to focus more on activities like acquisitions and new store openings, which take time away from the more important restaurant operations side of the business.

The company’s new incentive plan of aligning compensation with same-store sales growth and free cash flow growth would lead management to focus more on what makes each brand special and unique to its customers, getting closer to the average U.S. consumer, and building products and services around consumer needs.

Finding additional areas to cut spending

The fourth point of the plan builds on the company’s existing program to annually cut support costs by $50 million. Since the program was last announced in September 2013, the company has identified an extra $10 million in savings. It will focus more on operating support and cost cuts as it completes the separation of Red Lobster. As Barington Capital Group had pointed out in its presentation, Darden’s financial metrics didn’t show much benefit of economies of scale or scope through management of eight brands because each targets a different market and offers varying products.

Continue to Part 7

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