Overview: Starboard Value's activist position at Darden (Part 4 of 7)
Darden’s profits fall 35% in the 4Q
Activist investor Starboard Value has launched a proxy fight to gain control over the board of Darden Restaurants (DRI), after opposing the sale of the company’s Red Lobster seafood chain to private equity company Golden Gate Capital. The activist fund currently owns an ~8.8% stake in the restaurant company. Darden’s fourth quarter and fiscal 2014 results were announced in June and came below street estimates.
Shares fell after profits plunged 35% to $86.5 million or $0.65 per share. The company said earnings were impacted by ~$0.19 due to legal, financial advisory, and other costs related to the implementation of the strategic action plan announced in December, 2013, and various asset impairment charges.
Sales increase on the back of newer brands and specialty restaurant group
Fourth quarter total sales from continuing and discontinued operations increased slightly to $2.32 billion, from $2.30 billion in the 4Q13. The increase in total sales reflected the operation of 69 net new restaurants compared to the fourth quarter last year. Same restaurant-sales increases for LongHorn Steakhouse and the company’s specialty restaurants. For fiscal year 2014, total sales from continuing and discontinued operations were $8.76 billion—a 2.4% increase from $8.55 billion last year. Diluted net earnings per share declined to $2.15 from $3.13 last year.
Olive Garden’s results continued to be a drag on profits as same restaurant sales declined 3.5%. Red Lobster, whose sale to Golden Gate was still pending in June, saw same-restaurant sales declining 5.6% for the quarter. Same-restaurant sales increased 2.4% at LongHorn Steakhouse and 2% at the specialty restaurant group. Olive Garden will account for ~60% of Darden’s revenue after the sale of Red Lobster.
Will the Olive Garden “brand renaissance” plan work?
In March, Darden announced a brand renaissance plan for Olive Garden that included comprehensive menu changes and promotions “aimed at broadening the choice, variety, and value” offered to its customers. It recently updated its logo, rolled out a new national restaurant remodel design, and launched an updated web experience and a To Go platform for online ordering options. Darden said Olive Garden has simplified its culinary operations to focus on food quality, evolved its service approach to be more flexible and personal to anticipate guests’ needs, and introduced its largest menu refresh ever with more than 20 new menu items.
The management said on the recent earnings call that these initiatives are expected to “address erosion and visit frequency among our core guests. This plan also will enhance our solid position with millennial and multicultural households and is the platform for renewed same restaurant sales growth and margin expansion.” They added that the dinner menu has a $9.99 price point with the Cucina Mia section in the majority of Olive Garden’s restaurants to cater to millennial and value conscious customers.
CEO Otis added on the earnings call that with these initiatives in place “we are confident that we can return to industry leading financial performance with on a sustained basis mid-to-high single digit annual sales growth, low-to-mid teen annual operating income growth, and $350 million or more in annual return of capital to shareholders.”
Recent news reports noted that Darden’s casual dining business under brands Olive Garden and Red Lobster have suffered as customers are increasingly opting for fast casual food chains such as Chipotle Mexican Grill (or CMG) and Panera Bread (or PNRA). The NPD Group said in May research that casual dining restaurant visits were at a six-year low in the year ending February, 2014. Price sensitivity, customer experience, higher competition from fast casual outlets, and increased industry promotion were outlined as some of the reasons for the decline of casual dining by the NPD Group. Analysts have also highlighted the absence of innovation and healthier eating habits of millennials as some of the reasons for the falling popularity of casual dining outlets. Darden’s peers include full-service casual restaurants like Cheesecake Factory (CAKE), Texas Roadhouse (TXRH), Brinker International Inc. (EAT), and Bloomin’ Brands (BLMN).
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