Overview: Starboard Value's activist position at Darden (Part 3 of 7)
Darden CEO steps down
Activist investor Starboard Value 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 announced at the end of July that chairman and CEO Clarence Otis will step down by the end of the year or when a replacement is found. New York-based activist investor and Darden shareholder Barington Capital had sought to replace Otis earlier in March due to loss of confidence from the “rapidly deteriorating financial performance of Darden.” Barington had also wanted the company to separate the CEO and chairman roles to protect shareholder interests.
Starboard CEO Jeffrey Smith said in a statement that Otis’ retirement was long overdue and that “It’s surprising to us that it took this long.” He added that “It’s a shame for all Darden shareholders that this change happened only after the Board sanctioned the destruction of a billion dollars in shareholder value by approving the Red Lobster sale against the vehement objections of its shareholders.”
Operating margins and same-restaurant sales for flagship brands declining
With Darden’s financial performance lagging its peers, Barington noted in March that Otis is “failing to pursue opportunities to create strong independent operating companies and unlock the value of Darden’s significant real estate holdings.” Darden’s operating margins continue to be below its peers including full-service casual restaurants like Cheesecake Factory (CAKE), Texas Roadhouse (TXRH), Brinker International Inc. (EAT), and Bloomin’ Brands (BLMN). Barington added that in 3Q14, same-store-sales declined at Olive Garden—Darden’s largest brand accounting for ~42% of the company’s revenue—in six out of the previous eight quarters, and at Red Lobster—Darden’s second largest brand accounting for ~30% of the company’s revenue—in seven out of the previous eight quarters. In the 4Q14 the same store sales for both the flagship brands saw a decline.
Starboard and Barrington Capital wanted Darden to sell or spin off its real estate as well as separate its two mature brands, Olive Garden and Red Lobster, into one company. They wanted Darden to spin off the newer higher growth brands such as Longhorn Steakhouse, The Capital Grille, and Yard House into another company. Outgoing CEO Otis told an analyst on the company’s third quarter earnings call that a spin off of the Specialty Restaurant Group wasn’t viable because the “Specialty Restaurant Group is comprised mostly of casual dining brands that have a lot in common with LongHorn and Olive Garden.” However, Barington said Otis was “disingenuous” because there were huge differences that existed between Darden’s brands such as The Capital Grille and Olive Garden in terms of target customers, average check sizes, and alcohol sales, as well as different requirements in terms of marketing, menu innovation, food sourcing, and supply chain among other things.
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). Earlier this year, the NPD Group cited its food service market research and said that visits to fast casual restaurants were up 8% in 2013 over the previous year compared to no growth for the total industry and quick service segment.
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