Darden Restaurants is planning to spinoff its Red Lobster unit, making the restaurant chain the latest to bow to the demands of activist shareholders.
Darden, the company behind Olive Garden, LongHorn Steakhouse, Capital Grille and Bahama Breeze and other chains, has disappointed investors with declining profits for each of the past three years has been under pressure to improve performance. As part of its Red Lobster announcement, the company also said earnings this year would dip further than expected.
Shares of Darden fell $2.70, or 5.1%, to $50.22 in midday trading. Shares of the restaurant chain are up 11.4% this year.
Most recently, hedge fund Barington Capital, which owns 2.8% of the company's shares outstanding, has pushed Darden to narrow its focus so it can more effectively compete with more specialized rivals including Chipotle Mexican Grill. Barington has urged Darden to break is slower growing brands, like Olive Garden and Red Lobster, for those with better growth prospects, like LongHorn. Barington also wants Darden to convert to a real-estate investment trust to achieve tax advantages.
Darden executives said they're keeping Olive Garden, which accounts for about half of the company's revenue, since it's still a big driver of cash flow. Nonetheless, Darden told investors it expected earnings to fall up to 20% in the fiscal year ended May 2014, largely due to sluggishness with Red Lobster. The company had told investors earlier it expected earnings to fall upward to 5%.
"While today's announcement is a first step toward improving focus and operating execution at Red Lobster and Olive Garden, we view the plan Darden announced today as incomplete and inadequate. The plan fails to address significant additional opportunities to enhance long-term shareholder value, including placing its real estate into a REIT. We believe that Darden can and should be doing more to improve value for its shareholders," says James Mitarotonda, CEO of Barington Capital Group, stated:
Red Lobster has been losing importance with consumers, due to the rise of newer concepts that pitch better value. Selling Red Lobster could generate upwards of $2.5 billion for Darden, Miller Takak analyst Stephen Anderson told Reuters.