Darden Looks to Spin Off or Sell Red Lobster

Darden looking to spin off or sell Red Lobster
Tom Uhlman/Bloomberg via Getty Images
NEW YORK -- Darden Restaurants wants to set Red Lobster adrift.

The company said Thursday that it is looking to either spin off or sell Red Lobster as part of its plan to boost value for its shareholders. Those plans also include suspending the opening of new Olive Garden locations and limit the opening of new LongHorn Steakhouse restaurants.

Darden Restaurants Inc. (DRI) has also decided it won't make any acquisitions of additional brands "for the foreseeable future" and plans to review senior management's compensation and incentive programs so that there is more emphasis on same-store restaurant sales growth and free cash flow.

Its stock fell more than 4 percent in Thursday afternoon trading.

Red Lobster has 705 restaurants in the U.S. and Canada and is the biggest full service dining seafood specialty restaurant operator in North America. Its fiscal 2013 sales were about $2.6 billion.

Restaurant chains such as Olive Garden and Red Lobster have suffered since the downturn, with people being more careful about their spending. People are also increasingly heading to chains such as Chipotle Mexican Grill (CMG), where it tends to cost less and take less time than a sit-down meal at a restaurant.

Darden Chairman and CEO Clarence Otis said during a conference call Thursday that it had been considering its options for Red Lobster for some time and shareholders wanted changes.

In September investment firm Barington Capital, which represents a group that owns more than 2 percent of Darden's stock,
recommended that Darden consider splitting into two separate companies, with one company housing Olive Garden and Red Lobster and the other its remaining brands. Barington made the contents of the proposal public in October.

Otis said that Red Lobster has been unable to capture high-income customers as much as its other brands have. A separation will give Red Lobster the opportunity to focus more on its core audience, he said.

Otis also said changing market conditions prompted action. He noted that there is significant change occurring in the restaurant sector, "with relatively low levels of consumer demand in each of the past several years for restaurants generally, and for casual dining in particular, as well as additional unexpected softness since June."

Darden anticipates that after separating from Red Lobster it will be able to report higher and more consistent same-restaurant sales, new restaurant sales growth and increased and more consistent earnings per share growth. It expects to use proceeds from new debt raised at the separated Red Lobster to retire part of Darden's debt.

Darden expects that after the separation, Red Lobster will likely report low single-digit revenue growth driven by modestly higher same-restaurant sales.

The company anticipates that its cost-cutting efforts will bring about at least $60 million in annual savings starting in fiscal 2015. This is up from the $50 million in savings it previously predicted. Darden said it will use the increase in cash flow from lowering capital spending and operating support expenses for dividends, stock buybacks and to help strengthen its credit profile.

Sara Senatore of Bernstein Research said in a client note that the planned Red Lobster separation and other potential actions are a step in the right direction, but may result in only modest changes in performance. She reaffirmed a "Market Perform" rating.

Sterne, Agee & Leach's Lynne Collier is encouraged by the Red Lobster plans, saying the brand has been a drag on Darden's performance for the past several years. The analyst kept a "Buy" rating for Darden.

Standard & Poor's Ratings Services said Thursday that it put Darden's ratings under review. The rating agency said that it will evaluate the financial impact of the transaction and financing details during the review process.

Darden named Kim Lopdrup, president of its specialty restaurant group and new business, to serve as Red Lobster's CEO after the separation. Harland Herrmann, president of Yard House, will become president of the specialty restaurant group in January. Red Lobster President Salli Setta will remain in that position.

Preparing for Spin-Off

If Red Lobster is spun off, Darden Senior Vice President and Chief Financial Officer Brad Richmond will become chief financial and administrative officer for Red Lobster once the transaction is complete. Darden said it's started the process of identifying its board and a possible successor for Richmond.

Darden also announced Thursday that its second-quarter net income fell to $19.8 million, or 15 cents a share, from $33.6 million, or 26 cents a share, a year earlier. Excluding severance costs and other items, earnings were 20 cents a share. Revenue rose to $2.05 billion from $1.96 billion.

Analysts polled by FactSet predicted earnings of 20 cents a share on revenue of $2.07 billion.

The company now foresees fiscal 2014 earnings per share falling 15 percent to 20 percent compared with the prior-year period. It previously predicted a 3 percent to 5 percent decline. Revenue is now expected to climb 4 percent to 5 percent versus a prior guidance for a 6 percent to 8 percent increase.

The planned Red Lobster spinoff still needs final approval from Darden's board. It does not require a shareholder vote. The company expects any possible separation to close in early fiscal 2015.

Darden's stock dropped $2.40, or 4.5 percent, to $50.52 in afternoon trading.


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24 Comments

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stvhndyman

I didn't know RL was "targeting higher income people". I think these people can, and will, find better restaurants.
I always thought RL was a budget seafood restaurant.

December 20 2013 at 4:30 AM Report abuse rate up rate down Reply
idahoblue777

We call it Seafood Denny's. They start with low quality seafood and then, it goes downhill from there.

December 20 2013 at 1:12 AM Report abuse rate up rate down Reply
phpoling

Way overpriced! Should change the overpriced prices to good prices.

December 20 2013 at 1:01 AM Report abuse rate up rate down Reply
bagthepi

As usual those living in the Ivory Towers are completely out of touch with the real people of the world , especially those who used to eat at their restaurants. People quit spending their money for food that isn't any good. Menu items, food quality and service are the deciding factors. It's just that simple. So rather than admit that all their plans went awry, the CEOs and others in charge would rather just sell off the restaurants. That way they don't have to admit that they were WRONG!

December 19 2013 at 11:35 PM Report abuse rate up rate down Reply
BEWARE.. HUNTERS

My Hubby and I ate at Red Lobster last weekend and we were not impressed with the food. Our waitress was wonderful. Now back to the food...Walt's shrimp is not even fried anymore. The shrimp scampi is missing a very important potable ingrediant. The smoked seafood is so smoked you can taste nothing but the smoke. What a shame I can remember when my family, I have alot of family, would gather at the Red L drive the well tipped waitress crazy and the food was prepared without all the ways to hide the actual featured tasty sea creature. I have noticed that all the restaurants are going crazy with all the spices and creative ways to prepare food. Well stop it. Sometimes a person just wants a simply prepared meal. I must say the way it used to be. Go back to the way the food was prepared from the 70's 80's. You do not have to keep changing things just keep the people coming back. Just keep the integrity of what you do prepare yummy. To end on an upbeat note, the biscuits are quite tasty :)

December 19 2013 at 9:09 PM Report abuse rate up rate down Reply
Darleen

Red Lobster not a good place to eat anymore. Too many shortcuts taken. Anyone like minced salad? Also Darden not the best in the west. Would never recommend Red Lobster.

December 19 2013 at 8:40 PM Report abuse +2 rate up rate down Reply
1 reply to Darleen's comment
Linda

We hate Red Lobster and stopped going years ago. The type of people who go there turned us all off and most of the ones in better areas have closed up and we all know why. They no longer serve good food. It is horrible food and nasty service with poorly dressed or slovenly looking help serving. We prefer a place with white linen tablecloths and waiters who are clean and care about their customers. Years ago when it was owned by Muers it was wonderful and the food true seafood and so good not anymore.
Glad it is being sold or dumped. Just close up the ones that are left since people with money will not go there anymore.

December 19 2013 at 10:21 PM Report abuse +1 rate up rate down Reply
Dale

$28+ for a King Crab dinner is part of the reason people shy away from Red Lobster. I can buy the same amount at a local grocery store for more than half of that.

Plus, Olive Garden removing the Seafood Portifino off their menu. That was one of the best dishes they served. Haven't been back since!

December 19 2013 at 8:10 PM Report abuse rate up rate down Reply
1 reply to Dale's comment
stvhndyman

You can always buy your own food, prepare it yourself and save money.
But don't forget you must serve it yourself, clean up all the dishes, pots and pans yourself.

December 20 2013 at 4:26 AM Report abuse rate up rate down Reply
betty_brock

I don't know about the rest of them but our local Red Lobster isn't any good at all.

December 19 2013 at 7:47 PM Report abuse +3 rate up rate down Reply
1 reply to betty_brock's comment
Deborah Fuller

I agree there quality of good food went down the sink...............The shrimp and not the same The walt fried shrimp used to be great not anymore.

December 19 2013 at 10:08 PM Report abuse rate up rate down Reply
Velocity105

Tens of millions count on Red Lobster to provide reasonable prices on their seafood which I think they do. The alternatives in my city are vastly more expensive and I've been going to Red Lobster for 30 years. I think it's a mistake to cut it loose. They talk about "downturn" in the economy but the economy is reversing and if sales are $3B a year at RL then the only direction they have to go is up. Leave them alone and give them another chance.

December 19 2013 at 7:09 PM Report abuse rate up rate down Reply
herold1227

The root of the problem is that their customer base is mostly women. They love the seafood. The problem is there is hardly any beef on the menu (which men prefer) and their kids menu is a joke. In a nutshell is you have a family of 4 and only one person who wants seafood guess who is going to lose?

December 19 2013 at 6:05 PM Report abuse rate up rate down Reply