The letter recommends Darden create two independently managed, publicly-traded restaurant operating companies and also separate the company’s restaurant operations and real estate properties. One restaurant company would include the mature brands Olive Garden and Red Lobster. The second restaurant company would include higher-growth brands in LongHorn Steakhouse, The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V’s Prime Seafood.
“We believe that doing so will enable each restaurant operating company to benefit from greater focus on the unique requirements of its brands, stronger execution and increased market responsiveness, thereby improving innovation and competitiveness for both groups of brands,” the letter said.
The letter recommends transferring the company’s real estate assets, which are valued at about $4.2 billion, into stand-alone, publicly-traded real estate investment trusts (REITs).
“We believe that if our suggestions are fully implemented, the company’s common stock would trade between $69 and $76 per share before operating improvements, representing a premium of up to 65 percent over the closing price on Sept. 20 of $45.78 per share,” the Barington Capital letter said.
Darden Restaurants’ stock on the New York Stock Exchange was trading at $51.80 per share late in the afternoon of Oct. 17.
Darden Restaurants responded to the letter with a statement, “Darden welcomes input toward the goal of enhancing shareholder value. While it’s the company’s policy not to comment on specific discussions with shareholders, the company has had dialogue with Barington Capital, and the board will take the time necessary to thoroughly evaluate Barington's suggestions, just as the company does for any of its shareholders.”
The letter comes after Darden Restaurants, based in Orlando, Fla., reported disappointing results for the quarter ended Aug. 25. First-quarter net earnings of $70.2 million, equal to 54 cents per share on the common stock, were down from $110.8 million, or 86 cents per share, in the first quarter of the previous year. Olive Garden’s first-quarter sales of $918.3 million were down 0.4 percent from last year’s first quarter. Red Lobster’s first-quarter sales of $624.2 million were down 5.5 percent from last year’s first quarter.
According to the Barington Capital letter, shareholder return, including dividends, for Darden Restaurants has underperformed its peer group. For example, for the three-year period ended Aug. 20, Darden restaurants had shareholder returns of 17.4 percent, which compared with 92.5 percent for its peer group and 57.7 percent for the S&P 500 index.
Over the past three years Darden’s compound annual growth rate of 6.5 percent compared with 12.7 percent for its peers. Olive Garden revenues and Red Lobster revenues grew at 2.9 percent and 1.4 percent, respectively, for the three-year period ended in August. During the past three calendar years same-store sales at Olive Garden and Red Lobster grew at average rates of 0.02 percent and 0.54 percent, respectively.
The Barington Capital letter said Darden potentially may reduce its operating expenses by $100 million to $150 million a year. Darden Restaurants has taken steps to reduce operating support spending by $50 million a year on an ongoing basis beginning in fiscal 2015, said Clarence Otis, chairman and chief executive officer of Darden, in a Sept. 20 earnings conference call.
Darden’s history dates to 1968 when William Darden opened the first Red Lobster restaurant, according to the Barington Capital letter.
“Since then, the company has successfully grown Red Lobster and Olive Garden into two of the most recognizable and successful dining brands in the United States,” the letter said. “Yet, as the company’s management team has acknowledged, Darden is competing in a new era. Not only have the competitive dynamics and the consumer changed — with competition for market share intensifying and financially stretched consumers demanding more value for less money — the company itself has changed — becoming, in our opinion, more complex and burdened as well as less nimble and innovative.”