Executives at Darden Restaurants Inc. continued to stand by their plans to spin off or sell the struggling Red Lobster brand and declined to budge in their battle with activist investors during a call with analysts on Friday.

The Orlando, Fla.-based company, which also owns the Olive Garden, LongHorn Steakhouse and other casual-dining brands, has been under pressure from Starboard Value LP and Barington Capital Group LP to take more dramatic steps beyond the Red Lobster spinoff, first announced in December. They have urged Darden to separate its larger brands and create a publicly traded real-estate investment trust.

On Thursday, New York-based Starboard, which owns about 5.5 percent of Darden’s shares, said it had filed documents with the Securities and Exchange Commission to seek shareholder approval for a special meeting on the Red Lobster plans.

In speaking Friday during a shorter-than-usual call with analysts after releasing third-quarter earnings, Clarence Otis Jr., Darden’s chairman and chief executive, countered the Starboard pressure and said the company has already been holding conversations with shareholders in “a productive and nuanced manner” without the need of a special meeting.

“We appreciate the input we’ve received,” Otis said, “and these insights are reflected in the plans that we have announced.”

Darden reported Friday that Red Lobster and Olive Garden both showed same-store sales declines in the Feb. 23-ended third quarter. Same-store sales fell 8.8 percent at 706-unit Red Lobster and 5.4 percent at 836-unit Olive Garden. They rose slightly, 0.3 percent, at 453-unit LongHorn Steakhouse.

The company reported an 18.4-percent decline in profit for the Feb. 23-ended third quarter, blaming severe winter weather and costs associated with the Red Lobster separation. The company reported net income of $109.7 million, or 82 cents per share, falling from $134.4 million, or $1.02 a share, in the prior-year period. Revenue rose 1.1 percent, to $2.26 billion, from $2.23 in the prior-year period.

C. Bradford Richmond, Darden’s senior vice president and chief financial officer, said that the company had $10 million savings in general and administrative expenses in the quarter — toward an earlier-announced goal of $60 million by the end of 2015 — but legal, accounting and other fees related to the Red Lobster plan, as well as retention bonuses for Red Lobster managers, totaled more than $13 million in the quarter.

Eugene Lee, Darden’s president and chief operating officer, said that while December was usually a strong month for Darden’s brands, the company reduced some promotional spending this year.

“In the planning process this year, however, we did make some adjustments to our promotion and advertising plans for the month,” Lee explained. “Last year, both Olive Garden and Red Lobster featured discounted price-point promotions during December, which was a departure from our prior practice. This year, we decided not to use these kind of price-point promotions during this high-volume period.”

Instead, Lee said, the company emphasized the core menu and reduced media spending. Olive Garden was on the air only three out of the five weeks, versus four out of five in the prior year. Red Lobster reduced its rating-point purchases by 20 percent. Lee said the company also reduced incentives.

At the start of the fourth quarter, Olive Garden introduced the first phase of its “brand renaissance” with a focus on a new Cucina Mia menu. “We’ve been pleased with how quickly our operations teams have picked up this new menu,” Lee said, and consumer complaints have dropped off measurably.

In addition, Lee noted that Darden has digested the August 2012 acquisition of Yard House USA. “The Yard House integration is behind us,” Lee said. “The team is focused on regaining same-restaurant sales momentum, mastering the new systems implemented and opening new restaurants.”

The company opened 22,000-square-foot Yard House restaurant in Las Vegas during the quarter.

Food costs for Darden’s brands were generally in line for the third quarter, except for shrimp inflation, which as high as 35 percent in the third quarter. “We’ve seen early indicators that we’re looking for the [shrimp] situation improving,” Richmond said, but significant lowering of prices isn’t expected until June or after.

Darden ended the quarter with more than 2,100 restaurants. Besides Olive Garden, Red Lobster and LongHorn, Darden’s Specialty Restaurant Group includes 53 Capital Grilles, 48 Yard House units, 38 Season 52s, 37 Bahama Breeze restaurants and 13 Eddie V’s units.

Contact Ron Ruggless at ronald.ruggless@penton.com.
Follow him on Twitter: @RonRuggless