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In a “Dismantling Darden” report released Oct. 11, advisory firm Hedgeye Risk Management’s estimated Darden’s real estate value at a “conservative” $3.6 billion, compared to Barington’s $4 billion estimate.

Hedgeye’s restaurant team said, “This works out to $3.438 million per owned restaurant, which is significantly below the company’s stated cost to build a new Red Lobster or Olive Garden restaurant.”

Hedgeye cited Darden’s May 2013 Securities and Exchange Commission filings that put the cost in fiscal 2013 of a new Red Lobster restaurant at about $4.2 million and a new Olive Garden restaurant at about $4.1 million. As of May 26, Hedgeye said 1,048 of Darden’s restaurants were on owned sites and 1,090 were on leased sites.

In a Dec. 19 call with analysts, Clarence Otis, Darden’s executive chairman and chief executive, the company had evaluated a potential real estate investment trust (REIT).

“As we went through that evaluation,” Otis said, “we believe that the value creation opportunity is limited. And we believe that, that's the case because the Darden REIT may trade at a lower multiple than others so the net lease REIT and the substantial debt breakage cost that are involved. And so that is not something that we think makes sense going forward.”

Otis added that the company’s analysis saw “no diversification, really, in a Darden REIT, and the debt breakage costs are hundreds of millions of dollars.”

Brad Richmond, Darden’s chief financial officer and senior vice president, added that of the current 705 Red Lobster units, 473 are on owned real estate. That owned land would move to the spun-off Red Lobster company, he said.

Barington said it was “encouraged that the company has acknowledged that a separation of Darden into two independent companies,” but “unfortunately, following the separation of Red Lobster, Darden will still be left managing seven disparate brands with an infrastructure that we believe is too complex and burdened to compete with its more focused and nimble competitors.”

Barington also said it still recommends separating Olive Garden from Darden’s other higher-growth brands.

“Given the extensive list of benefits that Darden has stated will be achieved from the separation of Red Lobster,” Barington said, “we think that it is only logical that Darden should do the same with respect to its largest brand that accounts for over 40 percent of the company's revenue.”

For the Nov. 24-ended second quarter, Darden reported a 41.1-percent decline in profit, to $19.6 million, or 15 cents per share, from $33.6 million, or 26 cents per share, in the prior-year period. Revenue rose 4.6 percent, to $2.05 billion from $1.96 billion in the same period last year.

Darden released its Red Lobster spin-off plan when it released those earnings.

“Unfortunately, Darden's proposed plan appears to us to be more of an attempt to do the minimum necessary to maintain the status quo than an effort to formulate a truly comprehensive strategy to improve long-term shareholder value,” Barington said.

Barington said it would release further details about its Jan. 30 presentation later this month.

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