Darden Restaurants Inc. outlined its plan to ignite a “renaissance” at Olive Garden as it warned investors this week of disappointing sales in its fiscal third quarter.

Executives at the Orlando, Fla.-based casual-dining company also stood by their plan to separate Red Lobster into a separate company, despite continuing pressure from activist investors Barington Capital Group L.P. and Starboard Value L.P. for broader changes.

On Tuesday, Starboard said in filings with the Securities and Exchange Commission that it had hired Charles Sonsteby, former chief financial officer at competitor Brinker International Inc., parent to Chili’s Grill & Bar, and current CFO at Michaels Stores Inc., to advise the fund in its efforts to press changes at Darden. Last month, Starboard hired Brad Blum, a former president of Olive Garden, as an advisor as well.

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On Monday, Darden warned that weather and expenses related to its Red Lobster spinoff would impact earnings for the Feb. 23-ended third quarter, saying it expects a same-store sales decline of 8.8 percent at Red Lobster and a drop of 5.4 percent at Olive Garden.

The company’s LongHorn Steakhouse chain had a same-store sales increase of 0.3 percent, and its Specialty Restaurant Group, which includes the Bahama Breeze, Seasons 52, Capital Grille, Eddie V's and Yard House brands, showed a decline of about 0.7 percent. The company will release full earnings on March 21.

Clarence Otis, Darden’s chairman and chief executive, said in a statement that Olive Garden “had a particularly difficult December,” but that same-store sales improved later on in the quarter and became “consistent with results for the casual-dining industry overall.”

Olive Garden’s same-store sales fell 10.5 percent in December, showed a 2.0-percent decrease in January, and dipped 2.6 percent in February.

“We are encouraged by the progress the Olive Garden team is making with its brand renaissance plan to elevate the guest experience and reinvigorate sales,” Otis said. Those efforts included a new core menu introduced on Feb. 24.

Stephen Anderson, a restaurant analyst at Miller Tabak + Co. LLC, said in an interview Tuesday that he sees favorable results ahead for Darden’s Olive Garden “revival” plan and further corporate cost reductions.

“The ‘Cucinia Mia’ menu, which came out on Feb. 24, is really in my view a nod to what Chipotle and other fast-casual diners have been doing,” Anderson said, “through empowering customers with different choices with a pasta, a sauce and an add-on protein. That’s something that has been going on in fast casual for years, and it’s finally making its way into casual dining.”

Repositioning, however, can present its own problems, noted Anderson.

“As you recall, Ruby Tuesday tried to move in that direction, and the customer has to give you permission to do so,” he said. “Historically, that’s been very difficult to do.”

Anderson added, “It’s really critical for Olive Garden to embrace its value heritage.”

In a presentation to analysts on Monday, Darden said the core menu changes and promotions were “aimed at broadening the choice, variety and value that Olive Garden offers guests. In addition, Darden said it was looking to position the 834-unit Olive Garden brand in the sweet spot between value and polished casual dining by emphasizing that it was “a nicer place than the price suggests.”

As part of that repositioning, Darden expects to remodel 75 Olive Garden restaurants in fiscal 2014 and 125 to 150 locations in fiscal 2016 and 2017. The revamps would entail a new look and logo that executives unveiled for analysts.

Attracting younger diners is also a challenge, Anderson said, and Olive Garden is working on that with small plate offerings and lunch promotions.

“They can work that part of the barbell as well,” he said.

Darden said in its presentation Monday that it was also working on changing Olive Garden’s plateware, launching an online ordering program later in the year and considering car-side delivery of large orders.

Company stands by Red Lobster spinoff

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Red Lobster reported a 10.2-percent decline in same-store sales for December and decreases of 12.2 percent in January and 4.5 percent in February.

After the earnings warning on Monday, James Mitarotonda, chairman and chief executive of investor Barington Capital Group, issued a statement that said: “Darden’s deteriorating financial performance and decision to continue to separate Red Lobster without pursuing opportunities to monetize its valuable real estate have caused us to lose all confidence in the ability of Clarence Otis to manage the company.”

Anderson said Darden has opportunities to reduce its selling, general and administrative expenses.

“The company has already announced $60 million in cost reductions,” he said. “I estimate that can go as much as $100 million….”

That would put Darden in the area of expenses in the early 2000s, before the LongHorn Steakhouse acquisition.

“There is such potential for them to unleash more cost savings,” Anderson said, “and a lot of that is not customer-facing.”

Darden maintains its plan to spin off or sell the 705-unit Red Lobster chain.

“Darden remains on track to execute its previously announced plan to separate the Red Lobster business through either a tax-free spin-off to Darden shareholders or a sale of the Red Lobster business. The sale process is well underway,” the company said in a statement. “The company has also begun the process of establishing separate financials and associated infrastructure for the Red Lobster business should the board determine that the spinoff alternative creates more value for shareholders.”

The company reiterated its opposition to creating a real estate investment trust for owned properties, which both Barington and Starboard have pressed.

“Full real estate separation via the formation of a REIT would introduce significant operational complexity, remove from Darden an important strategic asset, and likely not create meaningful shareholder value,” the company said in its overview to the analyst presentation, adding that a REIT would reduce Darden’s cash flow, weaken its credit profile and increase borrowing costs.

Darden owns and operates more than 2,100 restaurants with more than $8.5 billion in annual sales.

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