Restaurant analysts reacted cautiously to Friday’s ouster of Darden’s entire 12-member board by activist investor Starboard Value L.P.’s slate of directors.
In notes issued Friday and over the weekend, following Darden’s annual shareholder vote, analysts expressed concern on what the new board would address first in Starboard’s 294-page “Transforming Darden Restaurants” report released in September, and shareholders’ general dissatisfaction with the prior board’s oversight.
Stephen Anderson, an analyst with Miller Tabak + Co., said the shareholder vote was “a convincing mandate from investors who had grown impatient with the company’s lackluster performance, and were disappointed that more value could not be extracted from the recent sale of Red Lobster.”
Orlando, Fla.-based Darden’s board drew intense criticism from activist investors with its July sale of the 704-unit Red Lobster brand in a $2.1 billion deal with Golden Gate Capital.
The sale left Darden with 840-unit Olive Garden, for which it has laid out a turnaround plan, and 465-unit LongHorn Steakhouse, as well as the Specialty Restaurant Group, including The Capital Grille, Yard House, Seasons 52, Bahama Breeze and Eddie V’s.
Anderson said the new board has placed a high priority on naming a new chief executive to replace outgoing CEO Clarence Otis, who was also the company’s chairman.
“We expect the board to seek management candidates with turnaround experience in the restaurant industry,” noted Anderson, adding that he expects Darden’s “first course of action will be to sustain the positive sales momentum at Olive Garden, and expect former concept head and new board member Brad Blum to play a significant role in Olive Garden’s revival.”
Blum served as president of Olive Garden from 1994 to 2002, and has led restaurant brands including Burger King and Romano’s Macaroni Grill.
Nicole Miller Regan, senior research analyst at Piper Jaffray & Co., said in a note that her team was “taking a more cautious stance” on Darden’s stock as it looked “for more clarity on forthcoming changes to leadership,” especially at the chief executive level.
“We maintain that human capital trumps financial capital,” Regan noted, adding that Darden’s current chief operating officer Gene Lee and Olive Garden brand president David George had “been instrumental in the recent sales momentum observed at Olive Garden.”
“Looking forward, we view both executives of paramount importance to delivering further improvement,” Regan said.
Beyond the chief executive and other management changes, David E. Tarantino, an analyst with Baird Equity Research, said he saw “several risks related to possible management disruption/turnover and the longer-term implications” of some of Starboard’s announced strategies for Darden.
Among those, Tarantino highlighted Starboard’s plans for cutting operating costs to improve margins, turning around top-line fundamentals for Olive Garden, selling real estate, spinning off the Specialty Restaurant Group and pursuing domestic and international franchising of the remaining brands.
Tarantino said that 100-day road map could include pursuing immediate “quick hit” operating cost-cutting opportunities; reducing corporate general, administrative and marketing expenses; and implementing revamped menu and beverage programs for Olive Garden.
“Beyond these initial activities in the first few months, we would not be surprised to see Starboard implement broader changes to the brands/operations, pursue a real estate separation (possibly in 2015), and/or spin off the Specialty Restaurant Group,” Tarantino said.
Approach to real estate
(Continued from page 1)
Anderson said the timetable for a board decision on the Specialty Restaurant Group would probably be 12 to 18 months. He also questioned the possibility of a real estate investment trust for the company’s holdings.
“We remain skeptical of Starboard’s plans to create a restaurant-only REIT, though we think one way the board may decide to monetize its real estate portfolio would be to refranchise a portion of the portfolio in certain U.S. markets, which we argue would be less controversial than the creation of a restaurant-only REIT,” Anderson said.
Overall, Tarantino said he had mixed feelings on the strategies outlined so far.
“Although some of the strategies that the new board seems likely to pursue look intriguing and almost certainly would help to boost near-term earnings, we have some concerns that the previously announced plans to fix Olive Garden may impact some of the guest-facing attributes that help to differentiate the brand,” Tarantino said.
Regan suggested investors approach Darden with caution.
“Until we can reasonably gain perspective on and visibility into the incoming leadership team's approach to running the business and effecting change we believe it is prudent to remain on the sidelines,” she noted.
“We believe that disruption from the wholesale turnover of leadership is a very real issue during this interim period,” Regan added. “That said, we remain confident in the long-term viability of the Darden portfolio and believe adept management of the company's brands can be positioned to deliver substantial guest and shareholder value.”
Regan noted that September same-store sales for Olive Garden rose 0.6 percent, and increased 3.2 percent at LongHorn Steakhouse, over the same period last year.
She added that Piper Jaffray was taking a “more cautious stance” on Darden after “the wholesale change in board leadership” and would downgrade its recommendation on the shares to neutral.
Contact Ron Ruggless at [email protected].
Follow him on Twitter: @RonRuggless
