Olive Garden's as Fixed as It'll Get

After big changes and hefty stock gains, the work gets harder.

Check, please. 

Starboard Value's Jeff Smith stepped down on Tuesday as chairman of the board at Darden Restaurants, marking the end of a tumultuous run as activist-in-chief and a job well done at the Olive Garden operator. Shares fell about 4 percent on the news, as investors saw an opportunity to take their gains and follow Smith out the door. 

Tasty Returns

Darden's shares rose 38 percent after Starboard disclosed a stake in the restaurant chain

Source: Bloomberg

It's a good time for investors to get out -- or at least lock in some gains. Before Tuesday's drop, Darden's shares had jumped 38 percent to all-time highs since Starboard disclosed its stake back in 2013. With a turnaround plan now in place and most of the excitement in the past, why wait around to see if management can carry out the humdrum, daily execution? Everyone knows the appetizers are often the best part of the meal, anyway. 

Darden on Tuesday reported its fifth consecutive increase in sales at established locations and bumped up its 2016 outlook for earnings and comparable sales, helped by new marketing, catering programs and online offerings. Diners seem to like the new menu at the Olive Garden, Darden's largest chain, which now offers simplified options, value items and more high-priced appetizers, alcoholic drinks, and desserts. 

Appetizing Sales

Darden has posted 5 consecutive quarters of same-store-sales increases

Source: Bloomberg Intelligence

Helping profits are behind-the-scenes cost-cutting efforts, from renegotiating contracts for landscaping and linens to spinning off more than 400 of the company's 1,500 restaurants into a separate investment trust. New tablets that let diners check out on their own helped Darden restaurants close out checks seven minutes more quickly than in the past, cutting labor costs and possibly boosting traffic.

But the question now is whether Darden can keep the momentum going, especially with pre-Starboard weak sales fading into the past, making year-over-year comparisons less flattering.

The rest of the casual dining industry seems to be suffering as restaurant-goers regain their appetite for fast-food chains such as McDonald's and Burger King. Competitors from Chili's operator Brinker International and Outback Steakhouse operator Bloomin' Brands have seen declining sales. Customer traffic across all casual dining chains hasn't increased in more than a year, according to Knapp Track Index, which measures restaurant sales and traffic.

Darden got a much-needed jolt from Starboard's Smith, who stands out from the activist-investor pack. As my colleague Tara Lachapelle has written, activist shareholders these days have been acting more like stock-pickers than the hard-charging investors once known for really shaking things up. 

But Starboard avoided the slacktivism. Perhaps best-known for a 300-page opus on how to boost earnings and simplify the business -- including suggestions to salt the pasta water and go easy on Olive Garden's breadsticks -- Smith and fellow board members started their service by waiting tables, greeting guests and helping in the kitchen at Darden's restaurants. 

salt the water

As Smith turns his attention to other targets, it's up to Darden to continue spicing things up amid softening industry trends.

Starboard's presence will still be felt even after Smith's departure. Though it has trimmed its stake from more than 9 percent and will likely keep cashing out, Starboard still has a 5.2 percent stake in Darden. Many of the board members it forcefully helped install remain, as does CEO Gene Lee.

But as far as investors are concerned, perhaps it's time to find another place to dine. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shelly Banjo in New York at sbanjo@bloomberg.net

    To contact the editor responsible for this story:
    Mark Gongloff at mgongloff1@bloomberg.net

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