Darden Ditching Seafood as Red Lobster Flounders

Darden Restaurants will divest its Red Lobster seafood chain and slash spending as the struggling company confronts persistently poor financial results and a hedge fund that has been agitating for changes. Today’s results, which missed Wall Street’s expectations, highlight a continuing problem for Darden and other casual dining chains: Americans are no longer going out to eat as often as they did before the 2008 financial crisis.

The biggest problem at Darden is Red Lobster, where sales dropped 4.5 percent in the last quarter and customer traffic was down 7.7 percent. Overall, Darden said its full-year profit for fiscal 2014 will decline as much as 20 percent from 2013, with same-store restaurant sales all falling at Olive Garden, Red Lobster, and LongHorn Steakhouse.

Darden said it would complete a tax-free spinoff of Red Lobster in mid-2014 but would also contemplate a sale of the chain, which has 705 locations in the U.S. and Canada and had $2.6 billion in sales last year. “While we are highly confident the future is bright for both Red Lobster and Darden excluding Red Lobster, we also recognize that the operating priorities, capital requirements, sales and earnings growth prospects, and volatility profiles of the two parts of the business are increasingly divergent,” Darden Chairman and Chief Executive Clarence Otis said in a statement today. The company also said it would halt its expansion into new brands—it has eight now, including Olive Garden, Capital Grille, and Yard House—and curb the pace at which it opens new restaurants. Darden also said it will bolster an effort to cut annual costs, adding $10 million to the previous $50 million goal.

“While we to some degree applaud this unexpected move as an effort to unlock shareholder value, we are somewhat puzzled that what will be left behind is still a seven-brand company in an industry in which succeeding over the long term with one brand can prove challenging,” Janney Capital Markets analyst Mark Kalinowski wrote in a client note today.

Kalinowski said that Darden management may have been better served by separating its mature, flagship brands, Olive Garden and Red Lobster, into one group distinct from the smaller, “growthier” properties, such as LongHorn Steakhouse and Bahama Breeze. That’s the same strategy advocated by Barington Capital Group, a New York hedge fund pushing Darden to boost its performance with a split of the brands and a publicly traded real estate unit. Barington owns 2.8 percent of Darden’s shares, according to Bloomberg data.

In a statement Thursday, Barington Chairman and CEO James Mitarotonda called Darden’s announcement “incomplete and inadequate” and “fails to address significant additional opportunities to enhance long-term shareholder value, including placing its real estate into a REIT.”

On a conference call with analysts, Otis said that Red Lobster’s sales and earnings are far more volatile than Olive Garden’s, which represents most of Darden’s sales. Olive Garden is in the midst of an operational revamp, and executives said they were pleased by the early results.

Darden shares fell more than 6 percent in morning trades today. They have gained about 10 percent this year, trailing rival restaurant operators.

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