Darden Plans to Split Off Red Lobster Restaurant Chain

Darden Restaurants Inc., owner of the Olive Garden and LongHorn Steakhouse chains, plans to separate its Red Lobster business, halt acquisitions and cut expenses as restaurant sales lose momentum.

Darden, based in Orlando, Florida, said today in a statement that while it expects to execute a tax-free spinoff of Red Lobster to shareholders, the company also may consider selling the business. Sales at Red Lobster, a seafood chain with 705 locations in the U.S. and Canada, fell 1.9 percent to $2.62 billion in the year through May 26.

Restaurant chains including Darden’s Olive Garden and Red Lobster have been struggling to lure diners as cash-strapped Americans eat out less, prompting Darden to lower its earnings forecast for the current fiscal year today. In October, New York hedge fund Barington Capital Group LP took a stake in Darden and said the company has potential to improve shareholder returns.

The value of Red Lobster “remains an open question,” Sara Senatore, a New York-based analyst at Sanford C. Bernstein & Co., said in a research note today. Spinning off Red Lobster and reducing capital expenditures and other costs “could result in only modest changes in performance,” she said.

Darden fell 3.6 percent to $51.02 at the close in New York for the biggest decline since Sept. 20. The stock has advanced 13 percent this year, compared with a 20 percent gain for the Standard & Poor’s 500 Restaurant Index.

‘Incomplete’ Plan

“We view the plan Darden announced today as incomplete and inadequate,” Barington Chief Executive Officer James A. Mitarotonda said in an e-mailed statement. “The plan fails to address significant additional opportunities to enhance long-term shareholder value,” including putting its real estate into a real estate investment trust, he said.

Barington earlier this month proposed a plan to investors that included restructuring Darden and said the move could increase its value to as much as $80 a share. The hedge fund holds about 2.8 percent of Darden’s stock, according to data compiled by Bloomberg.

Profit excluding certain items will decrease as much as 20 percent in the fiscal year that ends in May 2014, Darden said today. The restaurant operator previously estimated a decline of as much as 5 percent.

Sales Slide

Same-store sales slid 4.5 percent at Red Lobster in the second quarter, the company said. Analysts had projected a drop of 2.1 percent. Chief Financial Officer Brad Richmond said today on a conference call with analysts that Red Lobster’s comparable-store sales would fall as much as 5 percent in the current fiscal year.

Kim Lopdrup, president of Darden’s specialty restaurant group and new business, will become chief executive officer of Red Lobster after the separation, the company said.

Darden also said it will suspend adding new Olive Garden locations and plans a more limited expansion at LongHorn Steakhouse, which will combine to lower capital spending by at least $100 million annually. The company said it will also stop making acquisitions for the “foreseeable future.”

Net income in the three months ended Nov. 24 fell 41 percent to $19.8 million, or 15 cents a share, Darden said. Excluding some items, profit was 20 cents a share, matching analysts’ average estimate. Sales rose 4.6 percent to $2.05 billion, trailing analysts’ $2.07 billion projection.

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