Red Lobster's Pot Is About to Boil Over

A hedge fund tries to declaw the restaurant operator in a battle over the chain's future.

Feb 22, 2014 at 2:00PM

The future of Darden Restaurants (NYSE:DRI) has been simmering like a lobster in a pot of water waiting to boil over. Now an activist investor is stirring that pot, hiring one of the restaurant operators former executives in hopes of bringing about change and possibly gaining a seat on the board of directors.


Source: Darden Restaurants.

The owner of Olive Garden, Longhorn Steakhouse, and Red Lobster is the target of a tag-team duo of hedge funds looking to shake up the lagging restaurateur. Barington Capital and Starboard Capital are seeking a significant restructuring of the company, with the former looking to have Darden spin off the Olive Garden and Red Lobster concepts into a separate company; package the remaining growth-oriented concepts, including Longhorn, The Capital Grille, and Yard House, packaged into another entity; and create a real estate investment trust.

While Darden did bow somewhat to the pressure Barington exerted, agreeing to spin off Red Lobster by itself -- but otherwise rejecting the rest of the measures -- the hedge fund says that's a foolhardy move that will hurt more than it helps. Starboard agrees, and it wants Darden to slow down, delay the spinoff, and consider a more holistic approach to fixing the business. 

Because Darden has not shown an interest in heeding either call, Starboard's turned up the flame on the simmering cauldron by hiring a former president of Olive Garden as an advisor and giving him $50,000 cash to invest in Darden stock. The maneuver will give the hedge fund insight into the restaurant operator's operations, similar to how it hired a former Staples executive when it was angling for change at Office Depot during the run-up to its acquisition of OfficeMax. The office-supply company eventually agreed to put the Staples executive on its board.

I'm not entirely convinced anyone has the right solution yet, which may make Starboard's go-slow advice best. As Barington says, releasing Red Lobster into the wild on its own when its claws still have the rubber band of dramatically falling sales around them will doom it to failure. Yet its own plan to bundle it with Olive Garden, an only marginally healthier restaurant chain, doesn't seem to be a much better proposal. As I've said, Sears Holdings showed what happens when you put two ailing concepts together: You get one big ailing company.

It's true Darden has been on an acquisition spree, slapping some diverse chains into its portfolio willy-nilly such that it has a mishmash of concepts that don't exactly form a cohesive whole. Eddie V's is a luxury seafood restaurant, Yard House serves contemporary American fare, and Bahama Breeze is a casual, island-themed chain. The established Longhorn Steakhouse has been the only main concept that's done well.

There is a larger malaise in the casual-dining segment as diners choose fast-casual options. Ruby Tuesday, Brinker International's Chili's, and DineEquity's Applebee's are all similarly suffering.

Still, we've seen Ignite Restaurant Group's (NASDAQ:IRG) Joe's Crab Shack outperform Red Lobster, enjoying a 2% increase in comps in preliminary fourth-quarter results, while Bloomin' Brands' (NASDAQ:BLMN) Bonefish Grill, a higher-end seafood restaurant, moves in on its territory. Even so, Ignite's Romano's Macaroni Grill suffered a 9% drop that's more reminiscent of Olive Garden's recent past.

Starboard Value has turned up the heat on Darden Restaurants by hiring the former insider, and now we'll have to see if the pot boils over, or whether the restaurant operator moves to quench the fire.

Pull a chair up to the table
There's a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it's one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.

Compare Brokers