Darden Restaurants Leaves Investors Cold With Excuses

Relying upon the increasingly popular excuse that we had snow in winter, restaurant operator Darden Restaurants (NYSE: DRI  ) said poor weather was the cause of its earnings taking a big hit as same-restaurant sales fell 140 basis points in December, 190 basis points in January, and 170 basis points in February.

Source: Wikimedia Commons.

Sure, the Southeast got socked by winter storm Pax and there were ice storms in Texas, but according to the National Oceanic and Atmospheric Administration, December saw above-average temperatures across parts of the Southeast and Mid-Atlantic while Florida had its sixth warmest December ever. Similarly, January witnessed above-average temperatures from the Rockies westward, with Arizona, California, and Nevada each recording temperatures that ranked among the 10 warmest on record. Overall for the contiguous U.S., it was the driest period since 2003 and the fifth driest January ever.

Just remember that the next time some company tries to sell you the line that it was because of snow in winter that sales or earnings were down.

Now Darden's lackluster guidance could be the result of winter appearing on schedule, but considering around 40% or so of its restaurants are located in the West, the Sunbelt, or the around the Gulf of Mexico, that's a pretty large swath of stores that was only occasionally (if at all) affected by so-called winter weather.

Darden forecast third-quarter earnings will come in at $0.82 per share, $0.11 below analyst expectations, but more than half of the miss, or $0.06 per share, is as a result of the legal costs associated with its ill-advised spinoff of its Red Lobster chain.

Source: Darden Restaurants.

After being pressured to shake up the company by hedge-fund operator Barington Capital, the restaurateur landed on the idea of a spinoff of the seafood chain as the sole means of restoring shareholder value. The private equity firm, however, thought the maneuver didn't go far enough. It wanted to see Olive Garden calved off with it; the remaining growth-oriented concepts, including Longhorn, The Capital Grille, and Yard House, packaged into another entity; and a real estate investment trust created.

It's joined in this effort by another hedge fund, Starboard Capital, which isn't so much endorsing Barington's exact plan but says releasing into the wild the damaged Red Lobster chain all by itself will destroy shareholder value and recommends Darden slow down and take a more holistic approach to fixing up the company. 

No matter, Darden continues to dismiss their efforts and yesterday laid out its case for proceeding in the manner it has. It said it considered suggestions like those presented by the hedge funds, but decided they wouldn't provide much value to shareholders and would "remove Darden from an important strategic asset."

Starboard's already pressing to have the company hold a special shareholder meeting by filing a preliminary solicitation statement with the SEC in an attempt to force the issue, and yesterday Barington responded to Darden's presentation by declaring it's time for CEO Clarence Otis to go: "Darden's deteriorating financial performance and decision to continue to separate Red Lobster without pursuing opportunities to monetize its valuable real estate have caused us to lose all confidence in the ability of Clarence Otis to manage the company."

Source: Darden Restaurants.

That's seems to be a 180-degree turn from its previous position of keeping Otis on as CEO but splitting off his duties as board chairman.

I've noted I'm not convinced Barington's got the right prescription for healing Darden, as Olive Garden isn't exactly the picture of health either -- and two ailing companies don't necessarily make a healthy one. Comps continue to drop at the pasta-themed restaurant, and menu changes along with a new logo as proposed won't gloss over these failings. Starboard may be closest to being correct when it says to slow down, reconsider, and look again at the whole picture.

Laying all the blame for Darden Restaurants' underperformance on winter weather is a slippery slope toward burying the problems in an avalanche of obfuscation. And the restaurant operator's investors deserve better than that.

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