Please ensure Javascript is enabled for purposes of website accessibility

Red Lobster's Pot Is About to Boil Over

By Rich Duprey - Feb 22, 2014 at 2:00PM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

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

The future of Darden Restaurants (DRI 0.76%) 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' (BLMN 2.86%) 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.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Stocks Mentioned

Darden Restaurants, Inc. Stock Quote
Darden Restaurants, Inc.
DRI
$126.04 (0.76%) $0.95
Bloomin' Brands Stock Quote
Bloomin' Brands
BLMN
$21.56 (2.86%) $0.60

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning service.

Stock Advisor Returns
344%
 
S&P 500 Returns
120%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 05/28/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.