Olive Garden's new boss is definitely not the same as the old one, but other than not serving so many breadsticks with dinner, can the change in leadership really make a difference at the Italian restaurant?
Last week's annual meeting for Olive Garden owner Darden Restaurants (NYSE:DRI) was the site of a rare event in investing: Shareholders completely cleaned house, tossing out the old guard board of directors in favor of the entire slate of nominees put up by activist investor Starboard Value.
What happened to "When you're here, you're family?"
Dissatisfied with the direction management and the board had taken, as well as the high-handed manner the restaurant chain treated its critics, investors sent a strong message that dismissing shareholder concerns out of hand when a middle ground could be forged would result in your being voted out.
The hedge fund's CEO Jeffrey Smith and 11 other candidates have now been installed on the board, and while they will immediately begin the search for a new chief executive to take over for Clarence Otis, who previously announced he was resigning from the position, the larger task remains turning around what is otherwise ailing brand. It might be a well-known and valuable name in dining concepts, but Olive Garden is still suffering from declining customer traffic and the new team needs to reverse that direction pronto.
During the near year-long run-up to the annual shareholder meeting, Starboard and fellow hedge fund Barington Capital battled with Darden over the future direction of the chain, believing that a holistic solution was needed for the problems it and similarly failing Red Lobster faced.
The old board, of course, made that moot by rushing through the sale of the seafood chain that left a lot of value on the table, and like so many leaders who've run on the promise of making sweeping change, now that they've been given the reins of power they must confront the reality of what can they actually do now that they're installed.
Customers are getting their fill lately
Fortunately for Starboard, Olive Garden is off to a running start, thanks to the prior management team's rebuilding efforts, including its Never-Ending Pasta Bowl promotion that helped the Italian eatery record a second consecutive month of positive same store sales, the first time since May 2013 that's happened.
Considering the cutthroat competition in Italian food that's made it hard for anyone to grow sales, Darden's achievement actually is notable.
Only Brinker International's (NYSE:EAT) Maggiano's Little Italy has consistently reported higher comps -- 18 straight quarters of positive comps -- while other chains such as Romano's Macaroni Grill and Carrabba's Italian Grill have seen their own comparable sales fall.
Olive Garden, though, had been the worst of the bunch, having recorded eight straight months of negative comps and 14 out of the last 15 months before the most recent rise. It was one of the primary reasons Starboard Value believed it and Red Lobster needed a different management team to tackle it, one solely dedicated to their turnaround without the distraction of also having to manage Darden's other restaurants, including the Long Horn Steakhouse or its portfolio of specialty restaurants like The Capital Grille and Bahama Breeze.
But with the seafood restaurant gone, what can the new Starboard board build on?
A new table setting
Last month it updated its plan for transforming Darden, building on the one it originally offered in March, and which included a 14-point plan for changing Olive Garden's direction, including:
- Recreate Italian authenticity within Olive Garden
- Offer outstanding food by instilling a "Brilliant with the Basics" mentality
- Create a dedicated ongoing wine program
- Re-establish the value proposition
- Engage customers via marketing and advertising
- Capitalize on today's technology
- Appeal to the correct demographics and their need for value
- Improve the labor mode
Starboard says if it can increase same store sales by an average of 3% for the next three years, it would return the chain to its historic average unit value of $4.8 million and would add somewhere around $10.50 per share to its stock.
Whether it can succeed remains to be seen, and though the program Starboard Value laid could seem like it's gotten into micromanagement of running a restaurant, it also shows the hedge fund did its homework and may have the recipe for turning around Olive Garden's fortunes.