Activist investor spurs Darden to serve up Red Lobster

Darden Restaurants has put its ailing Red Lobster chain up for sale, in an attempt to defuse an activist shareholder campaign and to rid itself of a worsening drag on its earnings.

The company, whose other brands include US mid-market staple Olive Garden and LongHorn Steakhouse, also promised to expand a cost-savings drive and to change the way it pays executives.

The moves, which were the result of a board review conducted with the help of Goldman Sachs, demonstrate the increasingly swift impact that activist investors can have on a company’s strategy.

However it falls far short of a full victory for Barington Capital, the New York hedge fund which has been demanding change since building a stake of more than 2 per cent earlier this year.

In a presentation made public this week, Barington set out its case for separating the company into three: putting Red Lobster and Olive Garden into one company; the faster-growing brands into another company; and the property portfolio into a tax-efficient real estate investment trust.

Jim Mitarotonda, chief executive of Barington, called the Darden plan “incomplete and inadequate”. He said: “We believe that Darden can and should be doing more to improve value for its shareholders.”

The company’s latest quarterly results on Thursday reflected the continuing disappointing performance of Red Lobster, which is famous for its hearty seafood but has suffered from the rise of faster-service restaurant chains such as Chipotle.

The division will post same-venue sales decline of 4-5 per cent this fiscal year, while Olive Garden will also be down 1-2 per cent, Darden said, explaining cuts to its sales and earnings forecasts. Instead of a 3-5 per cent decline in earnings per share this year, it is now expecting a decline of up to 20 per cent.

Darden shares were down 3.6 per cent by the close of trading in New York.

Red Lobster has 705 restaurants in the US and Canada and had $2.62bn in sales last fiscal year. The company said it would entertain offers for the division, or would spin it off as a separate company by early 2015.

In other moves designed to sharpen focus on improving performance and increasing the scope for cash returns to shareholders, Darden will suspend Olive Garden restaurant openings for at least three years, eschew further acquisitions, and start to compensate executives based on same-store sales and free cash flow.

“This is a step that will better align management incentives with two performance measures that are even more important given the other changes we are making, and that play a significant role in driving value creation in the restaurant industry,” said Clarence Otis, Darden chief executive.

Barington took public its stinging critique of Darden management this week, saying they had presided over a company with bloated head office costs and that its brands were losing their distinctiveness because chefs and managers were hopping too often between restaurant chains.