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Investors Lose Appetite for Darden; Activist Investors Are Furious Over Decision to Sell Red Lobster for $2.1 Billion

Investors Lose Appetite for Darden

Activist Investors Are Furious Over Decision to Sell Red Lobster for $2.1 Billion

SPENCER JAKAB

June 19, 2014 3:35 p.m. ET

Darden Restaurants Inc. DRI -0.40% has had a lot on its plate lately, but it may regret skipping the seafood course.

Activist investors are furious with Darden for agreeing last month to sell Red Lobster, its second-largest chain, for $2.1 billion. Some are calling for the entire board to be replaced. Fiscal fourth-quarter results, due on Friday, almost seem like an afterthought given the larger debate on strategy.

Ironically, weak performance from Red Lobster might dull criticism that it essentially was given away. Same-store sales slumped 8.8% in the frigid fiscal third quarter. The drop in the latest quarter likely wasn’t nearly as severe, but Red Lobster’s performance probably was the weakest in Darden’s stable again.

Overall results won’t look great either, according to analysts polled by FactSet. They see earnings per share dropping to 94 cents in the period through May from $1.01 a year earlier.

To the activists, the Red Lobster deal looks fishy. But then so were some of the very same funds’ proposals before it was struck. There may have been more tax-efficient maneuvers available such as a spinoff. But a tired chain in a weak sector unsurprisingly fetched a so-so price. The deal creates the appearance of progress without enhancing value.

Overall, same-store sales this fiscal year are seen dropping by 2.8%, which would be worse than in recession-racked 2009. According to competitor Cracker Barrel Old Country Store Inc. CBRL +0.04% —a rare exception to a lousy industry trend—the number of U.S. casual eateries has grown by 9% since 2006 even as customer traffic has dropped by 9%.

There are some hopeful signs for restaurants. Newer players with attractive niches such as Kona Grill Inc. KONA -5.77% and Chuy’s Holdings Inc.CHUY +0.84% are doing well. And Darden has invested in similar concepts with similarly promising visitor numbers.

Even with struggling Olive Garden now comprising more than half of sales, Darden’s growth should look better as its smaller, more successful chains make up a larger share of revenue than before. Earnings will also get an artificial boost from extra share buybacks using cash from the sale.

The stock’s 15-percentage-point deficit versus the S&P 500 since Darden announced its plan in December shows the market’s verdict, though: Even without Red Lobster, this company is in hot water.

 

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About bambooinnovator
KB Kee is the Managing Editor of the Moat Report Asia (www.moatreport.com), a research service focused exclusively on highlighting undervalued wide-moat businesses in Asia; subscribers from North America, Europe, the Oceania and Asia include professional value investors with over $20 billion in asset under management in equities, some of the world’s biggest secretive global hedge fund giants, and savvy private individual investors who are lifelong learners in the art of value investing. KB has been rooted in the principles of value investing for over a decade as an analyst in Asian capital markets. He was head of research and fund manager at a Singapore-based value investment firm. As a member of the investment committee, he helped the firm’s Asia-focused equity funds significantly outperform the benchmark index. He was previously the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. KB has trained CEOs, entrepreneurs, CFOs, management executives in business strategy, value investing, macroeconomic and industry trends, and detecting accounting frauds in Singapore, HK and China. KB was a faculty (accounting) at SMU teaching accounting courses. KB is currently the Chief Investment Officer at an ASX-listed investment holdings company since September 2015, helping to manage the listed Asian equities investments in the Hidden Champions Fund. Disclaimer: This article is for discussion purposes only and does not constitute an offer, recommendation or solicitation to buy or sell any investments, securities, futures or options. All articles in the website reflect the personal opinions of the writer.

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