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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
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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