Darden details post-split plan for Red Lobster

Rescue efforts are under way for Red Lobster following Darden Restaurants’ December announcement to…

Rescue efforts are under way for Red Lobster following Darden Restaurants’ December announcement to sell or spin off the seafood chain.

During a March 3 conference call with analysts, Darden detailed progress on its comprehensive strategic plan, which also includes reducing unit growth for Olive Garden and LongHorn Steakhouse, lowering capital expenditures and forgoing acquisitions of additional brands and increasing operating support cost savings.

Darden said its sales process for Red Lobster is on track, and a new management team for the chain has been appointed.

Additionally, a three-pronged plan is in place to drive sales and profitability at the separated Red Lobster. First, the chain will drive a focus on seafood quality and variety with fresher ingredients and product offerings aligned to key occasions and local preferences.

The second priority includes streamlining restaurant operations to drive efficiency and enhance affordability for Red Lobster’s key consumer base. Third, the company said it will tailor marketing and promotional strategies to core customers.

“What is important is that this is a strategy, that given the highly integrated nature of Darden’s operating platform, would require us to put in place dedicated support resources for Red Lobster in key areas, including marketing, culinary and human resources,” said Clarence Otis, chairman and chief executive officer for Darden. “As I have said, it is a strategy that would increase the downward pressure that Red Lobster already has on Darden’s sales, earnings and margin growth. So, we believe a separation is appropriate, and … it would create two independent and excitingly positioned companies, each appealing to a separate and distinct style of shareholder.”

Red Lobster’s same-restaurant sales volatility has steadily dragged down Darden’s overall performance, due in part to the chain’s diverging priorities and customers from that of the operator’s other brands, which also include The Capital Grille, Yard House, Bahama Breeze, Seasons 52 and Eddie V’s Prime Seafood.

“All of our brands have been focused on two things: maintaining relevance to guests who fit their core profile, increasing relevance and pockets of consumer strength that are outside the core,” Mr. Otis said. “…when we look at household income as an example, Olive Garden and Longhorn have been able to successfully expand their guest base across the spectrum, with especially good progress among consumers in the middle and top thirds. Conversely, Red Lobster has not. … This same dynamic is at work to various degrees, when we look at generational and other segmentation.”

A separation, he said, will enable Red Lobster to focus in a more singular way on keeping its core customer base, while the remaining brands may continue to retain and broaden theirs.

Meanwhile, Darden has moved forward with a brand reinvention for Olive Garden, which includes a comprehensive menu overhaul, robust operations and service improvement, a new approach to advertising and promotion and a revamped logo and restaurant design.

Not everyone is on board with Darden’s efforts, however. Starboard Value L.P., which owns approximately 5.5% of Darden’s outstanding common stock, recommended in a Jan. 21 letter that the casual-dining operator delay its spin-off of Red Lobster in pursuit of alternative options, such as a company-wide cost-reduction plan or sale of the company’s real estate. And last September, Barington Capital Group, L.P., which holds more than 2% of the company’s shares, pushed for Darden to create two independently managed, publicly-traded restaurant operating companies that would separate Olive Garden and Red Lobster from the operator’s higher-growth brands.

During the call, Darden addressed alternative considerations, including the spin-off of Olive Garden and sale of real estate.

“We have also considered options for S.R.G. (specialty restaurant group) and LongHorn Steakhouse as other potential separation candidates,” said Brad Richmond, chief financial officer. “That being said, whenever we have concluded risk analysis across a wide range of financial metrics, including cash flow implications, debt allocations, credit impact, and our ability to effectively return capital to our shareholders, it has become abundantly clear that these separations are less viable than the Red Lobster alternative.”