Activist shareholder Starboard Value L.P. is escalating its campaign to replace the entire 12-member Darden Restaurants Inc. board, issuing late Thursday a detailed 294-page report called “Transforming Darden Restaurants.”
As Orlando, Fla.-based Darden released earnings Friday for its Aug. 24-ended first quarter, Starboard asked shareholders to consider its detailed operational suggestions, from adding salt to pasta water and modifying Olive Garden’s liberal breadstick policy, to addressing the company’s real estate holdings and increasing franchising.
Darden said in a statement that its "Olive Garden Brand Renaissance" is already under way. It said it will review Starboard's plan, but noted that many of the strategies "are already being implemented across our company and are showing results."
Mark Kalinowski, an analyst with Janney Capital Markets, said the board vote would be pivotal for the company, a point enhanced by Starboard’s proposals released late Thursday.
“Darden could use fresh thinking, and we are intrigued by several of the activist’s proposals,” Kalinowski said in a note Friday.
Starboard’s suggestions include domestic franchising and dividing Darden into two entities, with 840-unit Olive Garden and the 465-unit Longhorn Steakhouse in one and specialty restaurants like 54-unit Capital Grille, the 53-unit Yard House, the 40-unit Seasons 52, the 37-unit Bahama Breeze and the 15-unit Eddie V’s in another.
“One of the more intriguing activist proposals is the start of domestic franchising,” Kalinowski said. “In general, we believe that there would be significant pent-up demand by the numerous large, privately-held franchisee organizations in the U.S. to become Olive Garden franchisees. The activist identifies several states for which franchising Olive Garden may be appropriate, including Alabama, California, North Carolina, Ohio, Pennsylvania, South Carolina, and perhaps even Florida and Texas.”
Starboard also criticized Olive Garden for an outdated advertising strategy that focused too heavily on television, the failure to use salt in its pasta water, a liberal use of salad dressing that drove up costs and poor marketing of alcohol beverage sales.
In a call with analysts after earnings were released Friday, Darden president and chief operating officer Gene Lee said, “Overall, we’re encouraged with the progress we’re making with the Olive Garden brand renaissance.”
He cited such aspects of that plan as a core menu that reinforces value, simplified operations and better service, and an integrated communications platform that includes new emphasis on social media.
For example, demand for the $9.99 Cucina Mia mix-and-match menu section has doubled since it was introduced February, Lee said.
Olive Garden is also seeing reduced price sensitivity among guests from levels encountered during the last decade’s recession, he added.
In addition, the brand has completed its online ordering platform ahead of schedule, producing a 13-percent increase in to-go sales over the same period last year.
“In recent weeks, to-go sales have grown at an approximate 20 percent on a year-over-year basis,” Lee said.
Those online orders also show a 30-percent increase in check average, he added.
Net loss in first quarter
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Three Olive Garden remodels have been completed, and guest counts are tracking about 10 percent above their prior trends at those locations. The company plans to complete 75 remodeling projects this year of the 300 identified as needing work. Those restaurants, Lee said, lag other restaurants by about 200 basis points in same-store sales.
The company also now has Ziosk tabletop tablets — which, among other things, enable guests to order and pay bills directly on the device — in 11 of its Olive Garden restaurants.
“Initial results are very positive,” Lee said.
About 80 percent of guests in those units are interacting with the devices, and 60 percent of guests are paying their bills on the tablets, Lee said. The tablets also have produced an increase in add-on sales, e-club signups, survey responses and tip percentages.
“We are developing a plan to implement in the rest of the system and plan to [complete it] by the end of the fiscal year,” Lee said.
Earlier this month, Darden nominated a slate of directors that retained four current board members and gave four seats to Starboard, which owns about 8.8 percent of Darden’s shares. The proposal will be voted on at the company’s annual shareholder meeting on Oct. 10.
Starboard and another activist investor, Barington Capital Group L.P., have been pressing for changes since late last year, even before Darden said it would sell its 706-unit Red Lobster division. Golden Gate Capital acquired the brand in a $2.1 billion deal completed in July.
Citing items related to the Red Lobster sale, Darden reported Friday a first-quarter loss of $19.3 million, or 14 cents per share, compared with a profit of $42.2 million, or 32 cents per share, in the same period last year. Excluding non-recurring special items, the company's earnings were 32 cents per share. Revenue was $1.6 billion, an increase from $1.5 billion a year ago.
Same-store sales in the quarter were mixed at Darden’s two largest brands, increasing 2.8 percent at LongHorn Steakhouse and declining 1.3 percent at Olive Garden. Among the company’s specialty restaurants, same-store sales dipped 0.3 percent at Seasons 52 but increased at its other concepts, increasing 2.3 percent at Yard House, 3.9 percent at Capital Grille, 1.1 percent at Bahama Breeze and 2.5 percent at Eddie V’s.
Darden has 1,504 casual-dining restaurants.
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