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Expected Darden CEO pick could represent major change

Expected Darden CEO pick could represent major change

Gene Lee’s operations background is change from operator’s recent deal-making strategy

Darden Restaurants Inc. and its new chairman, Jeffrey Smith, didn’t look far for its next CEO.

Gene Lee, who was named permanent CEO on Monday, was considered a likely candidate for the job almost from the day in July when Clarence Otis announced his retirement plans amid a historic proxy fight for the company. Lee was certainly a consideration in October, after a slate from activist investor Starboard Value LP won all 12 seats to the company’s board, and Lee was named interim CEO.

The appointment was so expected that Darden’s stock barely moved on Monday after the announcement. The company’s stock ended the day up less than 1 percent.

“Everybody thought he was going to get the job,” Bernstein Research analyst Sara Senatore said. “He is well regarded. Most people in the industry think highly of him, so it made sense.”

But just because Lee was the obvious choice doesn’t mean he doesn’t represent a major change for the Orlando, Fla.-based casual-dining operator. Under Otis, who was a former CFO, the company focused on making deals. It acquired numerous restaurants, from growth chains like Yard House to more established names like LongHorn Steakhouse.

Lee, however, is an operator. The 53-year-old has more than 30 years of industry experience, and joined Darden in 2007 during its acquisition of LongHorn owner RARE Hospitality International, where he had been president and chief operating officer. Lee was also chief operating officer at Darden before being named interim CEO in October.

“He has more of an operator’s background than any of the previous Darden executives,” KeyBanc Capital Markets analyst Christopher O’Cull said. “He’ll be more focused on operational excellence rather than a deal-type culture.”

It’s believed that many of the operational elements of Starboard’s 300-page plan to improve Darden, released during the proxy fight, had previously been recommended by Lee, Senatore wrote in a note on Monday.

O’Cull said Lee will likely move the focus at Darden’s flagship Olive Garden brand to operational improvements, while shifting the menu to stick with more popular items more attuned to its Italian brand heritage. He suggested that Olive Garden could get rid of items such as burgers that don’t sell well and were aimed at the veto vote.
 
Eliminating some of those items, O’Cull said, could improve operations because the restaurants won’t be spending excess time on those excess items. “They’re going to focus on executing what Olive Garden is known really well for,” O’Cull said.

He added that Lee benefits from being considered something of an outsider, given that he came to the company as part of an acquisition. “He didn’t carry a lot of baggage,” O’Cull said. “He was somewhat of an outsider.”

But Darden’s search for a permanent CEO reportedly considered other figures from Darden’s past. The company apparently considered former Olive Garden president Brad Blum, one of Starboard’s advisors, who is now on Darden’s board, before settling on Lee, according to a report in the Wall Street Journal.

Despite the proxy fight, Darden had already shown some signs of life under Lee. All but one of the company’s seven concepts reported positive same-store sales in the second quarter ended Nov. 23. Earnings from continuing operations during the quarter more than doubled.

Lee’s appointment may also indicate that Darden is performing in the current quarter, too. “Things were moving in the right direction,” Senatore said. “He’s doing a good job.”

By naming Lee CEO, Darden’s new board also ensures some continuity and prevents a mass exodus among company managers.

Hiring Lee as permanent CEO “reduces the risk related to possible disruption that might have been caused by key leadership turnover,” Baird Equity Research analyst David Tarantino said in a note on Monday.

The company is also looking for a new CFO, after Brad Richmond said in November he would retire. That is also considered a key position on Wall Street because Starboard will look to make financial improvements at the company.

Management continuity could be important, given that all but one of Darden’s 13 board members are brand new. Bill Simon was retained as the 13th board member after all 12 of Starboard’s nominees were elected to the board in late September.

Darden could undergo significant changes, and in December Lee noted that the company is analyzing options for its real estate, and could look into the makeup of its brand portfolio or franchising.

Contact Jonathan Maze at [email protected].
Follow him on Twitter: @jonathanmaze

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