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Can Red Lobster Be Saved?

By  +Follow January 10, 2014 12:49PM
Tickers Mentioned:

Darden Restaurant, Inc.’s (DRI) decision to spin off the Red Lobster seafood chain was announced last month to somewhat mixed reviews. The move is expected to take place sometime later this year. While the restaurant operator of middle-tier establishments was able to separate the least exciting unit in Red Lobster, it also said that the albatross that is Olive Garden will still remain on its balance sheet for the foreseeable future.

So while this is a nice case of addition by subtraction for the main Darden group—which also operates more consumer-enticing brands such as Yardhouse, The Capital Grille, and others—it begs the question of why shareholders would want to participate in turning around the flagging franchise that carries over 700 locations nationwide?

Considering that Darden views Red Lobster as the unit weighing down its overall growth potential, a spin-off to a standalone company would be hard pressed to generate much excitement from investors. This seems much more suitable for a traditional private equity turnaround project than to have a newly created stock languish in the public market.

For the second quarter of 2014, Darden announced that Red Lobster’s same-store sales decreased by 4.6 percent. But, the struggling brand generated an estimated revenue of $2.6 billion in 2013, which accounted for about 30 percent of Darden’s total revenue.

So, for all its faults, Red Lobster is still generating revenue growth (albeit, in the low single digits) and is profitable. So the potential of a successful turnaround could offer promising rewards for patient investors.

Who Will Consider the Lobster?

The team charged with turning around the restaurant chain will includes Kim Lopdrup, who steps back into the Red Lobster CEO role after his 2004 to 2011 stint. He was previously president of Darden’s specialty restaurant group and new business.

Salli Setta remains in her role as Red Lobster’s president, and Brad Richmond steps in as the new CFO.

Turnaround investors know, more than anything, the acumen of a company’s management team is invaluable during periods of a company’s revival. Their vision has to align with those of consumer tastes—see Ron Johnson and failure of JC Penney (JCP) . That task is hard enough already, but when you factor in that Red Lobster is a multi-national operation, it’s that much more daunting.

Then there’s execution. While rock star CEOs are valued for their forward-thinking concepts and charismatic personalities, a good management team needs to ensure that a company trying to lean down is operating at full efficiency.

No Middle Road

Consumer tastes have splintered off a bit over the past several years. During the recession, the middle class was squeezed so hard that the majority of consumers traded down to more cost-effective dining options. High-end consumers, which were less affected, maintained their tastes.

For a company like Red Lobster and Darden Restaurants, the suburban template strategy seemed more like a product of a different time. The advantages of consumer brand recognition no longer carry the same weight as before, especially with new on-demand apps like Yelp (YELP) or Groupon (GRPN) to direct consumers to debatably superior alternatives.

That said, Wall Street loves turnaround potential. What’s more, the appetite for spin-off opportunities seems healthy. Over the last year, the Guggenheim Spin-Off ETF ($CSD) is up over 45 percent. Granted, some spin-offs attract investors because the unit being divested offers higher growth potential than the parent company. In this case, Darden is clearly trying to unload what may be perceived as dead weight as it tries to refocus its business into different demographics. It’s not entirely different from the failed proposed spin-off Netflix offered in 2011 when it suggested separating its DVD-by-mail business into Qwikster.

But retail turnarounds are notoriously tough, but it's not impossible. Gap (GPS) and Starbucks (SBUX) are prime examples of companies that managed to right the ship. Then there are the Sears (SHLD) and Abercrombie & Fitch Co. (ANF) . So it’ll be interesting to see how the Red Lobster recovery effort plays out—though that’s usually true with most turnaround stories in the early going. Will the management team choose to reinvest in quality and rehabilitate its image with consumers, or go the low-cost route and try to price its competitors out of the way? Or will a truly innovative strategy be introduced that warrants the risk investors would be taking on this spinoff at its current

Results for DRI
23 Apr 14 04:49:41
RT @KeithMcCullough: $DRI +3.8% (one of our Top 10 Investing Ideas - weekend long only product) post today's decision
23 Apr 14 04:48:45
RT @KeithMcCullough: CNBC tried to have a conversation about the $DRI conversation Howard Penney originated - w/out mentioning him of course
23 Apr 14 04:36:51
Investor gets votes for Darden meeting $DRI http://t.co/IM0ehTaJEe @HedgeyeHWP
Maryland Churchill
23 Apr 14 04:27:12
Looking for the next $DRI $AVP $LECO $IR Click http://t.co/BE9wiG9vgi
Twanna Chism
23 Apr 14 04:20:32
Regretting your investment in $DRI $DLPH $GWR $GAIN #wallstreet http://t.co/jqvXDKZSs0
Howard Penney
23 Apr 14 03:49:44
My $DRI note today uses the French saying "L'heure entre chien et loup" and refers to the moments after sunset when the sky darkens
Cramer's Shirt
23 Apr 14 03:48:03
$DRI RT @HedgeyeHWP: Investor gets votes for Darden meeting http://t.co/aX74mX6wJq
Howard Penney
23 Apr 14 03:45:04
Good morning Orlando! $DRI WOW what a letter from Starboard!
Constantine Greyson
23 Apr 14 03:28:52
$ALTR Todays movers to research $MAA $DRI $GAIN #moneymanagement http://t.co/MsgYsUyRDM
23 Apr 14 03:02:00
$DRI Darden - DEFA14A (Additional Proxy Soliciting Materials (definitive)) SEC Filing
23 Apr 14 03:01:50
$DRI Darden - DFAN14A (Additional Proxy Soliciting Materials - Non-Management (definitive)) SEC Filing
Aide Lemmon
23 Apr 14 02:52:45
$DRI Darden Receives Notice From Starboard Rega http://t.co/78jYwaY6li
Yahaira Landry
23 Apr 14 01:39:06
Looking for research on $IPGP $DRI $ODFL $DO #wealthmanagement http://t.co/5JbMIXBnXT
23 Apr 14 01:04:11
$DRI Dividend Growth On Hiatus For Darden Restaurants? http://t.co/RROuKatdkU
23 Apr 14 00:58:20
$DRI Darden's Spinoff Move A 'Bad Idea': Starboard http://t.co/EvLH7Se8As
Kamren Martinez
23 Apr 14 00:10:08
$EOG Are you considering selling $MCD $DRI $GLD #financial http://t.co/29yxz37snx
22 Apr 14 23:42:05
$DRI - Starboard Says Dardens Red Lobster Spinoff `Bad Idea -> http://t.co/64YJ83iC0X #stock #stocks #stockaction
Babara Blodgett
22 Apr 14 23:42:03
Top #Stocks today. Find out why. $DRI $TMUS $MDT $DO #wallstreet http://t.co/Sct1r6jHb2
22 Apr 14 23:39:05
$DRI Starboard Asks Darden for Investor Meeting on Red Lobster http://t.co/QotQ4rx72v
22 Apr 14 23:15:17
$DRI - [video] Case against Red Lobster spinoff -> http://t.co/TvCKmoVBsY #stock #stocks #stockaction
22 Apr 14 23:00:02
$DRI - [video] McDonalds needs US to turn positive: Analyst -> http://t.co/RGiN2lSJhl #stock #stocks #stockaction
22 Apr 14 22:24:15
$DRI Darden Receives Notice From Starboard Regarding Special Meeting Of Shareholders http://t.co/KbYzLPKJcz
Stock News 24
22 Apr 14 22:19:12
$DRI - Dividend Growth On Hiatus For Darden Restaurants? -> http://t.co/8N8i2fGzD1 #stock #stocks #stockaction
Stock News 24
22 Apr 14 22:19:01
$DRI - Starboard wins Darden shareholder consent: Sources -> http://t.co/AfVoofvw5i #stock #stocks #stockaction
22 Apr 14 22:12:16
$DRI - Starboard Asks Darden for Investor Meeting on Red Lobster -> http://t.co/UuSLfWWkyh #stock #stocks #stockaction
22 Apr 14 22:02:25
$DRI - [video] Starboard wins consent for special meeting -> http://t.co/TzCr0kFXeG #stock #stocks #stockaction
22 Apr 14 22:00:40
$DRI - Starboard wins consent to call special Darden meeting, CNBC reports -> http://t.co/hahifGHDgm #stock #stocks #stockaction
Stock News 24
22 Apr 14 21:34:30
$DRI - Starboard wins backing of 54 pct Darden shareholders for special meeti... -> http://t.co/UuK30BjKZb #stock #stocks #stockaction
Basil Gall
22 Apr 14 20:55:37
Are you Bullish on these #stocks $LEN $DRI $NI $LGND #overvalued http://t.co/PhzBWxb8sJ
22 Apr 14 20:23:07
$DRI Starboard Delivers Written Requests to Call a Special Meeting From Holders of More Than 55% of Darden's Outstanding Shares...
Romulus Eatonue
22 Apr 14 20:13:18
$DRI Darden Receives Notice From Starboard Regarding http://t.co/oux3AQiia5
22 Apr 14 20:12:22
$DRI - Darden Receives Notice From Starboard Regarding Special Meeting Of Sha... -> http://t.co/gERGo7A2WZ #stock #stocks #stockaction
22 Apr 14 20:00:38
$DRI Starboard Asks Darden for Holder Meeting on Red Lobster http://t.co/WtrV7RYkef
22 Apr 14 19:54:36
$DRI Darden Receives Notice From Starboard Regarding Special Meeting Of Shareholders http://t.co/OpfZSueusw
22 Apr 14 19:43:06
$DRI Darden investor wins backing for vote on Red Lobster divestiture http://t.co/ZrUFnTymxC
Rey Latimer
22 Apr 14 19:09:56
$DRI Darden investor wins backing fo http://t.co/uYmHSiuFcf
22 Apr 14 18:25:47
RT @JohnAGordon: $DRI: time for both sides to get better logic, see my note...http://t.co/7DpmfP60Hc CNBC: http://t.co/vKUrb0kZsM
22 Apr 14 18:12:34
$DRI - Darden investor wins backing for vote on Red Lobster divestiture -> http://t.co/C85NQqk5pQ #stock #stocks #stockaction
22 Apr 14 17:47:05
$DRI Darden investor wins backing for vote on Red Lobster spin off-CNBC http://t.co/py9gs2yfCx
22 Apr 14 17:29:38
$DRI [$$] Starboard Secures Votes to Force Darden Holder Meeting http://t.co/IGXvCQANU4
Luther Garcia
22 Apr 14 17:27:03
Stocks I'm keeping my Eye on...should you? $DRI $TMUS $ROL $ISRG Must have http://t.co/rI07skKRLK
22 Apr 14 17:12:12
$DRI - Starboard Asks Darden for Holder Meeting on Red Lobster -> http://t.co/W1AaYK2IGm #stock #stocks #stockaction
22 Apr 14 17:12:08
$DRI - Darden Receives Notice From Starboard Regarding Special Meeting Of Sha... -> http://t.co/qFgRNz6ep3 #stock #stocks #stockaction
22 Apr 14 17:08:06
$DRI Why Darden Restaurants (DRI) Stock Is Up Today http://t.co/DsYjhWoMAV
22 Apr 14 17:02:09
$DRI Why Darden Restaurants (DRI) Stock Is Up Today http://t.co/J7KEpQq9b6
22 Apr 14 16:50:02
Darden Restaurants : Receives Notice From Starboard Regarding Special Meeting Of Shareholders http://t.co/lxaJc3ApZw $DRI
22 Apr 14 16:48:34
$DRI Darden - Darden Receives Notice From Starboard Regarding Special Meeting Of Shareholders
22 Apr 14 16:12:23
$DRI - Starboard Delivers Written Requests to Call a Special Meeting From Hol... -> http://t.co/3xv3MXulYB #stock #stocks #stockaction
22 Apr 14 16:00:52
S&P500 #Stocks Performance $AGN $NFLX $HOG $WYNN $GNW $PRGO $VRTX $DRI $MU $NDAQ $REGN $MYL $GME $ETFC more@ http://t.co/ppYlnKK6xM
22 Apr 14 15:53:29
RT @theflynews: $DRI Starboard urges Darden not to separate Red Lobster prior to annual meeting: Full Story http://t.co/fQY0I2Lj1o
By  +Follow January 10, 2014 12:49PM



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