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Can Red Lobster Be Saved?

By  +Follow January 10, 2014 12:49PM
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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

 
 

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions.


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Results for DRI
4-traders.com
2 Sep 14 11:55:04
DARDEN RESTAURANTS : Results of Operations and Financial Condition, Change in Directors or Principal Office... http://t.co/UrMtSI18j0 $DRI
$Stocknewsalerts
2 Sep 14 11:54:23
$DRI Darden - DEFA14A (Additional Proxy Soliciting Materials (definitive)) SEC Filing From our Stock News Alerts App
BV Services
2 Sep 14 11:49:14
$DRI Darden Restaurants Inc files Form 8-K (Events or Changes Between Quarterly Reports) SEC Filing.. http://t.co/pJ6q6gOtUL
$Stocknewsalerts
2 Sep 14 11:48:48
$DRI Darden - 8-K (Current report filing) SEC Filing From our Stock News Alerts App
TalkMarkets
2 Sep 14 11:41:59
Two Canaries In The Consumer Coal Mine $DRI $MCD $CONN http://t.co/YNtD3cCspo
Keith McCullough
2 Sep 14 11:39:14
RT @HedgeyeHWP: To be clear $DRI did not cede any seats to Starboard - $DRI was going to loose a min of 4 seats anyway.
Anjali Fluker
2 Sep 14 11:39:09
RT @HedgeyeHWP: To be clear $DRI did not cede any seats to Starboard - $DRI was going to loose a min of 4 seats anyway.
Howard Penney
2 Sep 14 11:38:47
To be clear $DRI did not cede any seats to Starboard - $DRI was going to loose a min of 4 seats anyway.
Thudder & Wicks
2 Sep 14 11:31:00
$DRI #Darden Revamps Board to Stave Off Starboard Proxy Fight http://t.co/uuTwxR6oC6
OrlandoBizJournal
2 Sep 14 10:19:51
RT @AnjaliFlukerOBJ: What's been happening at $DRI? @Darden_News forecasts fiscal 1Q loss, reveals board nominees http://t.co/0yGSK1WEGN vi…
Anjali Fluker
2 Sep 14 10:15:57
What's been happening at $DRI? @Darden_News forecasts fiscal 1Q loss, reveals board nominees http://t.co/0yGSK1WEGN via @OBJUpdate @Hedgeye
Interactive Brokers
2 Sep 14 08:26:15
#IBTI Technical Analysis - Waverly Advisors Update http://t.co/xu7rxZqoRO $DRI $BIDU $LVS $SYNA $ACAD $DGLY $NVS $PANW $NCLH
John A. Gordon
2 Sep 14 08:23:29
$DRI board: nice to see some restaurant expertise proposed. Diffs between the 2 slates highlighted. http://t.co/6DCEr8dRmc
Stock News Headlines
2 Sep 14 08:15:12
$DRI: Red Lobster Spinoff Could Have Been Avoided: Report http://t.co/2DlYrqNQJ0 http://t.co/EgoMpkjDu0
Paul Loffarelli
2 Sep 14 08:02:13
RT @Briefingcom: $DRI: Darden Restaurants guides Q1 EPS just above consensus; reaffirms FY15 guidance; new Board of Directors will... http:…
Briefing.com
2 Sep 14 07:45:22
$DRI: Darden Restaurants guides Q1 EPS just above consensus; reaffirms FY15 guidance; new Board of Directors will... http://t.co/kzfg21AAg2
$Stocknewsalerts
2 Sep 14 07:38:08
$DRI Darden - PRER14A (Proxy Soliciting Materials (revised)) SEC Filing From our Stock News Alerts App
Equity Clock
2 Sep 14 07:35:44
Quiet technical action to 10:30 AM. S&P 500 stock breakouts were $DRI, $SPLS, $CAM and $BLL
Consestimate
2 Sep 14 07:32:02
Darden Restaurants slips after updated guidance. #Bullish or #Bearish on $DRI. Share with us here: http://t.co/WPP1bSj5nM
Interactive Brokers
2 Sep 14 07:20:12
#IBTI Technical Analysis - Waverly Advisors Update http://t.co/dQFvSkzkzQ $BIDU $PANW $PAY $NCLH $DRI $GG $SYNA $TASR
Media Sentiment
2 Sep 14 07:14:10
$DRI received a new alert. Find out why at http://t.co/5udYd0Ofs6 #stocks #daytrading #trading #mkt #NYSE #NASDAQ #markets 184
Keith McCullough
2 Sep 14 07:11:40
RT @HedgeyeHWP: The strongest members of the current $DRI board are leaving. Why is the new Chairman resigning? What message did sharehold…
Howard Penney
2 Sep 14 07:10:50
The strongest members of the current $DRI board are leaving. Why is the new Chairman resigning? What message did shareholders deliver?
Cit Dates
2 Sep 14 07:06:01
Range and volume leaders $DRI $AVGO $SPLS $UA
Heckler Yessir
2 Sep 14 07:04:14
that $DRI dunk... shit
Kyle Arnold
2 Sep 14 06:55:11
The offer from $DRI also includes the resignation of non-exec chairman Charles Ledsinger. Starboard would get four of their own nominees.
Kyle Arnold
2 Sep 14 06:51:33
The concessions from $DRI came as Darden announced it would probably get more bad news with its quarterly earnings release Sept. 12.
Thudder & Wicks
2 Sep 14 06:51:26
$DRI Darden Pre-Announces Earnings, Unveils Slate For Board http://t.co/yVVm7tZHw3
Kyle Arnold
2 Sep 14 06:48:35
In what may be @Darden_News's last chance, it offers more concessions to activist investors http://t.co/KmGS0CHcfL $DRI
Benzinga.com
2 Sep 14 06:44:15
Darden Pre-Announces Earnings, Unveils Slate For Board $DRI http://t.co/KGDM8mKlaO
Jose Moreno
2 Sep 14 06:40:00
$DRI what a nice follow
Howard Penney
2 Sep 14 06:30:56
Do you think that $DRI intentionally left out what price is as a component of SSS? I do!
MarketCurrents
2 Sep 14 06:29:33
Darden Restaurants slips after updated guidance http://t.co/howx30TCc4 #premarket $DRI
Sleek Money
2 Sep 14 06:22:26
Darden Restaurants, Inc. $DRI Issues Q1 Earnings Guidance http://t.co/IZp8r4Sze3
Financial News
2 Sep 14 06:15:15
$DRI: Darden Restaurants Inc.: Darden Announces New Director Nominees For 2014 ... http://t.co/TJdApbOxhS http://t.co/TbKR8sXBeH
Pristine Trading
2 Sep 14 06:14:07
ESP Gap Down: $EXEL $NUS $DRI $CREE #stocks #stockmarket
US Banking News
2 Sep 14 06:09:14
Darden Restaurants, Inc. $DRI Issues FY15 Earnings Guidance http://t.co/X8EmkZfPT6
US Banking News
2 Sep 14 06:09:13
Darden Restaurants, Inc. $DRI Releases Q1 Earnings Guidance http://t.co/TovNa0AC6b
4-traders.com
2 Sep 14 06:00:02
Darden Restaurants : Announces New Director Nominees For 2014 Annual Meeting Of Shareholders http://t.co/oAPnf6re0K $DRI
WKRB News
2 Sep 14 05:57:51
Darden Restaurants, Inc. $DRI Issues FY15 Earnings Guidance http://t.co/HF9Q6dXewR
WKRB News
2 Sep 14 05:57:51
Darden Restaurants, Inc. $DRI Releases Q1 Earnings Guidance http://t.co/K77ymWipur
Jerry Khachoyan
2 Sep 14 05:55:43
Good Morning. Moving/gapping today: $CONN $DG $HGSH $DGLY $FEYE $ACHN $NVS $NEM $GPRO $CPWR $SPLS $DRI $CENX $FNSR $TASR $NCLH
US Banking News
2 Sep 14 05:51:31
Darden Restaurants, Inc. updates FY15 guidance to $2.22-2.30 EPS. http://t.co/CM5GnGNrYL $DRI #DRI
US Banking News
2 Sep 14 05:51:30
Darden Restaurants, Inc. updates Q1 guidance to $0.31-0.33 EPS. http://t.co/ann7iZEHno $DRI #DRI
BV Services
2 Sep 14 05:37:35
$DRI Darden Announces New Director Nominees For 2014 Annual Meeting Of Shareholders.. http://t.co/N3Kage6teI
BV Services
2 Sep 14 05:36:45
$DRI Darden Announces Expected Fiscal First Quarter Results That Reflect Continued Progress On Operati.. http://t.co/ydgcbgXfiG
$Stocknewsalerts
2 Sep 14 05:36:26
$DRI Darden - Darden Announces New Director Nominees For 2014 Annual Meeting Of Shareholders From our Stock News Alerts App
4-traders.com
2 Sep 14 05:35:17
Darden Restaurants : Announces Expected Fiscal First Quarter Results That Reflect Continued Progress On Ope... http://t.co/wNQgQxVHui $DRI
Jamie Lissette
2 Sep 14 05:32:43
$DRI The Company reported continued progress on its Olive Garden Brand Renaissance Plan, (which is lovely)
$Stocknewsalerts
2 Sep 14 05:31:54
$DRI Darden - Darden Announces Expected Fiscal First Quarter Results That Reflect Continued Progress On Opera From our Stock News Alerts App
				
				
By  +Follow January 10, 2014 12:49PM
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