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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
NASDAQ
23 Oct 14 12:10:07
$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/bfER2c3kSa
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$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/sRDdxv8FYs
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23 Oct 14 12:07:11
$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/CR9dCsGL7p
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23 Oct 14 12:07:10
$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/iK0oRUot4V
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$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/xvGtUvDA8p
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23 Oct 14 12:04:08
$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/SuvXHFlSD2
NASDAQ
23 Oct 14 12:04:07
$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/7vhbivthRj
NASDAQ
23 Oct 14 12:04:05
$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/Lpps1tDdFd
NASDAQ
23 Oct 14 12:04:04
$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/wFJbvH6hiK
NASDAQ
23 Oct 14 12:04:03
$DRI - Initial Statement of Beneficial Ownership (3) http://t.co/aAYcFsg3b7
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23 Oct 14 12:01:34
$DRI Darden - 3 (Initial Statement of Beneficial Ownership) SEC Filing From our Stock News Alerts App
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23 Oct 14 12:00:06
All aboard the $DRI train #JeffSmith
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23 Oct 14 11:46:53
Jeff Smith Bullish On Yahoo, Darden, MeadWestvaco http://t.co/ckMZO1mmLe $DRI $YHOO $BABA $MWV
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23 Oct 14 11:46:41
60m $DRI Upper Trendline Pressure 50.570 #futures #stocks 02:46:26 PM http://t.co/WZwETG8am0 Signals based ... http://t.co/WZwETG8am0
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23 Oct 14 10:23:12
Potential Darden Restaurants $DRI Trade Has 4.64% Downside Protection ( http://t.co/Zu3Z6PcAzg )
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DRI 50.29 Stock Charts $DRI Darden Restaurants Inc. (NYSE) Last Updated: 10/23/2014 11:34:45 DRI Stock Chart - http://t.co/ntDkOchlNh
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23 Oct 14 06:32:50
60m $DRI Upper Trendline Pressure 50.000 #futures #stocks 09:31:33 AM http://t.co/WZwETG8am0 Signals based ... http://t.co/WZwETG8am0
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23 Oct 14 06:24:51
Most Consecutive Up Days Stocks #MeanReversion $MCRS {10}, $BBY {7}, $BC {7}, $CLVS {7}, $DRI {7} #brberisReport
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23 Oct 14 06:06:44
I think $DRI got their money's worth in free pub with the Never Ending Pasta Pass. http://t.co/whgDTBHakb
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23 Oct 14 02:32:06
RT @StockSignaling: Services Sector: Upgrades: $BABA $FRO $ARO $SSI $ODP $DRI $CLUB $NCLH $PLCE $VAC $AL $CHTR $COST $WERN $NWSA http://t.c…
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23 Oct 14 02:31:23
Services Sector: Upgrades: $BABA $FRO $ARO $SSI $ODP $DRI $CLUB $NCLH $PLCE $VAC $AL $CHTR $COST $WERN $NWSA http://t.co/Vtx6dLy0Nw #analyst
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22 Oct 14 20:25:02
Darden Restaurants : Board Appoints Additional Director http://t.co/TPpY6yZ3Bx $DRI $EAT
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22 Oct 14 19:03:21
Wednesday 10/22 News: $DRI volume down for the 5th day in a row #NYSE #stocks
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22 Oct 14 18:54:03
Wednesday 10/22 News: $DRI closed up for the 7th day in a row for the first time since July 2013 #NYSE #stocks
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22 Oct 14 13:35:39
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22 Oct 14 11:10:48
Zacks Upgrades Darden Restaurants to Neutral $DRI http://t.co/FxnG93tytj
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22 Oct 14 10:36:44
Darden Restaurants Upgraded to “Neutral” at Zacks $DRI http://t.co/4Oe4yJcoVA
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22 Oct 14 10:30:02
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22 Oct 14 08:16:23
@MadMoneyOnCNBC Jim r u still recommending $KR & $DRI? Thank u.
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@jimcramer r u still recommending $KR & $DRI? Thank u.
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@TheStalwart @bysamro How will this affect $DRI?
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21 Oct 14 06:37:20
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21 Oct 14 05:52:57
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20 Oct 14 12:20:04
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Daily Contracts
20 Oct 14 11:53:02
Real-Time feed of company contracts, original agreements and executive updates from Darden $DRI http://t.co/L5y9RjG4KB
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20 Oct 14 11:50:51
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20 Oct 14 11:28:13
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By  +Follow January 10, 2014 12:49PM
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