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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


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Results for DRI
SADIF - Analytics
1 Dec 15 04:48:31
Drillisch AG $DRI Has been updated in a new due diligence report by SADIF. https://t.co/28UOwbojxb
30 Nov 15 15:48:11
Antoine Gara
30 Nov 15 14:31:49
@nbits60 When you add $DRI w/the real estate $FCPT you get over $63 a share. Add $1.65 in dividends & it look ok for '15. Jury's still out.
Market Int Center
30 Nov 15 12:42:02
Darden Restaurants $DRI Showing Resistance Near $57.55 ( https://t.co/WUs6OXPJQu )
Michael Dempsey
30 Nov 15 09:25:22
Three month update - $DRI now trading at $56.22 - Still holding short. https://t.co/fBNZ1M9z8J
30 Nov 15 07:57:13
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We Share
30 Nov 15 06:41:03
Così, Inc. Thanks New York City https://t.co/nstKLYOwO4 via sharethis $COSI $PNRA $SBUX $YUM $MCD $DFRG $DRI
Florent Capital
30 Nov 15 06:39:31
Così, Inc. Thanks New York City https://t.co/QTnajeo4hg via @sharethis $COSI $PNRA $SBUX $YUM $MCD $DFRG $DRI
Breaking News
30 Nov 15 05:45:03
$DRI: Company Shares of Darden Restaurants, Inc. (NYSE:DRI) Rally 3.48%: https://t.co/e7xKmjY7mU
30 Nov 15 04:14:52
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Sleek Money
30 Nov 15 02:21:45
Brokerages Set Darden Restaurants Target Price at $70.88 $DRI https://t.co/VO8CXDeAbo
Breaking News Now
30 Nov 15 02:16:10
$DRI: Brokerages Set Darden Restaurants Target Price at $70.88 (NYSE …: https://t.co/J7uAL7l9GF
Dividend Yield
30 Nov 15 00:42:24
Dividend Stock Idea of the Day – Yum Brands (NYSE:YUM) - https://t.co/2fg4BMBB3e - $YUM $MCD $QSR $DRI $TXRH
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29 Nov 15 21:51:04
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29 Nov 15 21:37:04
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Stock Forums
29 Nov 15 21:37:03
DSLV VelocityShares 3x Inverse Silver ETN Quotes https://t.co/1L2NSjYzp7 $DSLV $COP $DGZ $DRI #DSLV #investing #nasdaq
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Stock Forums
29 Nov 15 21:36:23
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Consumer News
29 Nov 15 19:47:39
Darden Restaurants, Inc. $DRI Price Target Cut to $70.00 by Analysts at BTIG Research https://t.co/Bbl4Po8eYf #acn
SADIF - Analytics
29 Nov 15 14:42:22
Darden Restaurants, Inc. $DRI Rating Has been upgraded by SADIF. https://t.co/At9ct3HQeN
29 Nov 15 11:02:17
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28 Nov 15 15:36:33
DRI Darden Restaurants, Inc. Ask https://t.co/CxBYcOSzJa $DRI $UUP $XLB $XLU #DRI #invest #stock
Investors Hangout
28 Nov 15 15:36:11
CTIX Cellceutix Corp. Prev Close https://t.co/DRU6UzYOc0 $CTIX $NWBO $DRI $RYOIX #CTIX #investing #investing
Stephen Richards
28 Nov 15 11:32:19
Darden: Can Strong 'Leedership' Save Olive Garden's Declining Numbers? https://t.co/20F03FGrlC $DRI
Russell Barbour
28 Nov 15 06:45:09
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Aleksandr Obukhov
28 Nov 15 06:32:25
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28 Nov 15 05:02:02
$DRI is rated BUY, 19.2% upside by Wall Street analysts based on average ratings/targets https://t.co/599EG5HSQ6 https://t.co/wFS0qDhJfH
28 Nov 15 04:46:36
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Investors Hangout
28 Nov 15 04:41:05
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Lucky Jimmy
28 Nov 15 04:39:32
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Lucky Jimmy
28 Nov 15 04:34:05
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27 Nov 15 15:42:38
RT @ChinaInvest: RT SeekingAlpha: Darden: Can Strong 'Leedership' Save Olive Garden's Declining Numbers? https://t.co/vmLB8NhZMa $DRI
Mercantile Global
27 Nov 15 15:41:10
RT @ChinaInvest: RT SeekingAlpha: Darden: Can Strong 'Leedership' Save Olive Garden's Declining Numbers? https://t.co/vmLB8NhZMa $DRI
China Invest
27 Nov 15 15:38:52
RT SeekingAlpha: Darden: Can Strong 'Leedership' Save Olive Garden's Declining Numbers? https://t.co/vmLB8NhZMa $DRI
Media Sentiment
27 Nov 15 15:29:52
$DRI received a new alert. Find out why at https://t.co/nZwqReM0tj #stocks #daytrading #trading #mkt #NYSE #NASDAQ #markets 455
Seeking Alpha
27 Nov 15 15:28:15
Darden: Can Strong 'Leedership' Save Olive Garden's Declining Numbers? https://t.co/rMRT4e0VJQ $DRI
Capital Market Labs
27 Nov 15 14:50:41
Interactive Chart -> https://t.co/qYs5CPftCw $DRI Revenue is Rising. https://t.co/cRDOO7jn6E
Ticker Report
27 Nov 15 12:14:42
Darden Restaurants Receives Average Recommendation of “Hold” from Brokerages $DRI https://t.co/YRB0B93L6H
Dakota Financial
27 Nov 15 12:04:20
Darden Restaurants Receives Average Recommendation of “Hold” from Brokerages $DRI https://t.co/aFvFADfhKE
27 Nov 15 12:03:47
$DRI: Darden Restaurants Receives Average Recommendation of “Hold …: https://t.co/iSLmIAUluh
Consumer News
27 Nov 15 12:00:38
Darden Restaurants Receives Average Recommendation of “Hold” from Brokerages $DRI https://t.co/QfLDLTrInK #acn
US Banking News
27 Nov 15 06:40:58
Darden Restaurants Cut to Hold at Zacks Investment Research $DRI https://t.co/G9KRN0SJEI
Interactive Investor
26 Nov 15 11:25:17
.@Argonautcapital's Olly Russ thinks it’s time to buy Drillisch. Do you agree? https://t.co/Bu7PHhTnbq $DRI capital@risk
By  +Follow January 10, 2014 12:49PM



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