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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
John H Armstrong
22 Dec 14 10:35:16
RT @v2ratingsbot: $DRI looks overpriced (rated 2.5 as price is up to 58.37). Price vs ratings chart: http://t.co/II0ThSvAVc
v2 Ratings Bot
22 Dec 14 10:27:27
$DRI looks overpriced (rated 2.5 as price is up to 58.37). Price vs ratings chart: http://t.co/II0ThSvAVc
DailyFinance
22 Dec 14 09:45:18
Week's winners, losers: Olive Garden beats, Sony retreats http://t.co/e3bwfQND9y $SNE $DRI
MarketSnacks
22 Dec 14 09:17:45
Stock market winners: #PetSmart, $ORCL, $DRI, #Exxon | #stockmarket losers: #SeaWorld, $WTW, #Tesla & #interestrates http://t.co/RQvvP4hFGE
Market Int Center
22 Dec 14 05:23:08
Darden Restaurants $DRI Trading Near $56.85 Support Level ( http://t.co/04BrQHOf9u )
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21 Dec 14 23:40:55
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21 Dec 14 19:33:35
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21 Dec 14 15:14:22
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21 Dec 14 09:57:03
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21 Dec 14 05:11:55
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21 Dec 14 03:17:28
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21 Dec 14 03:15:10
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awolam
21 Dec 14 02:31:03
RT @SeekingAlpha: Darden: Statement Analysis Confirms Olive Garden Is Struggling http://t.co/XMAE2sjXAr $DRI
Alysia Sarkisian
21 Dec 14 02:23:44
RT @SeekingAlpha: Darden: Statement Analysis Confirms Olive Garden Is Struggling http://t.co/XMAE2sjXAr $DRI
StockNewsWires
21 Dec 14 02:23:02
$DRI: Darden: Statement Analysis Confirms Olive Garden Is Struggling (DRI) http://t.co/BqNisI2T6v http://t.co/mu5ssCeoR2
Seeking Alpha
21 Dec 14 02:18:07
Darden: Statement Analysis Confirms Olive Garden Is Struggling http://t.co/XMAE2sjXAr $DRI
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20 Dec 14 23:29:18
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20 Dec 14 23:08:24
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Jaitun
20 Dec 14 22:54:59
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20 Dec 14 22:01:32
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John A. Gordon
20 Dec 14 21:30:07
RT @The_Analyst: Has anyone counted before? Darden put out a 20pg deck on it's turnaround plan. Starboard put out 3 decks with a combined 5…
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20 Dec 14 19:32:21
In addition to the 500 pages Starboard's 3 presentations on $DRI, Barrington had an 87-pager, too. Compare to DRI's 20-pager...
Jordan S. Terry
20 Dec 14 19:26:48
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By  +Follow January 10, 2014 12:49PM
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