Darden looking to spin off or sell Red Lobster

The Associated PressDecember 19, 2013 

Darden Restaurants Red Lobster

FILE - This Thursday, Sept. 6, 2012, file photo, shows a Red Lobster restaurant in Hialeah, Fla. After new ad campaigns touting the quality of its food failed to spark sales, Darden Restaurants, the parent company of Olive Garden and Red Lobster, on Thursday, Dec. 19, 2013 said it is looking to either spin off or sell Red Lobster, part of its plan to boost shareholder value. (AP Photo/Alan Diaz, File)

ALAN DIAZ — AP

— Darden Restaurants wants to set Red Lobster adrift.

The company said Thursday that it is looking to either spin off or sell Red Lobster as part of its plan to boost value for its shareholders. Those plans also include suspending the opening of new Olive Garden locations and limit the opening of new LongHorn Steakhouse restaurants.

Darden Restaurants Inc. has also decided it won't make any acquisitions of additional brands “for the foreseeable future” and plans to review senior management's compensation and incentive programs so that there is more emphasis on same-store restaurant sales growth and free cash flow.

Its stock fell more than 4 percent in Thursday afternoon trading.

Red Lobster has 705 restaurants in the U.S. and Canada and is the biggest full- service dining seafood specialty restaurant operator in North America. Its fiscal 2013 sales were about $2.6 billion.

Restaurant chains such as Olive Garden and Red Lobster have suffered since the downturn, with people being more careful about their spending.

People are also increasingly heading to chains such as Chipotle, where it tends to cost less and take less time than a sit-down meal at a restaurant.

Darden Chairman and CEO Clarence Otis said during a conference call on Thursday that it had been considering its options for Red Lobster for some time and shareholders wanted changes.

In September investment firm Barington Capital LP, which represents a group that owns more than 2 percent of Darden's stock, recommended that Darden consider splitting into two separate companies, with one company housing Olive Garden and Red Lobster and the other its remaining brands.

Otis said that Red Lobster has been unable to capture high-income customers as much as its other brands have. A separation will give Red Lobster the opportunity to focus more on its core audience, he said.

Otis also said changing market conditions prompted action. He noted that there is significant change occurring in the restaurant sector, “with relatively low levels of consumer demand in each of the past several years for restaurants generally, and for casual dining in particular, as well as additional unexpected softness since June.”

Darden anticipates that after separating from Red Lobster it will be able to report higher and more consistent same-restaurant sales, new restaurant sales growth and increased and more consistent earnings per share growth.

The company anticipates that its cost-cutting efforts will bring about at least $60 million in annual savings starting in fiscal 2015. This is up from the $50 million in savings it previously predicted. Darden said it will use the increase in cash flow to help strengthen its credit profile.

Darden named Kim Lopdrup, president of its specialty restaurant group and new business, to serve as Red Lobster's CEO after the separation. Harland Herrmann, president of Yard House, will become president of the specialty restaurant group in January.

Red Lobster President Salli Setta will remain in that position. If Red Lobster is spun off, Darden Senior Vice President and Chief Financial Officer Brad Richmond will become chief financial and administrative officer for Red Lobster once the transaction is complete.

Darden said it's started the process of identifying its board and a possible successor for Richmond.

Darden also announced Thursday that its second-quarter net income fell to $19.8 million, or 15 cents per share, from $33.6 million, or 26 cents per share, a year earlier. Excluding severance costs and other items, earnings were 20 cents per share. Revenue rose to $2.05 billion from $1.96 billion.

The planned Red Lobster spinoff still needs final approval from Darden's board. It does not require a shareholder vote.

The company expects any possible separation to close in early fiscal 2015.

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