Darden Plans to Spin Off or Sell Struggling Red Lobster

Seafood Chain Reports 4.5% Sales Decline in Most Recent Quarter

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Darden Restaurants, owner of the Olive Garden and LongHorn Steakhouse chains, plans to separate its Red Lobster business, cut marketing spending on the chain, halt acquisitions and cut expenses as restaurant sales lose momentum.

Darden CEO Clarence Otis said marketing spending for Red Lobster will decline
Darden CEO Clarence Otis said marketing spending for Red Lobster will decline

Orlando-based Darden said today in a statement that while it expects to execute a tax-free spinoff of Red Lobster to shareholders, the company also may consider selling the business. Sales at Red Lobster, a seafood chain with 705 locations in the U.S. and Canada, fell 1.9% to $2.62 billion in the year through May 26.

U.S. Same-store sales slid 4.5 % at Red Lobster in the most recent quarter. U.S. sales increased 5.0% at LongHorn Steakhouse and declined 0.6% at Olive Garden. Analysts had projected a drop of 2.1% for Red Lobster. The company said on a conference call today that Red Lobster's comparable-store sales would fall as much as 5% in the current fiscal year.

Restaurant chains including Olive Garden and Red Lobster -- and rivals such as Chili's and Applebee's -- have been struggling to lure diners as cash-strapped Americans eat out less, prompting Darden to lower its earnings forecast for the current fiscal year today. Casual-dining chains in recent years have been offering various lunch promotions and discounts, along with dinner-time promotions like two meals for $20. Red Lobster this year was marketing a Four-Course Seafood Fest for $15.99, while Olive Garden has offered deals such as a never-ending pasta bowl for $9.99.

Clarence Otis, CEO of Darden, said on the call today that marketing spend for Red Lobster will decrease. "We believe there's an opportunity to reduce marketing as a percent of sales [for Red Lobster]," he said. "Over the last couple of years, it's -- it's floated up higher than is sustainable, and that's going to be a key focus area for the new Red Lobster going forward. Olive Garden's marketing as a percent of sales is in a place that makes sense for a national brand."

Darden spent a total of $302.6 million on measured media from January through September, according to Kantar Media. In 2012, it spent a total of $380 million. So far this year, it's spent $137 million on Olive Garden and $130 million on Red Lobster. In 2012, it spent $183 million on Olive Garden and nearly $150 million on Red Lobster.

Mr. Otis said also said that that as the company ramps up digital-marketing capabilities for its brands, "we would expect our television marketing expenses to scale down dramatically."

WPP's Grey is the lead agency for both Red Lobster and Olive Garden, and media is handled by Publicis Groupe's Starcom for both chains.

The value of Red Lobster "remains an open question," Sara Senatore, an analyst at Sanford C. Bernstein & Co., said in a research note today. Spinning off Red Lobster and reducing capital expenditures and other costs "could result in only modest changes in performance," she said.

Mark Kalinowski, analyst at Janney, said in a note today: "While we to some degree applaud this unexpected move as an effort to unlock shareholder value, we are somewhat puzzled that what will be left behind is still a seven-brand company in an industry in which succeeding over the long term with one brand can prove challenging. Perhaps it would make more sense to do a separation including all of the more mature brands in one entity, and all of the smaller, growthier brands in another entity." He also noted that Red Lobster generates about 30% of Darden's revenue, and a similar, though lower, percentage of profits.

In October, New York hedge fund Barington Capital Group took a stake in Darden and said the company has potential to improve shareholder returns. The hedge fund holds about 2.8% of Darden's stock, according to data compiled by Bloomberg.

Kim Lopdrup, president of Darden's specialty restaurant group and new business, will become chief executive officer of Red Lobster after the separation, the company said.

Darden also said it will suspend adding new Olive Garden locations and plans a more limited expansion at LongHorn Steakhouse, which will combine to lower capital spending by at least $100 million annually. The company said it will also stop making acquisitions for the "foreseeable future."

~ Bloomberg News and Ad Age staff ~

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