Darden Restaurants (NYSE:DRI) said today it will either spin off or sell Red Lobster, one of its oldest and biggest brands, as the company faces plummeting profits and Americans dine out less frequently. The Orlando-based company also said it plans to stop building new Olive Gardens and to slow down growth at LongHorn Steakhouse.
With 705 restaurants in the U.S. and Canada, Red Lobster is the nation's largest sit-down seafood dining chain. Sales last year were about $2.6 billion, but for the current quarter, it had the largest same-restaurant sales decline, with revenue down by 4.5 percent. Same-restaurant sales fell 0.6 percent at Olive Garden, the company's biggest chain by revenue, while LongHorn reported 5 percent higher same-restaurant sales. Those three chains combined posted a same-restaurant sales decline of 1 percent.
"While we are highly confident the future is bright for both Red Lobster and Darden excluding Red Lobster, we also recognize that the operating priorities, capital requirements, sales and earnings growth prospects, and volatility profiles of the two parts of the business are increasingly divergent," Clarence Otis, Darden Restaurants CEO, said in a statement. "By establishing two independent companies, a separation will better enable the management teams of each company to focus their exclusive attention on their distinct value creation opportunities."
In October, activist investor Barington Hedge Fund urged Darden Restaurants to spin off its Olive Garden and Red Lobster chains after their weak performance in Darden's fiscal first quarter. Barington, which reportedly owns a 2.8 percent stake in Darden, believed that Olive Garden and Red Lobster would operate better as a separate company, but it's clear that those plans have evolved to make Red Lobster a standalone business. The second Darden operation would include Darden's better-performing chains, including LongHorn Steakhouse and the five chains in its Specialty Restaurant Group: Bahama Breeze, Eddie V's Steakhouse, The Capital Grille, Seasons 52 and Yard House.
With results at Red Lobster well below expectations, the company reported a 42 percent drop in second-quarter earnings. For the period ended Nov. 24, net earnings from continuing operations were $19.8 million, compared with $33.7 million in the second quarter last year.
Darden Restaurants reported a profit of $19.8 million, or 15 cents a share, down from $33.6 million, or 26 cents a share, a year earlier. Sales grew 4.6 percent to $2.05 billion, aided by the operation of 99 net new restaurants compared with the year-ago period. Analysts were expecting a profit of 20 cents a share and sales of $2.07 billion.
The company also added that it expects earnings per share for next year to decline between 15 percent and 20 percent compared to fiscal 2013. The company had previously predicted only a 3 to 5 percent decline.
Shares of Darden Restaurants were down 4.6 percent to $51 in premarket trading Thursday morning.
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