Darden Restaurants – Is Clarence Otis’ Exit REALLY a Reason to Buy DRI Stock?

Lagging brands and a management shakeup are worrisome, but there are a few reasons to hope for a turnaround story

   
Darden Restaurants – Is Clarence Otis’ Exit REALLY a Reason to Buy DRI Stock?

It’s the end of the line for Darden Restaurants’ (DRI) Chairman and CEO Clarence Otis, whose departure was announced on July 28, and was met with a small rally Tuesday.

OliveGarden DRI stock 300x146 Darden Restaurants   Is Clarence Otis Exit REALLY a Reason to Buy DRI Stock?For all of Darden’s brand troubles, is the market trying to tell us that now is the time to bet on DRI stock … or is this just a brief respite for a stock that still remains 14% down on the year.

Let’s take a look.

It’s an unfortunate state of affairs when a CEO reveals he is leaving and investors celebrate, but that’s exactly what happened with Darden Restaurants after Clarence Otis’ announcement.

Darden comes from the old school of casual dining, with brands such as Olive Garden and LongHorn Steakhouse in its portfolio. Unfortunately for traditional restaurants, the trend in casual dining has favored more modern, faster concepts such as Chipotle Mexican Grill (CMG) and newly public El Pollo Loco (LOCO). So despite its newest beer-tinted concept Yard House, Darden has been left scrambling for market share in a couple of key brands that have weighed on its earnings, revenue and margin growth in the process.

Same-restaurant sales at Darden’s Olive Garden, for instance, were down 3.4% in fiscal year 2014, with the company expecting no movement in fiscal 2015. Meanwhile, total sales were up just 2.4%, while earnings declined significantly, from $3.13 per share to $2.47.

DRI investors — mainly activist investors Starboard Value and Barington Capital, the former of which has a 7.1% position in the stock — have been frustrated with Otis’ leadership. Specifically, Darden Restaurants has seemingly failed to unlock shareholder value in its hardest-hit brands, Olive Garden and Red Lobster — the latter of which and its real estate assets Darden sold for $2.1 billion to Golden Gate Capital. Starboard and Barington were calling for a spinoff of Darden’s real estate assets into a real estate investment trust.

While it’s difficult to say how Darden will look a year from now, it’s safe to say that it will look different than what the failed leadership of Otis has produced. And with so much hanging in the balance, investors might want to get in on the Darden story sooner than later.

Going forward, the company will separate the chairman and CEO roles, and the company will elect an entirely new board of directors at the Sept. 30 shareholder meeting.

Given the disparity of nominees between Darden’s and Starboard’s picks — Starboard is fighting for full control of the board while Darden has nominated nine independent directors and allowed three of Starboard’s nominees – the results will weigh heavily on the future direction of the company.

Even if Starboard gains control of the board, it’s probably too late for the REIT scenario since     “[a] substantial portion of Darden’s real estate value comes from Red Lobster’s owned real estate,” according to Starboard in an SEC filing.

Nonetheless, investors seem to have a greater chance for higher returns with a Starboard-led board of directors: As of March:

“Starboard’s average return on a 13D filing is 28.9% (versus an average of 8.8% for the S&P 500 during the same time periods). However, when they have received a board seat, their average 13D return has been 34.3% versus 13.1% for the S&P 500.”

For a stock that is down double digits year to date, 34% returns would be something to celebrate.

Bottom Line

There are plenty of other things to like about DRI should its management change for the better. Darden expects “to return to EPS growth” in fiscal 2015, DRI stock trades at 21 times next year’s earnings — below the industry average of 24.8 – and perhaps most attractive of all for while you wait, Darden pays out nearly 5% in dividends while it also completes a $700 million share buyback plan.

If in fact a new roster of board members can figure out a way to turn around Darden’s Olive Garden, which in its day was a star for the company, the dividend and share price will have nowhere to go but higher.

As of this writing, Gerelyn Terzo did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, http://investorplace.com/2014/07/darden-restaurants-dri-stock-clarence-otis/.

©2014 InvestorPlace Media, LLC

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