Shares of Darden Restaurants (DRI), which owns and operates thousands of restaurants under brand names like Olive Garden and LongHorn Steakhouse, are wavering as the market tries to evaluate everything that’s happened lately.
DRI reported earnings minus non-recurring items of 32 cents per share in the fiscal first quarter, beating estimates by 2 cents. Revenue came in at $1.6 billion, in line with estimates and up over 4% from the same quarter last year. DRI stock gained over 3% in pre-market trading on the news, but shares have subsequently pulled back and were down more than 1% in the early afternoon.
Wall Street’s ambivalence with DRI stock might seem confusing in the light of Darden’s earnings beat, but there’s more to the story: activist hedge fund Starboard Value LP is going for the proverbial jugular of Darden’s management, hoping to replace all 12 board members in an effort to turn the company around.
Starboard has Wall Street’s ear, as DRI stock has vastly underperformed the S&P 500 Index in the last 1-, 3-, and 5-year periods.
What’s Up With DRI Stock?
Starboard made a lengthy presentation yesterday outlining its plans to cut costs, increase sales and improve wait times, outlining its vision for how the hedge fund would change the company’s operations if it seized full control of DRI’s board. Darden responded to the suggestions today, saying more or less that management appreciates the advice, but that many of Starboard’s recommended changes are already underway.
While DRI stock and its first-quarter results were moderately better than analysts expected, by no means do they prove to investors that the current management is turning things around. Same-restaurant sales at Olive Garden, the largest restaurant chain in DRI’s portfolio and the source of the majority of the company’s profits, fell 1.3% in the quarter.
While Darden owns and operates more than 460 LongHorn Steakhouse locations, and sales at those locations rose 2.8% in the period, there were 831 Olive Garden restaurants at the end of the last fiscal year. Soif DRI can’t drum up some excitement at Olive Garden, then DRI stock may be destined to underperform the market for years to come.
Red Lobster previously posed the very same threat to DRI stock as performance suffered, but thankfully the company was able to sell that business earlier this year for $2.1 billion. In pawning off the burdensome task of reigniting Red Lobster sales on someone else, Darden simultaneously rid itself of a business that was dragging on sales and demanding a lot of attention from management.
Unfortunately for Darden management, that didn’t fix all their problems, and the entire board could be replaced by Starboard appointees if Olive Garden fails to pick up some momentum. Because the one thing DRI stock investors can all agree on is that the stock’s perennial underperformance must end.
As of this writing, John Divine did not hold a position in any of the aforementioned securities.
