30 Dec

Why Darden’s Red Lobster spinoff may still be a great opportunity

WRITTEN BY Xun Yao Chen

Darden Restaurant Inc.

Darden Restaurant Inc. (DRI) is one of the largest full-service chain restaurants in the United States. It owns brands that include Red Lobster, Olive Garden, LongHorn Steakhouse, Season 52, Eddie V’s, the Capital Grille, Yard House, and Bahama Breeze. The restaurant stock has been the center of attention of many activist investors and analysts like Barington Capital Group or Howard Penney, and now Starboard too. Interestingly enough, they’ve all given varying proposals so far.

Why Darden’s Red Lobster spinoff may still be a great opportunity

Investors displeased and disappointed

Shares of Darden sold off last week when management announced that it wasn’t going to spin off Red Lobster and Olive Garden together as one entity, which Barington Capital Group recommended, and would maintain its real estate properties as part of its restaurant businesses as opposed to spinning it out as a REIT (real estate investment trust).

Management only spinning out Red Lobster

A few days before the earnings call and the news that disappointed investors and the market, Barington Capital Group released a detailed report on its recommendation for Darden’s management to unlock company share value. But that didn’t stop management from saying no. Rather than spinning off Red Lobster and Olive Garden, it chose to spin off just one part, Red Lobster, as the company struggles to turn itself around and compete against others in this competitive environment.

Series

In this series, we’ll cover Darden’s recent earnings results, its latest call, and the thought process behind spinning off just Red Lobster. At the end, we’ll also explain why we like this plan and why it may be a great opportunity for patient investors. We believe Darden’s public peers include full-service casual restaurants like CheeseCake Factory (CAKE), Texas Roadhouse (TXRH), Brinker International Inc. (EAT) and Bloomin’ Brands (BLMN). Darden is also a component of iShares Select Dividend ETF (DVY). When Red Lobster spins off, it may also end up in the Guggenheim Spin-Off ETF (CSD) in the future.

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