Darden Restaurants Inc. investor, Starboard Value LP, says it has a recipe to boost the Olive Garden operator’s earnings by as much as $326 million.
Ask diners if they want wine, put salt in the pasta pots, clear tables faster and develop a smartphone application for the Italian-American restaurant chain.
No culinary detail was too small. Starboard, which is waging a proxy fight for control of Darden’s board, presented an almost 300-page proposal to streamline the company’s operations yesterday, on the eve of its earnings report. The plan also calls for separating Darden’s real-estate assets. It would raise the company’s stock by $19 to $38 a share, the investment advisory firm said.
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Starboard’s proposal puts pressure on Darden to show its current leadership can turn around operations on their own. The owner of Olive Garden, Longhorn Steakhouse and other chains revamped its board slate earlier this month, arguing it could add fresh perspectives without turning over control to Starboard, which holds a stake of about 8.8 per cent.
“We believe our plan will create enormous shareholder value,” Starboard said in its presentation yesterday. “While it is not everyday that shareholders are asked to replace the majority of an incumbent board, in certain circumstances, majority change is necessary.”
In Darden’s quarterly earnings report, the company posted earnings of 32 cents a share, excluding some items, and sales of $1.60 billion, in line with figures it preannounced earlier this month. Same-store sales fell 1.3 per cent at Olive Garden, its biggest chain.
Darden, based in Orlando, Florida, also reaffirmed a profit forecast of as much as $2.30 a share for this fiscal year.
Starboard prepared its presentation as part of an effort to elect its 12 nominees to the board during Darden’s annual meeting next month.
Darden irked Starboard by selling its Red Lobster chain to Golden Gate Capital this year and ignoring the investor’s requests to split off its real estate. Starboard announced its board slate in May, saying management had shown “contempt for shareholder interests.”
“We will carefully and thoughtfully review Starboard’s plan,” Darden President Gene Lee said in an e-mailed statement yesterday. “Many of the brand and cost-optimisation strategies are already being implemented across our company and are showing results.”
After Darden completed the Red Lobster sale in July, its tone became more conciliatory. Chief executive officer Clarence Otis, who had been criticised by Starboard, agreed to step down later this year. Darden also added four Starboard nominees to its board slate in an unsuccessful attempt to stave off the proxy fight. Investors will vote for board members at the company’s meeting on 10 Oct.
Starboard’s suggestions for improving Olive Garden included specific instructions, such as serving breadsticks while warm by having wait staff regularly visit tables instead of the current practice of bringing too many breadsticks, allowing them to get cold and stale.
The activist investor also criticised how the Italian restaurant chain “no longer salts the water it uses to boil the pasta, merely to get a longer warranty on its pots.”
Salads also have too much dressing, and straws and packaging deviate from standardised specifications, hurting profitability, Starboard said.
“We believe lapsed discipline around Darden’s renowned unlimited salad and breadsticks offering has led to both high food waste and a worse experience,” Starboard said.
Increasing alcohol sales alone could result in a $56 million increase in annual earnings before interest, tax, depreciation and amortisation, Starboard estimated. Improving “table turns” by cleaning and preparing tables faster, installing tabletop tablets and allowing customers to pay through smartphone apps could deliver another $20 million, it said.
“We remain open-minded toward all ideas that support long-term value creation for our shareholders and improve the dining experience for our guests,” said Lee, Darden’s president.
If Darden enacts Starboard’s plan to improve operations as well as separate real estate and certain brands, the company could increase its share price to as much as $86, the investor said. Turning around Olive Garden as well could bring the stock above $100, Starboard said.
Bloomberg News, edited by Hospitality Ireland