To sell or spin off, that is the big question Darden Restaurants are asking themselves.
According to the Associated Press, Darden Restaurants Inc. are considering either spinning off or selling Red Lobster, as part of their plan to boost shareholder value. The company is reportedly buckling under pressure from activist investor Barington Capital Group.
The company, which also runs Olive Garden and other restaurants reported on Thursday a 41 percent decrease in quarterly profit. Darden said the company will suspend their openings for new Olive Garden locations and limit the locations of LongHorn Steakhouse restaurants.
Barington Capital Group is reportedly pushing Darden to split the company into two. One part would focus on operating the well-functioning Olive Gardens and Red Lobster chains. The second section would run "its higher-growth LongHorn Steakhouse, Seasons 52, Capital Grille, Yard House, Eddie V's and Bahama Breeze restaurants."
"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," Darden CEO Clarence Otis said in a statement.
Red Lobster is the biggest seafood dining eatery in North America with 705 restaurants in the United States and Canada and about $2.6 million in fiscal 2013 sales. According to NBC News, with people being more careful with how much they are spending, Darden's restaurants are suffering the downturn; with more consumers turning to cheaper eateries like Chipotle.
"[There is significant change occurring in the restaurant sector] with relatively low levels of consumer demand in each of the past several years for restaurants generally, and for casual dining in particular, as well as additional unexpected softness since June," Otis said.
The news comes two months after activist Barington Capital publicly addressed the company's underperformance by separating Red Lobster and Olive Garden from their more profitable brands like Capital Grille. According to Darden no final decision has been made on the form of separation Red Lobster may face.
The company's net income fell to $19.8 million, or 15 cents per share, in the second quarter, which is from $33.6 million, or 26 cents per share, a year earlier. Red Lobster sales fell 4.5 percent and 0.6 percent at Olive Garden.
Darden named Kim Lopdrup, former Red Lobster president, to serve as the brand's new CEO following the separation.
"As a stand-alone company, we will be free to focus in a more single-minded manner on the many current and prospective guests who find what Red Lobster brings to the marketplace highly relevant," Lopdrup told the AP.
