Breakout
Red Lobster May Not
Be Worth Saving Says Restaurant Analyst
By
Michael Santoli
November 14, 2013 3:56 PM
Breakout
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Howard Penney of Hedgeye Risk
Management says casual dining giant Darden should whittle
itself down to just one key holding, and it's not the popular
Red Lobster chain.
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End the “Endless Shrimp” to
concentrate on the “Never Ending Pasta Bowl”?
This, in effect, is what an outspoken longtime restaurant analyst
thinks Darden Restaurants Inc. (DRI)
ought to do: Throw the
Red Lobster overboard in order to hunker down in the
Olive Garden.
Darden - the parent company
of those huge casual-dining chains along with
Longhorn Steakhouse,
Capital Grille,
Bahama Breeze and others – has struggled in recent years with
sluggish customer traffic, subpar profit margins and a lagging stock
price.
Sales are on track to slide almost 8% this year, compared to an
average 13% gain by industry peers. Shares of Orlando, Fla.-based
Darden have trudged higher by less than 10% the past two years,
compared to a 40% gain in the broad stock market and a 100% surge in
close rival Brinker International Inc. (EAT).
This sluggish performance has drawn an aggressive approach by
“activist” investment firm
Barington Capital, which last month reported owning the stock and
urged Darden management to break the company up. They propose creating
two companies, one to house the mature Olive Garden and Red Lobster
and the other for the smaller, nimbler brands, while also hiving off
its real-estate holdings.
Brinker, for instance, has
sold several brands such as
Macaroni Grill to focus on its core
Maggiano’s Little Italy and
Chili’s chains, increasing efficiency and boosting its stock
price.
Yet Howard Penney, analyst at Hedgeye Risk Management, tells Breakout
in the attached video that such a proposed maneuver isn’t radical
enough. “A lot of inefficiencies have been created by putting this
portfolio of brands together,” he says. “I think that’s fairly evident
when you break down the numbers on the income statement,” which show,
for example, much higher corporate overhead costs than its
competitors.
Darden, he says, “needs to undo what the CEO Clarence Otis has done
over the last eight years or so.” Of the idea simply to bust Darden
into two pieces, Penney says:
“I don’t think it makes
much sense. The smaller, faster-growing brands are not really growing
very fast and there’s really not much growth opportunity for them.
What I’d like to see is for the company to just get whittled down to
what I call the crown jewel, which is Olive Garden.”
And the chances of this
happening?
“Zero.”
CEO Otis has hewed to his collection-of-concepts strategy and is
unlikely to deviate any time soon.
Aside from an inefficient
corporate structure, Darden is up against the same challenges facing
other big casual sit-down restaurant companies: still-high
unemployment, stagnant wage growth and simply too many restaurants
vying for the family dinner dollar. The rise of “fast casual” players
such as Chipotle Mexican Grill Inc. (CMG)
and Panera Bread Co. (PNRA)
has squeezed full-service chains, with their slightly higher meal
prices and reliance on alcohol sales.
Ironically, even though business isn’t great across the industry,
Penney says the sector’s stocks are in a “casual dining bubble,” with
valuations near all-time highs for most leading stocks. No doubt, the
stocks have become caught up in the investor enthusiasm for plays on
the domestic housing and consumer recovery story.
While some companies such as Brinker’s Chili’s are performing well, in
general Penney figures its time for investors in these stocks to push
away from the table. |
