Darden Restaurants (NYSE:DRI) has been under considerable pressure from two activist investors to unlock shareholder value through a separation of the company's various restaurant chains. (see our previous article seekingalpha.com/article/1965391-expect-...)
In response to initial pressure, DRI announced plans to spinoff its Red Lobster unit in a move to unlock shareholder value. Two hedge funds, Barrington and Starboard Value, have been continually pressing management for more aggressive changes including the separation of their Olive Garden brand, significant cost reductions, and creation of a Real Estate Investment Trust. ("REIT") Starboard Value has hired a company veteran as an advisor and seemingly will launch a shareholder fight to pursue the more aggressive changes including a separation of the Chairman and CEO duties.
DRI management was not helped as it reported lackluster earnings citing weather as a significant detractor. The earnings report seems to have only further emboldened the activist crowd, including influential and media savvy Hedgeye analyst, that continue to push for more aggressive actions.
DRI cancelled an Investor Day conference scheduled for later this month. By canceling the event, DRI avoids having to publicly answer investor concerns over their strategic plan to separate Red Lobster and execution of cost saving initiatives. In our view, this is a sign DRI management does not want to publicly debate the merits of their strategic plan vis-a-vis the activist shareholders. An ominous sign for a management team already known for shutting out analysts critical of the company.
In conclusion, the continued lackluster performance and refusal to publicly debate the merits of their strategic plan is resulting in a credibility crisis for DRI management. The heightened media criticism and reactive measures of the management will force the board's hand making more aggressive changes inevitable. We expect that more aggressive strategic steps will ultimately be taken to unlock value for shareholders.
Disclosure: I am long DRI. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.