Despite posting higher comps in the fiscal first quarter 2015, the share price of Darden Restaurants Inc. (DRI) declined 1.5% on Sep 12, 2014 owing to a transformation plan issued by its hedge fund investor Starboard, who is dissatisfied with Darden’s working strategy. Starboard reportedly believes that too many breadsticks are served to diners at a time which go cold before being consumed.
Starboard – an 8.8% stakeholder of the company – stated that Darden is officially allowed to provide one breadstick per customer, plus an extra for the table. However, the company is serving more breadsticks due to a lack of training and discipline, leading to wastage of food.
Apart from this, Starboard reportedly claimed that the company uses more dressing over the salads than required and overcooks its pasta. Also, it claimed that the Italian restaurant does not use salt water to cook the pasta which is regarded as the first step for tasty pasta making. Also, Starboard believes that the restaurant uses longer asparagus sprigs, which are eventually wasted. Moreover, only 8% of the company’s beverages ordered are alcoholic and it has too many things on its menu.
Per media reports, Starboard is also not happy with the standard of advertising and the logo the restaurant uses. As a result, it came up with a detailed transformation plan for the company. The plan includes company-wide operational improvements that will enable it to generate $300 million more in EBITDA, a turnaround plan for Olive Garden, a strategy that would enhance the real estate assets of the company and also a new franchising program.
The plan also focuses on maintaining the current dividend while safeguarding the investment grade rating. Starboard believes that the implementation of the plan would boost its share price. Starboard stated that if the shareholders want this plan to be implemented, they would have to vote for its full slate of twelve candidates for election to the company's board of directors at the 2014 Annual Meeting of Shareholders to be held in Oct 2014. It has urged shareholders to reject members of Darden’s board.
However, Darden also issued a statement saying that many of the brand and cost optimization strategies provided by Starboard have already been implemented across the company and are yielding results. Also, the company stated that the Olive Garden Brand Renaissance plan as well as the efforts to grow and develop LongHorn Steakhouse and Specialty Restaurants are on track. The company has advised shareholders to vote for its assigned nominees.
We believe that Darden has taken a number of steps to reinvigorate its Olive Garden brand. However, these are yet to reap benefits as the company reported a 1.3% decline in comps in the fiscal first quarter 2015. Nevertheless, we would wait to see who gets elected to the board.
Darden currently has a Zacks Rank #3 (Hold). Better-ranked stocks in the same industry include BJ's Restaurants, Inc. (BJRI), Chipotle Mexican Grill, Inc. (CMG) and Jamba, Inc. (JMBA). While Chipotle Mexican Grill and Jamba sport a Zacks Rank #1 (Strong Buy), BJ's Restaurants carries a Zacks Rank #2 (Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
To read this article on Zacks.com click here.
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment