Darden To Sell/spin-off Red Lobster After Rough Q2

(RTTNews) - Darden Restaurants, Inc. (DRI) announced on Thursday it is looking to sell or spin-off its struggling Red Lobster chain. At the same time, the Orlando-based restaurant operator reported a profit for the second quarter that declined 41 percent from last year, with earnings and sales falling short of Wall Street estimates.

The company also slashed its earnings per share guidance for the full-year 2014, citing the impending spin-off or sale of the Red Lobster chain.

Under pressure from activist shareholders complaining the company has gotten too large to effectively manage, Darden plans to suspend acquisitions and stop opening new Olive Garden locations. Darden will also scale back plans to open more of its profitable LongHorn Steak restaurants.

"Under industry conditions that remained weaker than we had hoped, LongHorn once again delivered competitively strong same-restaurant sales results and we had continued progress at Olive Garden on both an absolute basis and relative to casual dining benchmarks. Our Specialty Restaurant Group remained firmly on track as well. However, Red Lobster's results were well below our expectations," Chairman and CEO Clarence Otis said in a statement.

Darden reported net earnings of $19.08 million or $0.15 per share for the second quarter, lower than $33.6 million or $0.26 per share in the prior-year quarter.

Results for the latest quarter include about $0.05 per share of costs related to expense reduction initiatives as well as legal and other costs.

On average, 27 analysts polled by Thomson Reuters expected the company to report earnings of $0.20 per share for the quarter. Analysts' estimates typically exclude special items.

Total sales for the quarter grew 4.6 percent to $2.04 billion from $1.96 billion in the same quarter last year, but missed twenty-three Wall Street analysts' consensus estimate of $2.07 billion by a whisker.

The company noted that the sales growth primarily reflects same restaurant-sales growth of 4.1 percent at the Specialty Restaurant Group, and the addition of 99 net new restaurants this year, partially offset by a 1.0 percent drop in blended same-restaurant for Olive Garden, Red Lobster and LongHorn Steakhouse restaurants.

Olive Garden sales grew 2.4 percent to $869 million, while U.S. same-restaurant sales edged down 0.6 percent. Red Lobster's sales totaled $561 million, down 4.9 percent, with U.S. same-restaurant sales also declining 4.5 percent. Longhorn Steakhouse's sales improved 16.5 percent to $320 million, with U.S. same-restaurant sales also increasing 5.0 percent.

The Specialty Restaurant Group's sales grew 20.6 percent to $291 million, with same-restaurant growing 6.7 percent at The Capital Grille, 6.2 percent at Bahama Breeze, 5.7 percent at Eddie V's, 1.2 percent at Yard House and 1.2 percent at Seasons 52.

The company noted that a shift in the Thanksgiving holiday week favorably affected second quarter same-restaurants sales by about 90 basis points at its large brands.

The company also declared a quarterly cash dividend of $0.55 per share on its outstanding common stock, payable on February 3 to shareholders of record at the close of business on January 10, 2014.

Looking ahead to fiscal 2014, Darden now expects net earnings per share to decline in a range of 15 to 20 percent over fiscal 2013, sharply down from the prior forecast for a decline between 3 and 5 percent.

The slashing of outlook reflects the impending spin-off or sale of the Red Lobster chain of restaurants.

Street is currently looking for full-year 2014 earnings of $2.88 per share on annual revenues of $9.02 billion.

"More importantly, it is increasingly clear that Red Lobster's competitive position and priorities have diverged in very significant ways from those of the rest of our business. The separation of Red Lobster and other changes we announced earlier today will better enable both Red Lobster and Darden excluding Red Lobster to take advantage of their distinct competitive circumstances and value creation opportunities. These are exciting steps forward that enhance our ability to create compelling long-term value for our shareholders," Otis added.

The company selected Kim Lopdrup, President of Specialty Restaurant Group and New Business, to serve as CEO of Red Lobster following the separation. Darden expects any separation deal to close in early fiscal 2015.

DRI closed Wednesday's regular trading session at $52.92, up $0.46 on a volume of 2.04 million shares. In the past 52-week period, the stock has been trading in a range of $44.11 to $55.25.