What do you do with a problem like Starboard Value, LP?
That’s the question Darden Restaurants, Inc. execs have been asking themselves for some months. But in the past week, relations between the casual dining company, which owns multiple restaurant chains including Olive Garden and LongHorn Steakhouse, and its pesky activist investor, Starboard Value, have turned vitriolic.
Hedge fund Starboard Value released a 300-slide presentation Sept. 12 that criticized the company and its Olive Garden brand, addressing everything from the restaurant’s less-than-Italian menu to its soggy breadsticks to the lack of salted pasta water.
Darden’s response: “We like our breadsticks.” The company’s defense of Olive Garden is likely what lifted the stock this week, as well as the prospect of upcoming board elections, which could smooth out Darden’s performance. If you look at the company’s performance over the last year, the one thing you won’t find is stability.
“Olive Garden’s results, clearly volatile intra-quarter, do show that there’s still significant month-to-month, again, volatility,” said Jeffrey Farmer, an analyst with Wells Fargo, on the September 12 earnings call.
But given how the stock’s been trading recently, however, investors have been convinced otherwise.
The company’s stock closed a rocky, but positive, week last Friday at $51.19 per share, its highest value since July. Indeed the performance improves when you know how much it rallied from the Friday before, when shares were down to $47.58 following the earnings release for the first quarter of the 2015 financial year.
The first quarter earnings call showed that same-restaurant sales were up at nearly all of Darden’s holdings and the company paid of $1 billion in debts following the Red Lobster sale. Despite all of that, earnings were down.
Nevertheless, week-over-week, Darden’s shares were up 7 percent, while the S&P 500 gained just over 1 percent. That’s less than what Darden gained on Friday alone. So why then does Argus Research analyst John Staszak sum up Darden’s performance in one bad word: “Lousy”? That’s where Starboard Value comes in.
The activist hedge fund entered the fray when Darden announced its intentions to sell Red Lobster late last December. In the week following Starboard Value’s acquisition of 3 percent of shares (which has since grown to 6 percent), shares jumped roughly 6 percent in value.
That jump was short-lived, and until Red Lobster’s sale shares slowly decreased almost 19 percent in value. Since July, though, shares have rebounded almost to that December high. So in the long run, it seems that Starboard’s investment has only put a damper on Darden’s performance – as exemplified from the stock performance following the Red Lobster transaction.
As a result, there are those who continue to hold out hope for Darden’s long-term success – 80 percent of analysts following the restaurant sector advise to buy or hold its stock.
That’s likely because Darden, in spite of Starboard’s criticism, might be a safer bet than its fast-casual counterparts – for now. While year-over-year, Chipotle Mexican Grill Inc’s shares are up over 55 percent; the stock has leveled off since July and looks to be heading down. And Panera Bread Company is just rebounding from a 24 percent decrease in share value from March to July. On the contrary, the ups and downs of Darden’s stock value has been the norm for nearly five years.
Still, customer taste is gradually shifting to fast-casual and away from the likes of Olive Garden. Consequently, when looking to 2015 and beyond, it’s these companies that Darden should be concerned with, not Starboard Value.
“Evolving guest experience expectations and the emergence of fast casual restaurant concepts have eroded pricing power industry-wide and prompted more aggressive industry promotional activity,” Morningstar analyst RJ Hottovy said in a research note from early September.
So for Darden’s performance to remain positive, or merely stable, it will need to focus on value. This will inevitably be on investors’ minds as they cast their votes in the board of directors vote. Those results will likely determine whether Darden will continue to play ball in the same court as Chipotle and Panera or whether its subsidiaries will go the way of Red Lobster.