By Jacob Passy
Investors in Darden Restaurants, Inc. (DRI) better hope that change is a good thing—because they’ve pulled off one of the biggest board shake-ups in recent history.
The entire roster of the full-service restaurant company’s board of directors was wiped out and replaced by a suite of candidates hand-picked by activist investor Starboard Value. The change-up ended feeling like nothing but a foregone conclusion, as Starboard’s seething commentary on the Olive Garden parent droned on for months.
In the wake of the massive shift, however, only two things are really certain: democracy is full of surprises and people are quite excited to have salted pasta water again.
— lisa baertlein (@LisaBaertlein) October 10, 2014
Guess there’ll be salt in the Olive Garden pasta water again. Darden Board Ousted. http://t.co/mPfUrmLrgt
— Robert Moss (@mossr) October 10, 2014
BREAKING: Olive Garden pasta water to be salted. http://t.co/LbXheHDzsx
— David Mariutto (@DavidMariutto) October 10, 2014
While investors got a taste of salty pasta victory, stocks saw a brief notch up at the news, Darden shares close 90 cents, or 1.83 percent, down at $48.37.
Looking to the company’s future, analysts said the only sure thing was that Starboard had achieved what it had always wanted: a say in the future of Olive Garden. What it does with Darden’s biggest brand, along with the rest of the company, is still very much for debate.
One possible move is to spin off its specialty restaurant group (SRG), which includes chains like Capital Grille, Yard House and Seasons 52. This strategy was one Starboard touted often in recent months, according to Lynne Collier, an analyst with Sterne Agee, and might actually pay off for investors.
“Darden investors are not really getting the value for these higher growth companies like Capital Grille and Yard House because they’re not significant contributors to the company,” Collier said. “To split them off separately as a growth company would probably be beneficial to shareholders.”
Even if the split-off were not to occur, the Starboard-led Darden would want to be more like the competition. Starboard has pointed to Brinker International (EAT) as inspiration, given the company’s success honing in on its biggest brands, Chili’s and Maggiano’s. And Starboard’s new board has the right men for the job, former Brinker CFO Chuck Sonsteby and former Olive Garden head Brad Blum.
That success is all Starboard needs to justify focusing its efforts on an Olive Garden and LongHorn Steakhouse overhaul. But some analysts are saying not so fast.
“To be sure EAT has continuously exceeded expectations on margins and periodically – on topline. But against a backdrop of continuous sector traffic declines, ticket has driven more than 100% of EAT’s comps,” a Bernstein research note said. “In addition, Chili’s saw comps deteriorate initially as it undertook its turnaround.”
And the last thing Darden needs at this point is a reversal in fortune. In fact, to some, even attempting a turnaround would be akin to beating a dying horse dead. To them, with the unstoppable rise of fast-casual competitors like Chipotle Mexican Group and Panera Bread, Darden’s future is worse than bleak.
“I’m bearish on their brands and concepts surviving against both the fast-casual movement, as well as the overall shift of consumers towards sole proprietor offerings,” said Michael Dempsey, an analyst with CB Insight. “Consumers want those ‘niche’ experiences that a big brand like Darden is not in the business of creating.”
So enjoy Olive Garden’s unlimited breadsticks while they last—yes, it seems like the fan favorites are safe with Starboard—because who knows how long Starboard can keep the company going.