ORLANDO, Fla. (AP) — Darden Restaurants Inc. is looking to either spin off or sell Red Lobster, part of its plan to boost shareholder value.
The company, which also runs Olive Garden and other restaurants, said today that it is also suspending the opening of new Olive Garden locations and will limit the opening of new LongHorn Steakhouse restaurants.
Its shares rose in premarket trading about 90 minutes ahead of the market opening.
Red Lobster has 705 restaurants in the U.S. and Canada and is the biggest full service dining seafood specialty restaurant operator in North America. Its fiscal 2013 sales were about $2.6 billion.
Restaurant chains such as Olive Garden and Red Lobster have suffered since the downturn, with people being more careful about their spending. People are also increasingly heading to chains such as Chipotle, where it tends to cost less and take less time than a sit-down meal at a restaurant.
Darden Chairman and CEO Clarence Otis said in a statement that the company regularly assesses its business and strategic direction and takes action when market conditions change. Otis said there is significant change occurring in the restaurant sector, ” with relatively low levels of consumer demand in each of the past several years for restaurants generally, and for casual dining in particular, as well as additional unexpected softness since June.”
Darden said it has decided it won’t make any acquisitions of additional brands “for the foreseeable future.”
Its board also plans to take a look at senior management’s compensation and incentive programs so that there is more direct emphasis on same-store restaurant sales growth and free cash flow.
Darden anticipates that after separating from Red Lobster it will be able to report higher and more consistent same-restaurant sales and new restaurant sales growth and increased and more consistent earnings per share growth.
The company anticipates that its cost-cutting efforts will bring about at least $60 million in annual savings starting in fiscal 2015. This is up from the $50 million in savings it previously predicted. Darden said it will use the increase in cash flow from lowering capital spending and operating support expenses for dividends, stock buybacks and to help strengthen its credit profile.
Darden named Kim Lopdrup, president of its specialty restaurant group and new business, to serve as Red Lobster’s CEO after the separation. Harland Herrmann, president of Yard House, will become president of the specialty restaurant group in January. Red Lobster President Salli Setta will remain in that position. If Red Lobster is spun off, Darden Senior Vice President and Chief Financial Officer Brad Richmond will become chief financial and administrative officer for Red Lobster once the transaction is complete. Darden said it’s started the process of identifying its board and a possible successor for Richmond.
Darden announced today that its second-quarter net income fell to $19.8 million, or 15 cents per share, from $33.6 million, or 26 cents per share, a year earlier. Excluding severance costs and other items, earnings were 20 cents per share. Revenue rose to $2.05 billion from $1.96 billion.
Analysts polled by FactSet predicted earnings of 20 cents per share on revenue of $2.07 billion.
The company now foresees fiscal 2014 earnings per share falling 15 percent to 20 percent compared with the prior-year period. It previously predicted a 3 percent to 5 percent decline.
The planned Red Lobster spinoff still needs final approval from Darden’s board. It does not require a shareholder vote. The company expects any possible separate to close in early fiscal 2015.
Darden’s stock rose $1.08, or 2 percent, to $54 in premarket trading after initially fall as much as low as $50 per share.