NEW YORK (AP) — Darden Restaurants wants to set Red Lobster adrift.
The company said Thursday that it is looking to either spin off or sell Red Lobster as part of its plan to boost value for its shareholders. Those plans also include suspending the opening of new Olive Garden locations and limiting the launch of new LongHorn Steakhouse restaurants. Darden Restaurants Inc. also won't make any acquisitions of additional brands "for the foreseeable future" and will review senior management's compensation and incentive programs to put greater emphasis on same-store restaurant sales growth and free cash flow.
Its stock fell about 4 percent to close at $51.02 Thursday.
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 customers being more careful about their spending. People are also increasingly heading to chains such as Chipotle, where food tends to cost less and the experience takes less time than a sit-down meal at a restaurant.
Darden Chairman and CEO Clarence Otis said during a conference call on Thursday that Red Lobster has been unable to capture high-income customers as much as its other brands have. A separation will give Red Lobster the opportunity to focus more on its core audience. He also said changing market conditions prompted action, noting the "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." Otis added that the company has been considering its options for Red Lobster for some time and shareholders wanted changes.
In September investment firm Barington Capital LP, which represents a group that owns more than 2 percent of Darden's stock, recommended that Darden consider splitting into two separate companies, with one company housing Olive Garden and Red Lobster and the other its remaining brands. Barington made the contents of the proposal public in October.
Darden anticipates that after separating from Red Lobster it will be able to report higher and more consistent same-restaurant sales, new restaurant sales growth and increased and more consistent earnings per share growth. It expects to use proceeds from new debt raised by the spun-off Red Lobster to retire part of Darden's debt. Darden expects that after the separation, Red Lobster will likely report low single-digit revenue growth driven by modestly higher same-restaurant sales.
The company said 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 increased cash flow from lowering capital spending and operating support expenses for dividends, stock buybacks and to help strengthen its credit profile.