This note was originally published January 22, 2014 at 09:48 in Restaurants. For more information on how you can subscribe to Hedgeye click here.
The behavior of all objects can be described by saying that objects tend to "keep on doing what they're doing." Yesterday proved that Darden will continue to be Darden until acted upon by an unbalanced force!
There is a foot of snow on the ground, but I can see a long heated battle this summer for control over the future of this company.
The irony of yesterday’s new flow on Darden was that the Chairman of the Board/CEO, Clarence Otis, thinks he has the best plan to create value for shareholders. On what track record does he base his credibility on? As the CEO of DRI, he has burned billions of shareholders’ cash flow without any accountability. Alas, I’d be remiss not to point out that Mr. Otis’ only operational job at Darden, before becoming CEO, was the $500 million disaster called Smokey Bones.
Here are a few key statistics on Clarence’s track record as CEO of DRI:
- In FY07, DRI generated $5.5 billion in revenues versus and estimated $8.9 in FY14 – CAGR of 7.12% (including acquisitions).
- In FY07, DRI generated $773 million in EBITDA versus an estimated $979 in FY14 – CAGR of 3.43% (including acquisitions).
- Between FY07 and FY14, DRI will have spent an estimated $4.204 billion in capital spending to generate an incremental $206 million in EBITDA. Is this considered creating shareholder value?
- In FY07, DRI reported $2.53 in EPS. In FY14, we expect them to report $2.40 in EPS.
- Between FY07 and FY14, DRI will have reduced its share count by an estimated 11%.
As CEO of Darden Mr. Otis could not grow the earnings of this company over a seven year period!
What is shocking is not simply that he still has a job, but rather that he has a plan to create shareholder value. Oh, the irony in this thought! If you are a current shareholder of DRI, do you have the confidence that the current management team can and will make the right decisions?
We must question, given these facts, why the Board of Darden has not taken more decisive action.
The challenge for the Board members of Darden (or any Board) is to recognize the appropriate time to step up and implement change. It is their challenge, their job, and their responsibility not to maintain the status quo. Newton’s first law of motion is often stated as: “An object at rest stays at rest and an object in motion stays in motion with the same speed and in the same direction unless acted upon by an unbalanced force.” Well, it is time for the Board of Darden to be the unbalanced force and to keep the company moving forward – in the right direction.
When a Board works closely with a CEO for a number of years, the best interest of shareholders’ can become blurred. As an outsider, it appears that this is the case with the current Board and Chairman/CEO Clarence Otis. The operational performance of DRI has stagnated and it is time for a change. Within this context, we urge the current Board members to consider the last paragraph of the Starboard letter very carefully:
“Based on our research and discussions with you to date, we do not believe that these initiatives have been fully and objectively explored. Further, given the negative reaction to the announcement of the proposed Red Lobster separation, shareholders are also clearly dissatisfied with the current proposal. In light of the foregoing concerns, as well as those raised by other large shareholders, we urge you not to continue down the current, potentially value destructive path. Instead, we believe it is incumbent upon management and the Board to commit to a full exploration of all alternatives, including those discussed in this letter, with an open mind. We believe that a failure to do so may violate the Board’s fiduciary duties.”
I couldn’t agree more with the Starboard letter and it appears that the DRI activists are close to agreeing on what we believe the new Darden should look like. If I could put myself in the position as the third activist, we’d all be in agreement that a different operating structure is critical to future of the company. Where I differ from the two shareholders, other than the fact that I don’t own a share, is they want to work with management and come to some sort of agreement. The problem is that the management of DRI doesn’t want to work with them.
This company has the potential to become the true leader in the casual dining industry, but it needs an unbalanced (unbiased) force to make the changes necessary.