Struggling Red Lobster to Split From Parent Company

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Bowing to investor pressure, Darden Restaurants announced yesterday that it plans to shed Red Lobster. The company said the split will most likely come in the form of a tax-free spinoff, thought a sale is also possible. 

Darden, the company behind Olive Garden, LongHorn Steakhouse, Capital Grille and a number of other chains, says it expects the separation transaction to close in early fiscal 2015, which begins in May 2014.

While Red Lobster is one of the big names behind Darden, it has been a drain on the company compared to Darden's faster-growing and more profitable LongHorn Steakhouse and Capital Grill. By splitting the restaurant from Darden, the company hopes to focus on the separate priorities and management tactics necessary for the increasingly divergent chains.

"By establishing two independent companies, a separation will better enable the management teams of each company to focus their exclusive attention on their distinct value creation opportunities," said Darden's CEO Clarence Otis in a statement.

Related: Meet the Top Franchise of 2014

The split has been in the works for some time, as Darden has been under pressure from investors to improve performance. Barington Capital Group LP proposed bigger actions, most significantly breaking Darden into three companies: one containing Red Lobster and Olive Garden, one holding younger and faster-growing chains such as LongHorn Steakhouse and Capital Grill and a third consolidating the chain's real-estate holdings.

However, Darden instead decided to take less drastic measures. "As a stand-alone company, we will be free to focus in a more single-minded manner on the many current and prospective guests who find what Red Lobster brings to the marketplace highly relevant," newly selected Red Lobster CEO Kim Lopdrup said in a statement. "A spinoff will also allow us to target our efforts and investments on value-creation opportunities that may be material to a stand-alone Red Lobster but not to Darden overall."

Yesterday, Darden also released disappointing second quarter results. Darden reported net earnings of 15 cents, a 42.3 percent decline from the second quarter of last year. While LongHorn Steakhouse same-restaurant sales increased 5 percent, Olive Garden sales dipped 0.6 percent and Red Lobster sales fell 4.5 percent. Darden projects that diluted net earnings per share for the fiscal year of 2014 will decline between 15 and 20 percent compared to fiscal year 2013, due in part towards the predicted sales forecast for Red Lobster. 

Darden additionally reported plans to reduce unit growth, forgo acquisitions, increase cost saving efforts and refine compensation and incentive programs in attempts to enhance shareholder value.

Darden currently owns and operates 2,174 restaurants, including 705 Red Lobsters, 834 Olive Gardens and 445 LongHorn Steakhouses.

Related: 99 Percent of November's Franchise Growth Was in the Restaurant Industry (Infographic)

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