Starboard Value LP began its activist investor endeavor at Darden Restaurants Inc. (NYSE: DRI) with its opposition to Darden's plan to sell its Red Lobster brand. In two letters sent to Darden between Jan. 21 and Feb. 10, 2014, Starboard expressed concerns with the proposed separation of Red Lobster, indicating that "the plan is not in the best interests of shareholders and could potentially destroy substantial value."
The letters also outlined key value creation initiatives for Darden Restaurants as a whole, including cost reductions and other operation-related improvement measures, a potential sale or spinoff of Darden's real estate holdings, separation of Darden's five specialty high-end niche brands from its mainstream casual dining outlets (Olive Garden, LongHorn Steakhouse and Red Lobster), and certain franchising opportunities; Darden owned the vast majority of its restaurants.
On Sept. 11, 2014, Starboard issued a 294-page presentation on transforming Darden Restaurants. It addressed a wide range of management and corporate issues at the restaurant company, especially problems pertaining to Olive Garden. Darden was seeing continued drops in same-store sales at the time, and Starboard believed it could successfully help Darden create value for all stakeholders.
Starboard Value is a hedge fund and investment advisor that focuses on investing in deeply undervalued, publicly traded small companies in the United States. As an activist investor, Starboard seeks to engage with management teams and boards of directors to develop alternative solutions to create value for all shareholders.
Activist investing requires a deep understanding of a target company's fundamental business, including end markets and competitive positioning. To that end, Starboard conducted extensive research on Darden and the casual dining industry. By working with industry executives, consultants and other advisors, the activist investor concluded that substantial opportunities exist to unlock value for all shareholders with the cooperation of Darden's management and board of directors.
Starboard owned approximately 5.5% of Darden's outstanding common stock at the time, making it one of the largest shareholders. Starboard was prepared to ask for the replacement of Darden's board if constructive collaboration proved to be lacking.
By early 2014, when Starboard was actively engaging with Darden's management and its board, total sales of Darden had declined to below $6 billion in 2013 from $7.5 billion in 2011. Sales were even lower at $5.3 billion in 2012, a deep drop of about 30% from 2011. As a direct result, Darden stock was trading range-bound between $40 and $50 per share during 2012 and 2013. This level seemed to be capping the stock's all-time performance with no sign of a price breakout.
In 2013, Darden stock underperformed the Standard & Poor's (S&P) 500 Index by 15% and its direct competitors, including Brinker International Inc. (NYSE: EAT), by 26%. The underperformance was even worse in 2012 and 2011. Poor financial results and stock performance can be traced back to operating inefficiencies. With the help of a leading operationally focused consulting firm, Starboard identified a total of $216 million in annual cost savings and $55 million in extra sales, for $271 million of added earnings, or about 65% of Darden's 2013 net income.
With Starboard implementing comprehensive operational and strategic initiatives, Darden has improved its financial and stock performances. Revenues bounced back to $6.8 billion in 2015, and net income shot up to $710 million, compared to the $400 million earnings range for the two to three years before Starboard's activist investing. Darden stock began to take off in late 2014 after the introduction of the new board and chief executive officer (CEO), and it kept climbing through 2015. Starboard initially predicted that the added earnings from cost savings and extra sales could create $15 to $26 per share in value for shareholders. Since then, the stock has gone as high as $67.78 per share, and closed at $64.20 per share on April 15, 2016.
Darden's financial success is also an investment success for Starboard. In the 18 months since Starboard came on board, the value of Darden stock has increased by close to 40%. To take advantage of the significant appreciation in Darden's stock price, Starboard has been reducing its stake, cutting it from 9.1 to 8.1% in January, then to 6.2% in February and again to 5.2% in March. Even with all the share sales, Starboard remains among the top five Darden shareholders, and intends to stick with Darden.