The Revolt and Revolution at Darden … Research Paper
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Olive Garden's Recovery
Olive Garden has certainly gone through its issues and travails over the recent years. As part of its parent company Darden, there has been some very valid concerns about the longevity and long-term success of Olive Garden and the other brands that have or currently do fall under the Darden Restaurants banner. However, things are looking up for Olive Garden right now. Even so, it has been a struggle and there has been a lot of trial and error. Through it all, Darden seems to have Olive Garden soundly on the right track right now and it remains to be seen if that shall continue. While Olive Garden has certainly been through some rough times, they seem to have righted the ship and they are now moving on to better things.
Summary of Darden Inc.
As indicated in the introduction, Olive Garden is actually one of several restaurants that falls under the corporate parent known as Darden Restaurants. Based out of Orlando, Florida, Darden's current lineup of restaurants include Olive Garden, Longhorn Steakhouse, Bahama Breeze, Seasons 52, The Capital Grille, Eddie V's and Yard House (Yahoo Finance). Darden use to also have Red Lobster in its collective but they sold that company about two years ago for about $2.1 billion in a divestiture that is still criticized as being the wrong move. The Red Lobster brand was sold to private equity firm Golden Gate Capital (Jannarone). Anyhow, Darden has since soldiered on and they have absolutely kept Olive Garden within its midst. Even after the aforementioned divestiture of Red Lobster, Darden still has a rather sizeable share of the restaurant sector around the country. They have about 1,500 restaurants across all of their brand names and they employee not quite 150,000 employees. Darden as its own name has been around since 1968. Despite the sale of Red Lobster, Darden has enjoyed sales growth over the last two-year-to-year periods including 2013 to 2014 and 2014 to 2015. The 2015 to 2016-year just ended May 31st, 2016 and the data has not yet been released for that time frame (Yahoo).
To drill down a little more on the financials, the author of this report would look at the financial statements and other relevant data for the company. As just noted, the overall revenue figures for the company are quite good from fiscal year 2013 to the present despite the internal leadership struggles and sale of Red Lobster, as will be mentioned in the coming paragraphs and sections. In fiscal year 2013, the company made about $5.9 billion in sales. In fiscal year 2014, this figure rose to $6.2 billion. In fiscal 2015, the figure rose even sharper to $6.7 billion. Gross profit over those same time windows generally rose but did dip in the 2014-year. The figures, respectively, were $1.3 billion for 2013, $1.295 billion for 2014 and $1.422 billion in 2015. As for net income applicable to common shares, much the same thing happened. The net income in fiscal year 2013 was $411 million. The net income figure was $286 million in fiscal 2014, a fall of more than a fourth. However, the figure strongly recovered (much like gross profit) in fiscal year 2015 to about $709 million. Operating income did much the same thing. All three fiscal years had a profit of somewhere between $300 million and $400 million but there was a dip in 2014, much like the other metrics. In short, total revenue has been good overall but there was a dip in operating income, net income and net income applicable to common shares in fiscal year 2014 as compared to what revenue was doing ... which always rose (Yahoo Finance.
The balance sheet reveals a little more cause for concern. Total assets hovered around $7 billion in fiscal years 2013 and 2014 but fell to a bit less than $6 billion in 2015. However, the good news is that overall debt has fallen over that same time frame. The total liabilities for Darden was $4.8 billion in 2013 and then rose a bit to $4.925 billion in 2014. However, there was a sharp fall in total debt to about $3.6 billion in 2015. Accounts payable fell from $531 million to $404 million over that time frame but the biggest reason debt fell was a sharp fall in long-term debt. The 2013 and 2014 figures were $164 million and $222 million, respectively. However, that figure was a scant $15 million in 2015 (Yahoo Finance).
The cash flow statement is a little dourer. Indeed, the net income (as mentioned before) took a sharp dip in between 2013 and 2015. However, it remained positive. The company shed nearly two billion in money when it came to cash flows from financing activities. Beyond that, the company only gained about $10 million a year in 2013 and 2014. However, that figure to rose the better part of half a billion in fiscal 2015. Investing activities was also a drain on cash flow. The company shed a total of nearly two billion dollars in investing activities including more than a billion in 2013 alone. That number shrunk below half a billion in 2014 and o less than a quarter billion in 2015. The current analyst opinions for Darden are mixed. There are more upgrades than downgrades, however. Raymond James, mentioned elsewhere in this report, has them at "underperform," which was a change from market perform. This followed another downgrade that they did in October 2015, which shifted them from "outperform" to "market perform." In short, they were shifted down two times in the span of less than three months. On the other hand, Piper Jaffray upgraded them to "overweight," Maxim Group upgraded them to "Buy" and Credit Suisse upgraded them to "Outperform." Other hedge funds and groups keeping an eye on them include Goldman, Deutsche Bank and Guggenheim.
Hedge Funds Make Their Play
As for the trials and tribulations of Olive Garden, there were many. 2014 was notable for Darden even beyond the sale of Red Lobster. Indeed, there roughly ten different events that Darden went through that led to some realistic questions about where Darden would be in five to ten years ... or even by 2020. It started when one of the more prominent hedge funds out there, known as Barington Capital, insisted that Darden should spin off both Red Lobster and Olive Garden. Both of those chains were struggling mightily at the time and Barington was of the mind to cut bait and get rid of them both. Not long after that, another hedge fund entered the fray but did so in a financial way. Indeed, Starboard Value entered the situation and bought a 5.6% stake in Darden. They were out there saying much the same thing as Barington as it related to Olive Garden and Red Lobster. Darden Corporate was steadfast in holding onto Olive Garden but decided to part ways with the Red Lobster brand. This was seen as a way to acknowledge that change was necessary but Darden refused to capitulate when it came to getting rid of Olive Garden (Summers).
Sale of Red Lobster
The spat between Barington, Starboard and Darden got much nastier. Many shareholders in the Darden sphere decided that they wanted a voice. Of course, Barington and Starboard were among the people that thought that way. However, Darden did not seem to listen much, let alone care, about the feedback from the stockholders and stakeholders because they executed the sale of Red Lobster with little further notice. Beyond that, there are many that say that the company could and should have gotten a lot more than the $2.1 billion that got for the sale. Many people, including the two hedge funds involved, were very critical of the deal and this led to a mutiny where people with the hedge funds went for control of the Darden Board of Directors. Making things worse, the earnings figures for the company as a whole fell by roughly a third just as all of this was going on (Summers).
There was at least one casualty that came as a result of the hastily done sale of Red Lobster and that was Darden Chairman and CEO Clarence Otis. He announced that he would leave at the end of the year or when his replacement was found, whichever happened first. The fallout continued when the company's annual meeting was delayed by two whole weeks. It was originally going to happen in Orlando on September 30th. However, Darden decided a delay was in order so that proxy materials could be released. The main purpose of that pivot was to state its case against the Starboard plan. Starboard, for its part, was rather vicious in that they declared that what Darden was going was "an act of prolonging shareholder suffering at the time" (Summers).
Starboard took full advantage of that delay. They penned a three-hundred-page report that absolutely lambasted and denigrated Darden… [END OF PREVIEW]
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