Red Lobster Never Recovered From the Great Recession

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It has been less than six months since Darden Restaurants Inc. (NYSE: DRI) first said that it would shed its Red Lobster restaurants, either in a spin-off or in a sale. The company announced Friday morning that it has sold its Red Lobster chain to private equity firm Golden Gate Capital for $2.1 billion.

Darden owned six restaurant chains in addition to Red Lobster, with Olive Garden being the largest with sales of $3.7 billion in the fiscal year ended in May 2013, and Red Lobster the second largest at $2.6 billion in sales. The problem was traffic — down 8.8% at Red Lobster and 5.4% at Olive Garden.

The so-called casual dining category of which Red Lobster and Olive Garden are members took a beating in the wake of the financial crisis. During the recession customers left for cheaper stores like McDonald’s Corp. (NYSE: MCD) or Yum! Brands Inc.’s (NYSE: YUM) KFC and Taco Bell. As the economy recovered, diners targeted the less expensive, but trendier fast-casual eateries like Chipotle Mexican Grill Inc. (NYSE: CMG) and Noodles & Co. (NASDAQ: NDLS).

Essentially, time passed the casual dining restaurants by. Among the first to go were P.F. Chang’s and O’Charley’s, both of which were sold to private equity buyers two years ago. The fast-casual chains offer marginally healthier food with faster service at lower prices in a more modern atmosphere. If Darden could find a buyer, then selling Red Lobster makes a lot of sense.

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But the story does not end there. A group of shareholders, including private equity firms Starboard Value and Barington Capital Group, have objected to the sale both because they believe the price is too low and because stockholders get no say in the transaction. Barington has called the deal a “fire sale.” Starboard questioned the impact of the sale on Red Lobster’s real estate holdings, although Darden executives say a sale-and-leaseback deal with American Realty Capital Properties allows Darden to realized value from the real estate.

Now Darden can focus on enticing more traffic to its Olive Garden stores. Why the company believes that can be successful is anyone’s guess.

Darden shares closed down 4.34% Friday, at $48.49 in a 52-week range of $44.78 to $55.25.

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