Olive Garden?
According to RBC Capital analysts David Palmer, Jack Kindregan and Eric Gonzalez, the key question now is what happens next with Olive Garden. Will the company move forward with its turnaround plans or can activist investors force a divestiture of Olive Garden as well?
The report notes that sales at both Red Lobster and Olive Garden have been slipping over the last few quarters, as customers are switching to more casual chains such as Chipotle Mexican Grill, Inc. (NYSE:CMG) and Panera Bread Co (NASDAQ:PNRA). However, Darden Restaurants, Inc. (NYSE:DRI) sees more potential in a come back for Olive Garden than Red Lobster. The company believes that Olive Garden fits well with its other, higher-end restaurant chains where diners are willing to spend more.
Darden Restaurants, Inc. (NYSE:DRI) revamped the logo for the iconic American Italian restaurant and has blended in several lighter menu items, as well as smaller dishes that fit with modern eating trends.
The company currently operates more than 830 Olive Gardens across North America.
Red Lobster – Darden: Deal only minimally dilutive
The RBC report also highlights that this deal is really only minimally dilutive. Granted Darden Restaurants, Inc. (NYSE:DRI) announced the transaction will have a dilutive impact to FY15 earnings, but the company did not provide any specific guidance.
RBC Analysts Palmer et al summarize their perspective below. “We are currently estimating EPS of $2.78 for FY14. However, we believe the dilutive nature of this deal in FY15 undersells the full future impact, since overhead reductions (~25% of current G&A) and share repurchases (up to $700mm) will not happen instantaneously. The full implementation of these programs could lead to a net accretive transaction by FY16. While some activist hopes will diminish with this transaction, we do believe that the new Darden Restaurants, Inc. (NYSE:DRI) should be given a higher multiple than the old Darden.”