Shares of Darden Restaurants (DRI) took a sharp drop Tuesday after its chairman, an activist investor who had taken control of its board, resigned despite stronger than expected earnings, the company said Tuesday.
Jeffrey Smith, CEO of the Starboard Value hedge fund and Darden's chairman since October, 2014, will be replaced by Charles Sonsteby, a board member who is chief financial officer of The Michaels Companies. Darden operates 1,500 restaurants, including the Olive Garden chain.
The news came on a day that Darden reported a robust performance in its third quarter ended Feb. 28. It beat analysts' expectations by a penny, coming in with adjusted earnings of $1.21 a share, up from 99 cents a share in the same quarter last year. On an unadjusted basis, Darden had earnings of $105.8 million, or 82 cents a share, down from $133.8 million, or $1.05 a share, last year. The loss was mainly due to retirement of debt. Revenue rose 6.7% to $1.85 billion for the quarter, beating expectations of $1.84 billion, according to Zacks.
Yet the stock dropped on news of Smith's departure, down 3.77% on the day, to $64.80 a share.
Sales in the same restaurants as those open a year ago were up 6.2%. Olive Garden had a 6.8% sales rise, and Bahama Breeze had an increase of 9.9%, the strongest among the company's seven chains.
Smith took the helm of Darden's board when his hedge fund succeeded in replacing the restaurant company's dozen directors with its own nominees. The hedge fund complained that company management had made numerous mistakes, from bungling the sale of the Red Lobster chain to allowing Olive Garden to put too many bread sticks on customers' tables.
"It is with mixed emotion that I leave the board of directors," Smith said in a statement. "I will thoroughly miss working with the capable and talented people throughout the company, and I am so incredibly proud of what we have been able to accomplish together.''
Casual dining chains like those owned by Darden have been struggling to remake themselves in the face of growing competition from fast casual eateries like Chipotle and Panera Bread. But in 2014, Darden shed Red Lobster along with connected real estate assets for $2.1 billion, and by the end of last year, the company appeared to have turned a corner, posting a profit in the wake of increased sales at Olive Garden and its other restaurants.
In the meantime, Smith has taken on new battles. Starboard, which owns a 1.7% stake in Yahoo, has threatened to try to oust that board at the annual shareholder meeting later this year. Starboard has been pressing the company to sell its core web assets, like Yahoo Mail, to the highest bidder. And while Yahoo has initiated a sales process, Starboard has accused the company of dragging its feet in order to buy time for a turnaround plan devised by Yahoo CEO Marissa Mayer.
Smith is also encountering problems in his effort to merge office supply chains Office Depot and Staples. The two companies agreed to merge last year in a deal valued at $6.3 billion, but the Federal Trade Commission has moved to block it. Now the issue is being decided in court.
All those travails are weighing on Starboard’s portfolio. Shares of Office Depot are down 18% in the last 12 months, while shares of Staples are down 32% in the same time period. Yahoo's stock is down 16% over the last 12 months.
Starboard could not be immediately reached for comment.
Some analysts are wondering whether there could also be trouble looming on Darden's horizon. In an investor's note, RBC Capital Markets questioned whether the company could maintain its strong financial performance in the midst of an industry channel that continues to not do well.
"With industry trends having slowed further to about -2% in the weeks since Darden’s fiscal third quarter, we wonder whether Darden can continue to find growth drivers in a seemingly unhealthy category in casual dining,'' the note said.
