Darden investor urges spinoff of high-growth brands

An activist investor is hungry for change at Darden Restaurants Inc. Hedge fund Barington Capital Group LP, along with other investors, has taken a 2.8% stake in Darden, the owner of Olive Garden, Red Lobster and six other restaurant chains. The fund is pushing for Darden to form two separate companies, among other changes, according to people familiar with the matter.

New York-based Barington has held talks with the restaurant operator's management. The investor group argues that Darden should create one company with its Olive Garden and Red Lobster restaurants, and another with its higher-growth chains, which include Capital Grille, the people said.

It isn't clear what other investors are in the group, which also has urged the company to reduce costs faster than it already is and to try to cash in on its real estate. Based on Darden's current market value of about $6.47 billion, the group's stake is worth roughly $181 million.

"We believe that Darden has the potential to deliver significantly higher returns to shareholders," said a Barington spokesman.

A spokesman for Darden said the company "welcomes input on enhancing shareholder value," adding that its board "will take the time necessary to thoroughly evaluate Barington's suggestions, just as the company does for any of its shareholders."

Based in Orlando, Fla., Darden has more than 2,100 restaurants in North America, which, in addition to the other chains include the LongHorn Steakhouse, Yard House, Eddie V's Prime Seafood, Seasons 52 and Bahama Breeze brands. The company owns the land at more than 1,000 of its restaurants, according to financial filings. Other companies have extracted value from their real estate by creating real-estate investment trusts or using sale-leaseback transactions.

Darden has been hurt by economic weakness as some consumers shift to lower-priced fast-food restaurants, while others gravitate toward competing chains like Chipotle Mexican Grill and Potbelly that don't have table service and therefore offer the prospect of quicker meals—and no tips.

At Olive Garden—Darden's biggest chain by revenue—same-restaurant sales dropped 4% in the first fiscal quarter, while they fell 5.2% at Red Lobster.

The company also has been hit with higher food and labor costs. During its most recent earnings call, Darden said that it would aim to save about $50 million annually.

Reflecting the challenges the company faces, its stock price had fallen about 15% over the past 12 months. It was little changed at $46.35 around midday Wednesday before surging more than 6% on The Wall Street Journal's report of the Barington group's stake.

In its most recent quarter, Darden's overall sales grew 6.1% to $2.16 billion, and the company posted a $70.2 million profit. Sales at its higher-end chains have been more robust as well-off consumers continue dining at upscale restaurants. Same-store sales at Darden's higher-end chains rose 0.5% in the quarter.

Barington was co-founded in 1992 by James Mitarotonda, and was named for Bari, Italy, near where he was born. Mr. Mitarotonda, now the fund's chairman, president and chief executive, hadpreviously worked in the retail and financial-services industries, and participated in the retail-management executive training program at Bloomingdale's, according to Barington's website.

Barington's portfolio has around a dozen companies at any given time. Earlier this year the hedge fund built up a stake in Jones Group Inc., pushing for the retailer to reduce costs, add directors and sell parts of its portfolio. Jones is now in the late stages of an auction of the entire company, according to people familiar with the matter.

In 2006, the fund contacted apparel maker Warnaco Group Inc.'s management and suggested that the company sell non-core brands and reduce expenses. Warnaco later sold its Anne Cole, Ocean Pacific and other brands.

—Julie Jargon contributed to this article.