Although no final decision has been made, Darden is likely to execute a tax-free spin-off of Red Lobster to its shareholders, but it may also consider a sale of the Red Lobster business.
Darden is also expected to reduce the expansion of its Olive Garden and LongHorn Steakhouse branches. The reduced unit growth will lower capital spending by at least $100 million annually.
"Darden is the market leader in full-service dining because of the passionate commitment, collective capabilities and hard work of generations of employees. We are also the leader because we regularly and rigorously review our business and strategic direction, and take decisive action when market conditions change," said Clarence Otis, Darden's Chairman and CEO.
"Our industry is in a period of significant change, with relatively low levels of consumer demand in each of the past several years for restaurants generally, and for casual dining in particular, as well as additional unexpected softness since June. Even with challenging industry conditions, however, companies that have outstanding assets and excellent teams can continue to create compelling value provided they are strongly aligned behind the right priorities."
Speaking about the separation from Red Lobster, Mr Otis said: "While we are highly confident the future is bright for both Red Lobster and Darden excluding Red Lobster, we also recognise that the operating priorities, capital requirements, sales and earnings growth prospects, and volatility profiles of the two parts of the business are increasingly divergent. By establishing two independent companies, a separation will better enable the management teams of each company to focus their exclusive attention on their distinct value creation opportunities."
Red Lobster had annual sales of approximately $2.6 billion in fiscal year 2013. As consumer demand dynamics have changed, Red Lobster's priorities and operating support requirements have come to differ meaningfully from those of Darden's other brands, which are having greater success increasing appeal among consumers outside their core guest profiles.
As a separate company, Red Lobster will have greater freedom to pursue marketing and operating strategies that are more tailored to the needs of those consumers who fit its core guest profile. In addition, compensation and incentives for Red Lobster's management teams will be more closely aligned with its performance.
Kim Lopdrup, currently Darden's President, Specialty Restaurant Group and New Business, has been selected to serve as Chief Executive Officer of Red Lobster following the separation.