​Can a hedge fund's recipe fix Darden?

A man talks on his mobile phone in front of the Times Square Olive Garden in New York in this June 23, 2010, file photo.

REUTERS

For investors and diners, something's clearly off in Darden's (DRI) kitchen, thanks to the restaurant operator's wilted stock price and slowing traffic at its Olive Garden chain.

Hedge fund Starboard Value, an activist investor that owns about 8.8 percent of Darden, has whipped up an elaborate 300-page recipe for fixing all that ails the restaurant owner. The plan sheds some light on the struggling company's operations, including a stinging assessment of how Olive Garden's breadsticks and salads have changed for the worse.

The improvements touch on everything from the board's makeup -- Starboard is urging shareholders vote in new board members -- to singling out a major snafu in how Olive Garden cooks its pasta. The latter is a shocker, at least to any self-respecting cook, given that Starboard asserts that Olive Garden "no longer salts the water it uses to boil the pasta." The reason, according to the report, is so the Italian restaurant chain will "get a longer warranty on its pots."

"This appalling decision shows just how little regard management has for delivering a quality experience to guests," the report notes. "How can the management of the world's largest Italian restaurant chain think it is OK to serve poorly prepared pasta?"

The report even cites "The Frankies Spuntino Kitchen Companion & Cooking Manual," a cookbook from a Brooklyn hot-shot Italian chef, to back up its assertion that salting the water is step No. 1 when cooking pasta.

"We remain open minded toward all ideas that support long-term value creation for our shareholders and improve the dining experience for our guests," Darden chief operating officer Gene Lee said in a statement on Friday.

He added that the Olive Garden is under going a "brand renaissance" that's improving diner satisfaction and getting people to return to the chain.

Of course, the proof is in the pudding, and that turned out to be rather unsavory for Olive Garden in its fiscal first quarter. For the period ended Aug. 24, same-store sales at Olive Garden slipped 1.3 percent, the company said on Friday.

Darden's other restaurant chains are apparently faring somewhat better, with LongHorn Steakhouse reporting a 2.8 percent increase in same-store sales during the period. The chains in its specialty restaurant group, which includes The Capital Grille and Eddie V's, all saw increases, except for Seasons 52, where same-store sales dipped 0.3 percent.

So far this year, the stock has declined by more than 9 percent, while the S&P 500 has climbed almost 7 percent in the same time.

Starboard sought to prove that its turnaround tips for the restaurant chain weren't based on one bad dining experience. According to the report, the hedge fund spent two years working on the plan, including hiring more than 100 "mystery [shoppers]" at all of Olive Garden's major markets.

Olive Garden's problems include food that has strayed from authentic Italian, poor margins and food quality, and pricing that's too high for consumers, the report alleges.

And what about those breadsticks? Too much waste is created, with the chain serving as many as 700 million breadsticks a year, an average of three per customer, which Starboard claims is too many for diners. Restricting breadsticks to one per customer, which Starboard recommends, could save as much as $5 million.

On top of that, the breadsticks now contain more air and have less flavor, with Starboard complaining they taste like "hot dog buns." Salads are overdressed, leading to "added cost and unhappy customers."

Many of Starboard's suggestions relate to financial issues. It is urging Darden to split off its real estate assets, which it says could create shareholder value of $1 billion, as well as spinoff its specialty restaurants group.

The report comes on the heels of Olive Garden's embarrassing "Never Ending Pasta Pass," which has become a serious headache for Darden. The chain offered seven weeks of pasta, salad and soft drinks for $100, but customer demand crashed Olive Garden's website. The restaurant chain also warned customers trying to resell the passes that they might not be able to use them.