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Olive Garden Owner Defends Breadstick Strategy As Conveying "Italian Generosity"

Four days after an activist hedge fund released an eviscerating analysis on the state of Olive Garden restaurants, claiming it was giving away too many breadsticks and doesn't salt the water before cooking its pasta, among other things, parent company Darden responds.

Posted on September 15, 2014, at 1:48 p.m. ET

Mike Mozart / Via Flickr: jeepersmedia

The parent company of Olive Garden is standing by its own plan to reinvigorate the Italian casual dining chain after an activist hedge fund released a meticulously researched and heavily critical treatise on the state of the restaurant last week.

Last Thursday's presentation by hedge fund Starboard Value grabbed headlines for its detailed portrayal of the problems at Olive Garden — which included giving away too many free breadsticks, ordering asparagus that was too long, and not salting the water before cooking pasta to extend warranties on its pots — and overshadowed Darden's first-quarter earnings, which beat analyst estimates. Starboard has been battling with Darden since late last year and is seeking to replace the entire board at the company's annual shareholder meeting in early October.

Darden responded to Starboard's claims Monday with a presentation of its own that defended its current course for the restaurant chain, including its breadstick strategy. In addressing what was perhaps Starboard's most media frenzy-inducing criticism — Olive Garden's salad (overdressed) and breadstick (too many served and poor quality) strategy — Darden called its breadsticks "an icon of brand equity" for more than three decades, and said the unlimited nature of which "conveys Italian generosity." As for Olive Garden's salad quality, Darden said it had the highest loyalty rating of any menu item based on its internal customer satisfaction surveys.

Further, in response to Starboard's assertion that the Olive Garden brand was losing its Italian authenticity, Darden cited its newly remodeled "Brand Renaissance" restaurants as evidence that it is staying true to its Italian roots. "Based on focus group feedback," Darden wrote in its presentation, "guests feel the remodel is even more Italian than before, because of the wine cues and Mediterranean colors."

Still, Darden's response and its earnings win are likely not enough to stave off Starboard's crusade to gain control of its board, according to one source familiar with the shareholder voting that will culminate at the company's annual meeting next month in Orlando. A lot of shareholders have been left wondering who is in charge at Darden, the source said, especially given that lame-duck CEO Clarence Otis, who in July announced that he would step down by the end of the year, was not on the earnings call, and the current chairman, Charles Ledsinger, will not seek election at the annual meeting.

Analysts have been mixed as to whether an entirely new slate of directors would improve things for Darden, with the main argument against Starboard's proposal being that it would be disruptive to the execution of an improvement plan the company says is already underway. But as the company prepares to meet with proxy advisory giant Institutional Shareholder Services, which will recommend a course of action for voting shareholders, the source said Darden is going to have to come up with a better plan than simply relying on the disruption argument.

Darden shares jumped nearly $2 Monday morning after releasing its defense to just below the $50 per share mark.