What’s Cooking at Olive Garden?

It's certainly hot in Olive Garden's kitchens. Olive Garden is the largest Italian restaurant chain in the U.S., and owner Darden Restaurants (DRI 0.46%) is calling for a turnaround to improve its top and bottom lines. More importantly, it will help get activist investors off the back of CEO Clarence Otis.

Can an improved menu bring customers back and help it fend off competition from Romanos Macaroni Grill, owned by Ignite Restaurant Group (NASDAQ: IRG), which is trying to mount its own turnaround? Maybe customers are looking for more from the Italian casual-dining chains than just salad and breadsticks.

Source: Olive Garden

It all starts in the kitchen
As with every restaurant, the key is to make food that resonates with customers and keeps them coming back for more. Olive Garden has given this task to its head chef Jim Nuetzi. He's working to improve Olive Garden's menu by adding items such as capers, kale, polenta, olives, and pistachio-crusted truffles. These flavorful ingredients would not have been found at an Olive Garden before.

Source: Olive Garden

Chef Nuetzi and his team work out of Olive Garden's test kitchen at Darden's headquarters in Orlando. The company is trying to create dishes that appeal to a younger clientele who maybe would not have considered going to Olive Garden before. Or if they did go, it was with their families and not on their own.

An example of a new dish on the menu is Polenta Shrimp alla Greco. This dish consists of sauteed shrimp on creamy polenta with olives, capers, and tomato sauce. This type of dish is typically found on the menus of trendier restaurants and not at an Olive Garden.

Darden Restaurants could use a boost
Darden's latest results were disappointing all around. Third-quarter earnings per share declined almost 20% from last year. Same-store sales were weak at all of Darden's concepts, and the winter weather made things worse. In the third quarter, same-store sales decreased 5.4% at Olive Garden, fell 8.8% at Red Lobster, and dropped 0.7% at its Specialty Restaurant Group. The only restaurant that managed to post a slight increase was LongHorn Steakhouse, which posted a sales increase of only 0.3%.

Source: Darden Restaurants

The pressure is on CEO Clarence Otis
Darden shares have fallen more than 5% in the past year. This underperformance is why activist investors Starboard Value and Barington Capital are angling for change at Darden Restaurants. Item number one on their agenda is the removal of Otis as chairman and CEO.

Source: Red Lobster

Darden Restaurants has been resisting the calls from the hedge funds for the removal of Otis. Instead the company drafted a plan to spin off Red Lobster. Otis feels spinning off Red Lobster is the best course of action, as it offers slower growth than the other concepts. Red Lobster's same-store sales have declined in seven of the past eight quarters.

Furthermore, by spinning off Red Lobster, he feels he can work to turn Olive Garden around and use the cash-flow from Olive Garden to fund the growth of Darden's other concepts. An Olive Garden turnaround is critical because the brand accounts for about 40% of Darden's revenue.

Meanwhile, over at Romano's Macaroni Grill...
The Olive Garden isn't the only Italian restaurant in need of fixing. In its latest quarter, Ignite Restaurant Group reported that same-store sales declined 4.1% at Macaroni Grill. The company feels that the winter weather accounted for a good portion of the decline in same-store sales. Macaroni Grill posted total sales of $91.8 million in the first quarter.

Source: Romano's Macaroni Grill

Macaroni Grill is making some progress. According to the Nation's Restaurant News, Macaroni Grill:

...finished first among Italian casual dining chains for its Italian trattoria-inspired atmosphere and received highly favorable rankings for food quality, cleanliness and service.

The survey results showed that Macaroni Grill made year-over-year improvements in value, menu variety, craveability, and atmosphere. This is a positive sign considering that Ignite Restaurant Group has only owned Macaroni Grill for slightly more than a year. Ignite Restaurant Group purchased Macaroni Grill last year for $55 million.

How do shares compare?

Source: Yahoo! Finance

Foolish final thoughts
For Darden investors, a turnaround of Olive Garden is key to boosting the top and bottom lines. In terms of the spinoff of Red Lobster, there's no denying that there is a lot of hidden value among the different brands in the Darden Restaurants portfolio. Hopefully, management and the activist shareholders can come to an agreement that unlocks shareholder value and both sides win. Both sides winning is a victory for all of Darden's shareholders.