We've Just Witnessed The First True Masterpiece Of The Modern Hedge Fund Era (2024)

Bill Ackman is probably best known for this strategy. The activist investor has been leading a multi-year fight to show that Herbalife — a maker and distributor of diet drinks — is an illegal pyramid scheme that should be shut down. In July, Ackman hosted a special event where he flipped through a 235-page slideshowabout Herbalife.

Other investors have done similar things, though the scope has been a bit less ambitious. Last year, Whitney Tilson put together a big presentation on a private education company whose stock he thought would go down. Other hedge funders have done slideshows on a certain theme, like the bullish case on housing.

There are whole conferences basically devoted to this kind of investing.

Sometimes, as in the case of Ackman, the investor is an "activist" trying to get something to happen (in his case, government involvement in Herbalife. Others are trying to get board seats. A lot of times the focus is on financial engineering ("Well if you spin off the real estate into a separate entity, and sell the brand name to a holding company in Antigua, you could reduce taxes by 200 basis points...")

But while some of these presentations are dry, and some (like Ackman's) seem designed to overwhelm you into submission, a new entry into the field has taken the genre of a hedge fund presentation to a whole (and awesome) new level.

On Friday, activist investor Jeff Smith of Starboard Value, presented a nearly 300-page report about Darden Restaurants, the parent company of beleaguered restaurant chain The Olive Garden.

A lot of the media coverage of the presentation centered around a small part of it where Smith talks about Olive Garden's breadsticks strategy. Some of the headlines from the presentation include: "Olive Garden Investor: Back Off On Breadsticks" (AP), "Investor tells Olive Garden: Fewer breadsticks, sell more booze" (Fortune),and "Is Olive Garden’s problem that it’s serving you too many breadsticks?" (Washington Post).

But if you're main takeaway from all this is that Scrooge-like investment manager Jeff Smith thinks Olive Garden should stop giving away so many breadsticks, then you're actually missing the real story.

Smith likes the unlimited breadsticks idea. He just thinks they should be served differently. Rather than a waiter bringing out a huge bowl of breadsticks (many of which will turn cold and stale fast) he wants them to be served when demanded. Here's the slide from his presentation where he explains what he wants.

Smith is upset about the waste, the deterioration of quality, and he doesn't like the fact that if the server just dumps a bunch of breadsticks on the table, then they don't have to come back to the table as often, and that will leave the customer service experience wanting.

The argument is both subtle and powerful, and can not be reduced to "back off on the breadsticks."

What's amazing is that the presentation is page after devastating page of this type of takedown for the company. Unlike many presentations which can get boring, this one makes for riveting reading, and awe at the amount of research that went into taking down a chain Italian restaurant.

The presentation also blends its nuts-and-bolts take on Olive Garden's operation with data to back things up. So in the section on breadsticks and wasted food, Starboard shows that despite a pasta-heavy menu, Olive Garden's food costs are among the highest in the industry.

In addition to food waste, Starboard sees wasteful packaging practices. Note the point about the length of straws at Darden Restaurants.

The presentation also takes aim at menu complexity, which it says is overwhelming for customers, and contributes to kitchen inefficiencies.

Also, it wouldn't be a complete hedge fund presentation if there weren't a populist element.In this slide, Starboard attacks the company for its wastefully luxurious corporate HQ.

On the flipside, Starboard believes that Darden isn't paying enough to its restaurant General Managers, and that it's failing to create a sense of ownership and innovation down at the restaurant level. This slide shows how Darden's competitors are paying more to their GMs, and offering them more in bonuses.

The presentation goes on and on, poking hole after hole in how Darden (and the Olive Garden specifically) is being run.

There's a whole section on how the food looks like garbage...

And a slide about how Olive Garden has strayed too far from its Italian roots...

And of course there's also a deep financial dive, including a part about how Olive Garden is sitting on substantial, under-appreciated real estate assets.

Other crucial parts of the presentation include a detailed look at the current board of directors (and the proposed replacements), a criticism of the fact that Olive Garden doesn't put salt in its pasta water (to increase the longevity of its pans), and detailed survey data (partly done by mining Yelp) showing how people rate Olive Garden food (not well).

In short, the presentation is thorough, creative, multi-faceted, and above all leaves the reader with the rock solid sense that Olive Garden is being run into the ground. The amount of depth, and research into the operations of the company (not just the financials) really sings.

Now of course, this is just one side, and Olive Garden management might have counterpoints to much of it. But that's not the point. As a sales job, it's perfect.

And so we've seen the first true masterpiece of the era of hedge funds and their highly-public investment theses.

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