Red Robin faces more pressure from investors

Oak Street the latest to push for change at casual-dining company

Red Robin Gourmet Burgers Inc. pushed back Tuesday after an investor group publicly stepped up pressure on the casual-dining company to make changes to its board and strategic direction.

Investor group Oak Street Capital Management LLC, which owns about 13.3 percent of Red Robin’s outstanding shares, sent a letter to the company’s management Monday seeking changes on the company’s board of directors; a reduction of corporate overhead; a moratorium on growth until profitability of existing locations is restored; and a redirection of operating cash flow towards a $50 million share repurchase program. The firm also asked Red Robin to remove a “poison pill” that would prevent shareholders from acquiring more than a 15-percent stake without board approval.

The Oak Street partners said they met with company officials on Jan. 7, but came away disappointed by the “lack of urgency” because a special meeting of the board was not called to discuss the proposals.

In response to Oak Street on Tuesday, Red Robin chairwoman Pattye Moore said the board disagrees with many of the investor group’s assertions, “in particular with the suggestion that the board lacks a sense of urgency with regard to improvements at Red Robin.”

Moore noted that the board had added several members last year in addition to bringing in a new chief executive, Steve Carley. The company also has loosely outlined a strategic plan, dubbed Project RED, promising that more details on the plan would be revealed at the fourth quarter earnings release in mid February.

Project RED’s strategic goals include driving guest traffic and average check; improving guest frequency and enhancing sales of new menu items; and optimizing the food and beverage revenue mix.

“We have set ourselves an aggressive timetable for this strategic task, and, while moving fast, have been working to incorporate the views of multiple key constituencies, including our shareholders and franchisees,” Moore wrote. “We look forward to sharing with you and our other shareholders the details of Project RED in just a few weeks, and look forward to hearing thoughts from all our shareholders then.”

In the letter Tuesday, Moore did not address the push by another shareholder group to take the company private.

A few weeks before Oak Street's letter, the Clinton Group Inc. and Spotlight Advisors LLC, which collectively hold about 8.95 percent of Red Robin’s shares, sent a similar letter that also argued that the burger chain should seek a private buyer. Turnaround efforts, they said, would be better accomplished as a private company.

EARLIER: Red Robin gets more pressure for buyout [3]

Analyst Brad Ludington of KeyBanc Capital Markets Inc., said Monday that both Oak Street and Clinton appear on the same page in terms of eliminating the poison pill and consideration of potential acquisition. Oak Street, however, seems to leave open the possibility that Red Robin could implement a turnaround as a public company, he wrote.

Oak Street’s chief investment officer David Makula and partner Patrick Walsh wrote in their letter Monday that Project RED so far seemed “nothing more than a series of general statements that read like a ‘cookie cutter’ list that could be applied to almost any restaurant concept.”

Makula and Walsh said they were also frustrated that “there have been no visible improvements to the company’s cost structure or its capital allocation program.”

Operating costs continue to escalate, Oak Street said, while corporate operating margins have declined substantially. Red Robin also continues to open new restaurants despite declining returns on invested capital, according to the letter.

Oak Street said it would seek representation on the company’s 10-member board, saying “the market has lost confidence in the board’s ability to effectuate positive change.”

For its third quarter ended Oct. 3, Red Robin reported a net loss of $4.2 million, or 27 cents per share, compared with a profit of $5.7 million, or 37 cents per share, in the same quarter a year ago. The loss included a $6.1 million non-cash restaurant impairment charge and a $2.3 million in pre-tax executive transition expenses.

Same-store sales during the third quarter swung positive, however, with a 0.9-percent increase at corporate locations. Red Robin said the increase reflected a 2.6-percent bump in guest counts, partially offset by a 1.7-percent dip in the average check.

At the end of the third quarter, Red Robin had 312 corporate and 134 franchised locations.

Contact Lisa Jennings at [email protected]