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Struggling Red Robin swallows a poison pill

The casual-dining chain is girding itself for a battle with activist investor Vintage Capital, says RB’s The Bottom Line.
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the bottom line

Red Robin Gourmet Burgers this morning swallowed a “short-term shareholder rights plan,” otherwise known as a poison pill, designed to deter investors from gaining control of the company by acquiring shares on the open market.

Red Robin said it adopted the poison pill after discussions with advisers.

In this instance, the move is clearly targeted at Vintage Capital Management, an activist investor that has been acquiring shares of late and has a history of making bids to acquire companies.

Vintage has been quiet thus far in its campaign, and representatives for the Orlando, Fla.-based firm did not respond to requests for comment this morning.

The firm first filed federal securities documents last month, indicating an activist intent in its investment in Red Robin. Among the options in its evaluation of Red Robin stock listed in its filing: “Pursuing a transaction that would result in … the acquisition of all or a controlling interest” in Red Robin.

Vintage acquired more shares late last month, disclosing in a Securities and Exchange Commission filing this week that it now owns 11.6% of the Greenwood Village, Colo.-based casual-dining chain.

Vintage Capital has a broad history in the activism game, ranging from passive investments in companies such as Papa Murphy’s to activist campaigns and outright offers to buy companies. Red Robin’s decision to swallow a poison pill suggests it is worried about Vintage’s stock purchases and is looking for leverage in its talks with the firm.

At the very least, it suggests a lot could happen with Red Robin in the coming months.

Red Robin’s stock has lost half of its value over the past year amid mounting sales and profitability challenges, particularly inside its restaurants. That lost value is likely what attracted Vintage, a value investor.

The casual-dining chain recently said it plans to close 10 underperforming stores after same-store sales fell 3.3% in the first quarter, while transactions declined 5.5%. Its biggest problem is a loss of dine-in customers, due at least in part to staffing cuts the company made more than a year ago.

Denny Marie Post retired as CEO in April, with Board Chair Pattye Moore stepping into the role on an interim basis. Red Robin has since hired The Elliott Group to look for Post’s successor.

This isn’t the first time that Red Robin has sought a CEO as activist investors were sniffing around. In 2010, it hired Steve Carley, who helped usher in a brand turnaround in the aftermath of the recession.

Red Robin is looking to refranchise its restaurants, something that Vintage is unlikely to discourage, given its own track record investing in franchise businesses.

Yet Red Robin’s challenges are complex and probably won’t be solved simply by handing off the operating responsibility to different investors. It is a burger-centric casual-dining chain, fending off intense competition from fast-casual better-burger chains. It is a family-focused concept that has worked to target older consumers that are of drinking age so they buy alcohol.

Like many other casual-dining chains, Red Robin has struggled to strike the right balance as customers demand more takeout and less dine-in. Its dine-in sales fell 5.5% in the first quarter, while takeout business rose more than 20%.

Its dine-in business is critical, however, because takeout isn’t as profitable. As I said before, service cuts make a difference these days. Those sales can be difficult to recover.

It also has a mall problem, with 76 locations inside enclosed malls that have seen worse sales challenges than its stand-alone restaurants.

So Red Robin must find a way to get customers into its mall locations that are increasingly devoid of traffic, while also convincing diners to spend time inside their restaurants instead of getting takeout from a fast-casual chain.

And it must do this while it looks for a CEO and fends off an activist investor. In other words, Red Robin and its board might not have the time to turn around the company. 

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