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Recent moves from the management of Red Robin Gourmet Burger (Nasdaq: RRGB) bodes well for my investment thesis on the company.

Oak Street Capital recently asked the company to appoint its nominees to the board, to remove the poison pill, halt store expansion until operations improve, and create a $50 million buyback. The investor group chastened Red Robin for its failure to react swiftly in turning the company around. After an immediate but perfunctory response that they were acting, Red Robin management acceded somewhat to the demands a few days later.

The company raised the threshold on its poison pill to 16.5% from 15%, meaning the plan would not go into effect until a buyer acquired more than 16.5% of outstanding shares. Oak Street and affiliates own about 13.3% of shares. Red Robin also said the plan would expire after the annual shareholders meeting in May, unless the shareholders approved an extension. The amendment also allows for the company to be acquired if a majority of unaffiliated shareholders approve.

So things appear to be shaping up. And even a modest turnaround would make this stock look inexpensive at current prices.



Red Robin


McDonald's (NYSE: MCD)


Chipotle (NYSE: CMG)


Source: Capital IQ, a division of Standard & Poor's.

But if operating income can simply be improved to 2008's levels -- not even the peak -- then the stock would now be trading at 4.7 times EV/EBITDA. That's a discount to peers such as Burger King, which was recently bought out at nine times.

The company announces earnings on Thursday, and analysts are expecting just a nickel per share, well below last year's $0.10. Aside from the earnings numbers, I'll be looking for an increase in traffic, even more than margin increases. The restaurant chain needs to be focusing on getting people back into its locations, even if that comes at the cost of lower margins. So until then, I'll be waiting on Thursday's news.

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Jim Royal, Ph.D., owns shares in Red Robin and McDonald's. Motley Fool Options has recommended a write covered strangle position on Red Robin Gourmet Burgers. The Fool owns shares of Red Robin Gourmet Burgers. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.