The Plot Thickens at Red Robin

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The situation with Red Robin Gourmet Burgers -- home of the much heralded "endless fries" and also the subject of a "Fight Club" between yours truly and Eric Jackson back in early March -- is once again getting interesting. Back in March, Eric took the bearish view of the casual-dining chain, and I was the bull. In the five weeks following our showdown, Red Robin shares ran up about 23%. Less than two months later, though, shares had given back that gain and then some, falling about 39% to $17 in the aftermath of a reduced company outlook for the rest of 2010. While I may have landed some good punches and won a few rounds of that match, Eric is winning the fight ... at least for now.

But once again, the Red Robin story is heating up. Shares got their boost up to the $28.50 range back in April following an agreement that the company reached with a group of activist investors, Clinton Group and Spotlight Advisors, in early March. As I mentioned back in a February 1 column, the company and its margins had been in declining for years, and the activists were seeking some changes at the company in order to right the ship, including the expansion of the Board of Directors and replacement of the CEO.

On April 16, Clinton Group and Spotlight reduced their stake in Red Robin to 3.4%. But by mid-June, they had rebuilt that stake to 4.75% of the company, and on July 12 they filed a 13-D that listed ownership of 1.11 million shares, or 7.12% of the company. As indicated in a June 24 13-D filing, the activists have also had recent discussions with the newly appointed chairwoman of the board and one other board member -- the activists are clearly re-engaged.

Meanwhile, another familiar name has also taken a stake in Red Robin -- none other than the ever-controversial Biglari Holdings , parent company of the Steak n Shake and Western Sizzlin chains, recently revealed that it now owns a 6% stake in Red Robin. Biglari Holdings (formerly Steak n Shake) is no stranger to activist investing, although the filing used to report the company's stake in Red Robin reveals it as a passive investment. It will be very interesting to see how this development plays out; Biglari Holdings CEO Sardar Biglari is typically anything but passive. Red Robin shares have risen more than 20% since the end of June, amid the renewed attention brought by Biglari's ownership stake and the activities of Clinton Group and Spotlight Advisors.

Red Robin shares currently trade at 17 times trailing earnings: not cheap. Consensus estimates for 2011 are calling for earnings of $1.21 a share, putting the forward P/E at 17 as well. But clearly, there's much more to this story than valuation. Red Robin is a company whose margins have declined substantially over the years. The company's operating margin, which was 9.3% in 2004, was just 3.4% in 2009. Meanwhile, the net profit margin fell to 2.1% from 5.8% during the same period. While the company has remained profitable throughout the recession, there is still the belief by some -- including Clinton Group and Spotlight -- that given the right management team, the company can perform substantially better. In 2005, this was a $61 stock; it can be had today for just a third of that price.

The balance sheet remains decent but not great; as of the latest quarter, the company had about $14 million in cash and $170 million in debt and capital lease obligations, $151 million of which is long term, with no major maturities until 2012, when $147.8 million comes due. But as of year-end 2009, the company owned 32 of its current restaurant locations -- a potentially valuable portfolio of real estate that may give the company some options.

Just when you think a story has run its course, it gets more interesting. Red Robin certainly fits that bill. Stay tuned.