A group of activist investors are mounting a proxy fight against the national restaurant chain in an effort to shake up the board and company management. A group calling themselves the “committee to enhance Denny’s”, who collectively own 6.5% of Denny’s shares, are irked by more than just the lagging share price. Namely, that Denny’s has fallen behind main competitor IHOP in the national chain breakfast business, a company which has thrived in recent years relative to Denny’s. The number of customers being served at the more than 1,500 Denny’s stores has declined by nearly 20 percent from five years ago and the company stock price has dropped by more than 50 percent in that span. As such, Investment firms Oak Street Capital Management, Macquarie Futures Inc. and Dash Acquisitions are looking to provide a shakeup to the Denny’s board by nominating their own slate of three directors. To purchase a governance profile for Denny's Corporation, visit our online store.
Among the concerns of the activist group is what they perceive as marketing gimmicks. For instance, Denny’s purchased a superbowl ad in order to advertise that for a second year in a row they would be giving away free breakfasts nationwide. Jonathan Dash, a member of the “committee to enhance Denny’s”, recently told the WSJ that “Denny’s paid a good amount of money to communicate to the public that they were giving away free food. That was not the best use of their marketing dollars.” This was followed two weeks later by a Denny’s offer of unlimited refills on french fries and pancakes, which sparked public outrage and a company apology when the 150th anniversary of the end of the Irish Famine was used as the basis for a free food celebration. Other problems at Denny’s according to the committee include failure to grow system-wide restaurants, strategic errors, high capital expenditures eliciting no measurable return, and corporate governance issues such as creating a pay for performance system which would better align shareholder and management interests.
Our evaluation of compensation at Denny’s based on its 2009 proxy statement elicited a high concern. The value of awards granted under the company’s long-term incentive plan is heavily dependent on short-term stock price performance. Also, the vesting structure of restricted stock presently lacks meaningful performance hurdles. This leaves the potential for a large increase in the value of the stock award that may be more related to an increase in the value of U.S. equities in general than the skill of management in running the company. It’s clear that the skill of management at Denny’s is being brought into question, and “the committee to enhance Denny’s” believes the election of their three nominated directors at the 2010 annual meeting may be a jumping off point for making the board and company management more accountable to its shareholders. Denny’s Corporation has set a record date of March 23, 2010 and a meeting date of May 19, 2010 for its upcoming 2010 annual meeting of stockholders. To try Board Analyst and access corporate governance data on Denny's and any of over 3,400 U.S. and Canadian public companies, request a product trial here.
Greg Ruel - Research Associate
