CKE Restaurants: Hedge Fund Exerts Cost Cutting Pressure

Ramius LLC, a Hedge Fund  with a  3.6% ownership position, sent a letter today to CKE Restaurants' (CKR) CEO stating its overall disappointment with CKR's  fundamental performance and its need for cost cutting and capital expenditures reductions.

 

Ramius stated that substantial opportunity exists for CKR to reduce its G&A costs, as the company currently has three headquarters facilities that could be combined into one.  In Fiscal year 2000, G&A costs per store was $39.1K,  and in 2008, that cost had increased 22% to $46.7K  per store, totaling $144 million (high versus competitors in the QSR segment).  Ramius suggested that total S&G costs are about 30%  too high and should be closer to $100 million mark.

  

Capital spending reduction request: CKR plans to target $145 million for Fiscal 2009 capital spending, yet CKR is expected to produce only $105 million of cash flow according to analyst expectations. Ramius has indicated it is not prudent for CKR to undergo a $40 million deficit in order to fund its capital spending commitment, especially with the fact that both the economic climate and its balance sheet leverage have changed materially for the worse.

 

The Hedge fund stressed that it acknowledges the difficulties of operating in today's economic environment , but feels it's unacceptable for Management and the Board to stay the course and continue to blame the company's poor performance on economic issues that are out of its control.

 

Ramius declared that Management and the Board have done little to address and mitigate "shareholder value destruction" and shareholders deserve a greater sense of urgency regarding actions to improve shareholder value. It also relayed plans to vote against CKR's four recommended Directors due to questionable governance issues such as oversight and compensation policies. 

   

CKR answers:  

CKR's response to  the Ramius letter didn't take long. It shot back a letter of its own with a sort of  "standard boiler plate" communication  stressing that it understood  Ramius's concerns ,and are eager to reply,  however its Annual Meeting scheduled for this Thursday and subsequent  first quarter earnings results (due out 6/25) preclude the company from entering into any discussions due to applicable rules and regulations governing disclosure (what a mouthful).

 

The Bottom line:

 

This activist shareholder might be a pain in Management's side, but in the long run, this type of constructive analysis ultimately ends up prompting a company to re-evaluate itself and take the appropriate actions to improve, and that's always good for the stock price. The real question is:  Will the other large shareholders side with Ramius or Management?  Will a proxy fight develop?

 

Stay tuned, there should be some "Gordon Gecko" fireworks at this Thursday's Annual meeting.

 

Disclosure: Long