Red-Faced At Red Robin

The resignations of two top execs cloud the fast-growing chain's future

Red Robin Gourmet Burgers (RRGB ) prides itself on a culture of what it calls "unbridled acts." The company's former CEO, Michael J. Snyder, came up with the concept after watching an unbridled horse run free in the high mountain desert of Idaho. Snyder uses it as a metaphor on the Red Robin Web site: "What if our company could run that same way with power and grace, no restraints, yet everyone knowing the direction and objective? What if we could be 'unbridled' in everything we do at Red Robin?"'

But the unbridled act dogging Red Robin these days isn't one you'll find Snyder waxing rhapsodic about: On Aug. 11, in the wake of an internal audit that turned up what a company press release describes as $1.25 million of expenses "inconsistent with Company policies or that lacked sufficient documentation," Red Robin said the 55-year old Snyder was retiring after 26 years at the chain. The company, which turned over the issue to the Securities & Exchange Commission, said the expenses involved "use of chartered aircraft and travel and entertainment expenses, including charitable donations." James P. McCloskey, senior vice-president and onetime CFO, resigned at the same time. Neither exec responded to BusinessWeek's requests for comment.

Until those revelations, Red Robin was a Wall Street darling. With a menu that includes "gourmet" items such as Whisky River BBQ burgers and grilled salmon burgers, the chain, with more than 275 restaurants, enjoyed healthy per-4store growth rates. Its stock jumped from a 2002 initial public offering price of $12 to just under $63 this past June. But the exits of Snyder and McCloskey were just the start of the bad news. The same day the company announced the duo's departure, it also lowered its annual earnings forecast. Red Robin's stock plunged 24% in a day.

Snyder has had a long and profitable relationship with Red Robin. In 1979 he opened a franchise in Yakima, Wash., with his brother Steve. By 1995, Snyder was Red Robin's largest franchisee, with 14 outlets. That's when he approached Red Robin's Tokyo-based owners with a proposal to overhaul the slow-growing chain. In 1996, in exchange for injecting some cash, Snyder was named president and got a minority stake. He closed underperforming restaurants, added high-ticket items, and refinanced the chain's hefty debt.

Between 1997 and 2000, when Snyder sold his franchises to the company for some $24 million, earnings jumped 63%, to $189 million, while net income went from a loss of $8.6 million to a profit of $15.4 million. The torrid pace continued: Average annual profit growth of 48.7% for the three years ended this past May helped land Red Robin the No. 96 spot on BusinessWeek's 2005 Hot Growth ranking of the fastest-growing small companies.

From the outset, Snyder enjoyed a trusting relationship with the six-person board, five of whom the company says were independent. In addition to his $1.1 million paycheck and his stake in Red Robin (now 9.5%), Snyder also owns a 31% stake in a large franchisee, Mach Robin, which owns Red Robins in the U.S. and Canada. That's a potential conflict since franchisee Mach Robin and franchisor Red Robin are on opposite sides in many business transactions. Last year the board waived its ethics code governing conflicts of interest to let Mach Robin build another restaurant outside of Boise, Idaho. In an SEC filing, Red Robin states that "The Audit Committee determined that the terms of agreement were no less favorable to the company than the terms that could have been negotiated with other, unrelated parties." A board spokesman declined comment.

Earlier this year, after reading newspaper reports about execs misusing their company's private jets, Red Robin instructed its law firm to review Snyder's travel logs, says a company insider. Snyder's contract allowed him use of a leased corporate jet but required that he pay for private travel. In a conference call with analysts, the company said Snyder had repaid the $1.25 million and that McCloskey resigned after he was shown results of the audit.

Snyder is no longer the head of Red Robin but will stay on as an unpaid consultant. "Mike is going to assist us in brand work, as he always has," said new CEO Dennis B. Mullen, a longtime restaurant exec, in the conference call. Snyder won't be involved in day-to-day business, but "Red Robin is his life, and he's a huge shareholder."

The company has moved to improve its corporate governance. On Sept. 8 it beefed up its board, adding a pair of certified public accountants with experience in SEC compliance. That hasn't stopped the inevitable lawsuit charging that the company issued "false and misleading statements" before cutting its earnings projections. The suit also alleges that Snyder and McCloskey benefited by selling shares before Red Robin issued the lower outlook for 2005. SEC filings show that Snyder sold $14 million in stock through prepaid forward contracts in May; McCloskey sold $1 million in late 2004 and early 2005. In legal papers, Red Robin's lawyers call the suit "frivolous."

The tumult isn't slowing Red Robin's plans. The chain aims to open 15 new joints this year. Sales are up 23.4% in its most recent quarter, with same-store sales up 4.8%. "This is a strong company with a tremendous future," Snyder said to analysts after Red Robin announced his departure. Maybe so. As CEO, Snyder created all the right buzz for the brand. But now the attention he's getting is the kind that no business leader wants.

By Ronald Grover in Los Angeles

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