Red Robin Weathers Turbulence

The restaurant industry, like many other consumer-related industries, has been on fire of late. The share prices of Outback Steakhouse (NYSE: OSI  ) , PaneraBread (Nasdaq: PNRA  ) , and Motley Fool Hidden Gems selection CEC Entertainment (NYSE: CEC  ) have all increased 10% or more since mid-October.

Today, Red Robin Gourmet Burgers (Nasdaq: RRGB  ) is joining the parade, with its shares up more than 9% after it released third-quarter earnings Thursday night.

Earnings per share came in at $0.39, which is down from last year's $0.43 per share. Two unusual items related to the recent departure of the CEO, though, took $0.06 per share off that total. If those items were reversed, the company would have delivered $0.45 per share, which would have been a 4.7% improvement over last year. Let's revisit the one-time items later on, because they are interesting.

Investors are giddy about Red Robin's earnings report for two reasons. First, the results were better than the company's internal guidance of $0.33 to $0.35, though they just matched analyst earnings estimates of $0.39. Second, and more important, the company raised its revenue and earnings guidance for the rest of the year. For full-year 2005, it now expects revenue of $118 million to $119.5 million, which surpasses the analysts' prior consensus estimate of $116.7 million. In addition, the company projects $1.71 to $1.73 in EPS instead of the $1.69 to $1.72 initially expected. The $1.72 midpoint of the new estimate would be a 20.3% improvement over last year's $1.43 in earnings. Compare that growth rate with the company's trailing price-to-earnings ratio of around 30, and the stock's valuation is a little high, but not unreasonable.

Back to the one-time items related to the former CEO. The first is a gain of $0.05 per share that represents money that the CEO inappropriately spent -- the reason he was dismissed -- and has now been paid back. The other item is an $0.11-per-share charge for accounting for stock options that the former CEO and the former chief financial officer exercised. The math definitely adds up to a $0.06-per-share reduction in earnings, and I'm not questioning the accounting for either of the transactions.

However, if I were a shareholder of Red Robin, I'd be a bit burned that the former CEO was allowed to profit from stock options (thus hurting the earnings) despite having committed improprieties. A CEO should be able to benefit from stock option grants only if his actions benefit the company. Red Robin appears to be a great business, and people love the product, but it wouldn't be the first time that a board of directors doesn't scrutinize management's behavior closely enough and allows shareholders to get burned. For that reason, if I held shares, I'd keep a close eye on this bird and especially its board.

For related avian Foolishness:

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Nathan Parmeleeowns shares in Outback Steakhouse but has no financial stake in any of the other companies mentioned. The Motley Fool has an ironcladdisclosure policy.


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