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Red Robin’s New CEO: Hired to Stop the Dive

By Johnny Chen – Nov 6, 2019 at 10:22PM

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The struggling burger restaurant is looking for a rebound.

In September, Red Robin Gourmet Burgers, Inc. (RRGB 3.27%) announced the appointment of industry veteran Paul Murphy as its new CEO. Murphy will replace interim CEO Pattye Moore, who held her position since April 2019. Murphy was previously the executive chair of Noodles & Co. Prior to his time at Noodles, Murphy was the CEO for Del Taco Restaurants, Inc.

Struggling Red Robin is looking to Murphy to execute its rebound, who has a proven record of reviving distressed restaurant companies. 

Man about to bite into a burger.

Image Source: Getty Images

Murphy's resume shows he can turn around brands

When Murphy was named as the executive chairman at Noodles in 2017, the brand was struggling, closing dozens of underperforming stores. Under Murphy's tenure, Noodles rebounded with four consecutive quarters of same-store growth. Murphy focused on healthier menu options, including the introduction of vegetable noodle Zoodles. Zoodles proved to be a key driver for Noodle's turnaround success.

As Del Taco's CEO, Murphy led the restaurant chain during the Great Recession, by refreshing stores and positioning Del Taco as a "QSR (quick service restaurant)-plus" option for diners. During his tenure, the company had 17 consecutive quarters of company operated same-store growth and 11 consecutive periods of systemwide comp gains. He also led Del Taco's 2015 IPO.

Red Robin is facing challenges

Red Robin has been struggling recently, with a 2.3% drop in year over year overall revenue. Much of the revenue decline was tied with its in-store performance. Red Robin's second quarter 2019 financials reported drops of 1.5% in same-store sales and a 6.4% decline in traffic. A factor resulting in the disappointing performance is its decision to cut two restaurant staffed positions, which resulted in longer service times. Given the longer wait times and slower service, customers likely opted to dine elsewhere. 

To counter these challenges Red Robin focused on staff training, off-premise sales growth (which include to-go orders and catering), and changes to restaurant operations. The off-premise sales growth may be the best driver toward profitability. In the second quarter of 2019, Red Robin's off-premise sales grew 25.7% compared to the same quarter last year and comprised 12.5% of its total food and beverage sales. The company has also added resources to further its off-premise sales including expanding its delivery coverage and the hiring of a new catering director.

Another challenge: A rejected buyout

On the same day Red Robin announced Murphy's appointment, the company rejected a Vintage Capital buyout bid for $40 per share. Red Robin's board said the offer was inadequate, noting that "the strategic plan currently being implemented by Red Robin positions the Company to deliver greater long-term value to its shareholders than Vintage's proposal." Vintage, which already owns 11.5% of Red Robin stock, voiced concerns regarding Red Robin's poor performance and its lack of engagement with Vintage regarding turnaround plans. 

Prior to the official rejection, Red Robin hired takeover-defense advisors (investment bankers and lawyers) and took legal actions to thwart Vintage's bid. Given the combative history between Red Robin's board and Vintage, further legal action involving the two remains a possibility.

What does Murphy's CEO appointment mean from here?

Murphy has the demonstrated ability to turn around distressed restaurant brands. He has shown the aptitude to reinvigorate other underachieving restaurants resulting in a sustained record of growth. His appointment may be the right hire for the struggling Red Robin.

Murphy may face added challenges with Vintage's possible legal action following the Red Robin's rejection of its buyout offer. Even if the legal challenge does not come up, Red Robin could be a target for future buyout bids. 

While it remains to be seen if Murphy can help Red Robin overcome its financial woes, he has the experience and the skill set to execute the rebound strategy. While the future possibility of buyout bids and Vintage's legal action may complicate matters, Murphy is the right person to lead the company.

Johnny Chen has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Red Robin Gourmet Burgers. The Motley Fool has a disclosure policy.

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