There's nothing Wall Street hates more than uncertainty. Bad news sends shares tumbling too, but nothing is considered worse than a future that Wall Street can't reasonably quantify. Shareholders of Red Robin Gourmet Burgers
The uncertainty primarily stems from the abrupt and less-than-voluntary "retirement" of Chairman and CEO Mike Snyder and the resignation of Senior VP and (until June) CFO James McCloskey. At this point, we only know that Snyder was inappropriately spending company funds on travel and other perks, and that McCloskey decided to leave along with Snyder. (It was reasonable to suspect something was afoot when McCloskey changed positions in June.) In its conference call, the company stated that the expenses Snyder incurred don't affect its operating results, nor should they require Red Robin to restate results. It is also expected that Mr. Snyder will repay the company for the charges he ran up.
Wall Street is also nervous about Red Robin's updated guidance for the third and fourth quarter. This is partly due to increased store openings and their associated costs, and partly from a charge for accelerated vesting of stock options given to Snyder and McCloskey. It's important to note that the vesting on these options was accelerated in 2002, and the options were exercised in the past as well. Because Snyder and McCloskey are leaving the company, the expense associated with those options must be recognized now. Had they stayed on board through 2007, the original vesting schedule, there would be no charge.
The company also announced that they are working with the SEC regarding an internal audit and waiting for the agency's response. At this point, that's all we know.
On a personal note, I think the company took the proper action. Too often investors see company management misbehave and abuse shareholder funds with little or no consequence. As Chairman, CEO, and an owner of franchised restaurants, Mr. Snyder had a very complicated relationship with Red Robin, full of potential conflicts of interest. Before Sarbanes-Oxley took effect and barred companies from loaning money to their executives, Mr. Snyder also used personal loans from the company to purchase the underlying shares of some of his options. While two of the three loans had been repaid, one remains outstanding. Any sign of company funds being inappropriately spent only promotes speculation that Snyder was stacking the cards in his favor. Despite the good he may have done for Red Robin's restaurants, the company is far better off removing Snyder now and wiping the slate clean of any potential conflicts.
That said, investors shouldn't assume Red Robin is in the clear, especially since it still hasn't heard back from the SEC. Shareholders should also hold the still-intact board of directors partly responsible for Snyder's actions; they were fully aware of his potential conflicts of interest. Lastly, the company intends to retain Mr. Snyder as a consultant. Shareholders should pay close attention to the company's filings to see how well Mr. Snyder is being compensated for this consulting arrangement, compared to his previous salary and bonuses.
Further Foolishness to sink your teeth into:
Nathan Parmelee has no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.
