GREENWOOD VILLAGE, CO-Bear Stearns has downgraded its ranking of the Red Robin restaurant chain’s stock to a neutral rating from its former buy recommendation after CEO Michael Snyder and CFO James McCloskey resigned last week following an internal investigation regarding travel and entertainment expenses. The Bear Stearns report says that Red Robin appears to be sound and to be performing well, but the investigation and management changes raise doubts about the possibility of further revelations.

Snyder did not participate in last week’s Red Robin conference call with financial analysts to discuss results for the second quarter ended July 10, but he attended the call to introduce new CEO Dennis Mullen and new president and COO Eric Houseman. Mullen said that the company would not comment beyond the contents of its announcement and its SEC filings regarding Snyder’s retirement. The company named Katherine Scherping as its new CFO.

The announcement said that a Red Robin investigation “identified various expenses by Mr. Snyder that were inconsistent with company policies or that lacked sufficient documentation.” Snyder has agreed to reimburse the company following completion of a special committee’s review, it said.

The Bear Stearns report said that its analysts “are surprised at the announcement” regarding Sndyer and “do not feel sufficiently comfortable that there will be no further related announcements.” Bear Stearns added that Red Robin “had internal controls issues in 2004″ and that “With a new CFO in place, we feel the potential for finding more earnings discrepancies is increased.”

Despite these reservations, the analysts’ report said that “Fundamentally, the business appears to be performing well” and that Red Robin had surpassed Bear Stearns’ expectations for quarterly earnings by about 4 cents per share. “The fundamentals are good and our expectations of Red Robin’s growth potential are unchanged,” the report said.

Red Robin earned net income of $7.4 million, or 45 cents per share for the second quarter, compared to net income of $5.7 million, or 35 cents per share in the second quarter last years. Sales grew to 114.1 million, compared to $92.5 million in last year’s second quarter. Comparable restaurant sales increased 4.8% for company-owned locations, 3.8% for franchise restaurants in the US and Canada increased and 6.7% for franchises in Canada.

Mullen said during the conference call that new management expects to follow the same operational and expansion course that the previous executives had mapped out. That plan calls for Red Robin to open 26 new locations and for its franchisees to open 15 to 17 this year, which the company is on track to do, according to Mullen.

During the second quarter, Red Robin opened three new company-owned restaurants, for a total of 11 new company-owned restaurants through July 10. Its franchisees opened four new restaurants in the second quarter, increasing year-to-date franchise openings to nine. At the end of the second quarter, Red Robin totaled 274 locations, with 148 company-owned and 126 franchised.

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