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Big Performance, Big Bite? Red Robin on Watch

February 28, 2014 | About:

Burger fans probably know Red Robin Gourmet Burgers Inc. (RRGB). Founded in Seattle, Red Robin Gourmet Burgers is a full-service casual dining restaurant chain that operates franchises and develops restaurants under the name of Red Robin Gourmet Burgers. By October 2013, Red Robin operated 350 company-owned restaurants and 135 franchised restaurants across the US and Canada. This burger-loving firm not only serves a broad variety of burgers made from beef, chicken, fish, pork and turkey, as well as veggie patties, but also offers salads, sandwiches, soups, entrees and the famous all-you-can-eat steak fries. Furthermore, a limited service non-traditional prototype restaurant is being developed by the company, named Red Robin’s Burger Works.

Nice Weather for Red Robin

The restaurant industry has not been easy these days, as many setbacks seem to have interfered with companies’ performance. Holiday seasons, bad weather and other challenges lead to under top-line results for many. Firms such as Chili’s of Brinker International (EAT) or McDonald's (MCD) have complained about the hostile weather conditions striking their business.

This is not the case of Red Robin though. The firm delivered some pretty awesome fourth-quarter results, outpacing competitors. EPS of $0.62 beat the year-ago quarter’s earnings of $0.59 by 5.1% on margin expansion. Revenue growth was not as impressive, reaching a tepid 0.5% to $241.9 million, driven by higher franchise royalties, fees and other revenues. A 5.1% rise in average guest check provided Red Robin a 3.7% growth in comps, and same-store sales jumped 3.2%.

Outlining a set of initiatives which include menu innovation, effective marketing strategy and remodeling programs to strengthen the brand, management expects same-store sales growth. Steve Carley, the firm’s chief executive, explains the “new service and presentation, innovative new menu items and targeted marketing efforts,” and adds that “2014 will be a year of continued focus and execution across our engagement, efficiency, and expansion initiatives.”

Nevertheless, we should regard these expectations carefully, as this industry is constantly susceptible to macroeconomic uncertainty, fierce competition and, of course, seasonality.

Good Model

Due to Red Robin’s business model and strategy, which has proven to be stable, the firm is currently considered one of the most recognized restaurant chains in the casual dining segment. The combination of a broad variety of high-quality gourmet burgers, and a Bottomless Steak Fries promotion, along with a menu-item customization strategy, makes it possible for Red Robin to lure different consumers with varying preferences.

Still, 30% of its consumers are under 18 years old, given the restaurants’ family-friendly atmosphere. Time efficiency beats most competitors, allowing quick table turnover and short wait for patrons. Consumers seem to enjoy their experience at Red Robin as their guest loyalty program has currently approximately 2.7 million clients registered.

The Project RED to increase firm’s efficiency and cutting of costs reveals the determination of the company to improve its model, looking to increase profitability and expand operations. With less than 500 units, Red Robin is indeed smaller than other similar firms, but is far from saturation levels. Yet, the restaurant industry remains fiercely competitive, and the discounting and promotions environment may affect profitability in the mid-term.

Holding On

Some analysts think the management’s guidance was solid, though unspectacular, and the still-soft consumer spending environment will make it difficult for the brand to keep a sustainable advantage in the competition. The food-cost inflation strikes many companies and some like Red Robin have dealt with it by raising menu prices. This strategy, however, is likely to deter customers to alternatives eventually and as the firm doesn’t benefit from the cost advantages larger players have, the control over its profitability is limited, making marketing the main tool to drive traffic.

Red Robin is indeed aware of these difficulties, and is working to have more control of profitability by shifting product mix, introducing alcoholic beverages such as can crafted beer cocktails and managing employee costs more effectively. All the same, food cost inflation is expected to remain elevated, and the margin pressure is likely to hinder Red Robin’s growth.

Small Bites

Despite the sluggish economic environment, Red Robin managed to post positive same-store sales, and grow sustainably the past three years. Its fundamentals are strong and presented a better than expected performance during 2013. Improved guest traffic and innovations have had a positive outcome and Red Robin, now expecting comps to grow 4%, might be likely to sustain its growth momentum.

Focusing on television advertising and social media campaigns to drive traffic, the company is relying in consumers' confidence. The expansion plans are still tranquil. This needn’t be a bad sign though, as the competition is intense, and an expansion implies pre-open costs which might affect the company’s operating margins. Rather than a big expansion, Red Robin developed the Red Robin’s Burger Works prototype in order to profit from smaller markets and non-traditional locations.

The stock’s P/E of 35.1 is slightly higher than the industry’s average of 28.2, but the net income growth in three-year average reached 64.1. Red Robin has proved effective at reducing operating expenses through the RED initiative and reducing payroll expense from 26.6% of total revenue in 2010 to 22.9% in 2012, and still has the opportunity to enter high-traffic areas at lower occupancy costs with its smaller concept.

Cautious analysts say the stock is still to watch, suggesting a closer look given the limited control the company has over its profitability.

Disclosure: Damian Illia holds no position in any stocks mentioned.

About the author:

Damian Illia
A fundamental analyst at Lonetreeanalytics.com constantly looking for value and income investments.

Visit Damian Illia's Website


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