Red Robin Gourmet Burgers (RRGB, Financial), Red Robin for short, announced its second quarter earnings last week.
The company reported a total sales growth of 4.29% and profit loss of 32.4% year on year. Mr. Market initially reacted negatively, sending Red Robin’s shares down by 5.7% but ended up appreciating the company’s shares by 12.2% from the day’s bottom to closing. Nonetheless, Red Robin’s share price touched its one-year low at $48.64 a share during that period.
(Red Robin Gourmet Burgers share price, Google Finance)
Accordingly, despite good sales growth, business operations costs went up by 6.74% resulting in profit decline. Particularly the following went up year on year: labor and occupancy costs, depreciation and amortization, pre-opening and acquisition costs.
(Red Robin Cost and Expenses, Business Wire)
The company also had an asset impairment charge of $3.86 million that was not given, in my opinion, much of a discussion in the quarterly report. Compared to first-quarter performance, Red Robin had an asset impairment charge of $800,000 related to a relocation of one restaurant.
(Red Robin Gourmet Burgers, Image Source)
Red Robin Gourmet Burgers
According to its recent annual filing, the first Red Robin® restaurant was established in Seattle in 1969. A decade later, the first franchised Red Robin restaurant was opened in Yakima, Washington. The company also opened its first Red Robin Burger Works® in Denver in 2011.
Based on its recent quarterly filing, there were 449 Company-owned Red Robin® restaurants, 11 Red Robin Burger Works®, and 86 franchised Red Robin restaurants, for a total of 546 restaurants. The company opened seven Red Robin restaurants and relocated one in the second quarter.
In 2012, the company began a Brand Transformation Initiative. The initiative was to enhance Red Robin’s service, menu, food presentation and other guest experiences. The brand transformation goal is to reinforce Red Robin’s position as a go-to place for families while attracting more visits from adult guests dining together. The company completed 30 restaurant remodels in the second quarter.
Red Robin has over 390 restaurants conforming to its new brand standards, including new restaurant openings, and stated that it will substantially complete the remodeling of Company-owned restaurants by the end of 2016.
(Red Robin Gourmet Burgers, Company Website)
Meanwhile, Red Robin has several registered trademarks and service marks, including Red Robin, Red Robin Gourmet Burgers®, Red Robin America’s Gourmet Burgers & Spirits®, Red Robin Burger Works®, “YUMMM®”, Red Robin Gourmet Burgers and BrewsTM, and Red Robin RoyaltyTM names and logos.
The company also has a Red Robin RoyaltyTM loyalty program. Red Robin closely tracks the frequency and purchase behavior of its guests enrolled in the program. Also, certain perks are provided being enrolled in the program.
(Red Robin RoyaltyTM loyalty program, Company Website)
Comparable sales and sales growth
(Growth Figures, Own Data Compilation from Company Filings; *1H 2016: average of Q1 and Q2 comparable store sales in constant currency)
Comparable store sales refer to the amount of revenue a retail location generated in the most recent accounting period, relative to the amount of revenue it generated in a similar period in the past.
Observably, Red Robin had been having good sales growth performance fundamentally backed by solid growing same store sales in previous fiscal years. Same store sales only started to show negative numbers in the fourth quarter of 2015 and had been on a decline since.
Nonetheless, Red Robin expects to have a total sales growth of 5% in fiscal year 2016. Also, it projects a comparable sales store growth of 2%.
Cash, debt and book value
As of July 10, Red Robin’s unaudited financial statements revealed that it had $25.9 million in cash and $293.4 million in total debt. Red Robin had a debt-to-equity ratio of 0.77 and a book value of $380.9 million. Goodwill and intangibles composed 37% of Red Robin’s book value.
Cash flow
(Red Robin Gourmet Burgers’ Consolidated Cash Flow, Annual Filing)
In fiscal year 2015, Red Robin grew its cash flow from operations by 14% to $140.9 million. Notably, the company was able to have smaller asset impairment charges and accounts payable last year. In contrast, provision for deferred taxes and benefit from stock option exercise and accounts receivable increased.
Red Robin allocated $166.28 million in capital expenditures leaving it with -$25.36 million. The company also spent $2.53 million in acquisition of franchised restaurants and reduced its debt by $325.55 million. In addition, Red Robin spent $40 million for share buybacks. Other than relying solely on its operational cash flow to fund operations, Red Robin also took in some $415.5 million in debt. The company does not pay out dividends.
Valuations
According to GuruFcus data, Red Robin has a trailing 12-month price-earnings (PE) ratio of 26 times, price-book value (PB) ratio of 1.87 times and a price-to-sales (PS) ratio of 0.84 times. Red Robin currently trades about a little above than the Global Restaurant industry peer(s) median PE ratio of 24.76 times. In contrast, the company trades lower than the industry peer PB ratio of 2.66 times and PS ratio of 0.92 times. Meanwhile, the broader Standard & Poor's 500 index trades at a PE ratio of 25 times and PB ratio of 2.9 times.
Conclusion
Red Robin, despite missing any dividend payments, had an average annual total return of 17.69% since 2010, while the S&P 500 had provided 12.61%. In addition, the company’s shares had never touched the $48 level a share any time between its recent earnings announcement and late 2014.
As one can observe, the company has been actively seeking ways to enhance its sales growth. Either opening new stores to capture market share or pursuing restaurant enhancement to encourage more loyalty with its guests. In terms of serving its shareholders, I believe the company has done well despite its current multi-year low share prices, especially for those investors who had purchased its shares for the past decade.
Despite the ongoing same store sales weakness, the company still is optimistic in achieving positive growth in FY 2016. Also, the company trades just about its industry median. But compared to other restaurant favorites such as the high-growth Shake Shack (SHAK, Financial), the stalwart McDonald’s (MCD, Financial) and the struggling Wendy’s (WEN, Financial), the multiyear low share price presents an opportunity.
Disclosure: I may initiate a long position in Red Robin Gourmet Burgers within the next 24 hours.
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