When Red Robin Gourmet Burgers Inc.(NASDAQ:RRGB) reported second-quarter earnings on Aug. 8, there was some hope that the company was poised for a huge earnings beat. Disappointingly, shareholders got another quarter of falling earnings and slumping revenue, though revenue is up 4.3% year-over-year.
And while it is not clear how things could get better or worse for Red Robin, it is hard to miss the biggest obstacle the company has been facing, revenue. Revenue has been falling for the last eight quarters, going back to the second quarter report of August 2014. Let's look at the strengths and weaknesses of the most current quarter.
The Good
- Revenues increased 4.4%, while restaurant revenues were down 3.2%.
- Operating profit margins did fall, down 1.6% from 22.5% last year to 20.90%.
- The company continues to buy back shares, purchasing $20 million in stock.
- Earnings per share fell to 55 cents, down from 78 cents one year ago, with net income falling to $7.6 million, all the way from $11.2 million one year ago.
- Red Robin plans on opening 24 new restaurants, 3 Burger Works and is planning to complete 70 remodels.
- Management expects revenue to grow 5%, revenue growth to fall to 2% and margins to stay around 21%.
- Menu changes and additions were also noted, including new Tavern menu items, a happy hour, Red Robin Loyalty and a focus on Bottomless.
- Operating margins were down due to higher operating and labor costs, but were also affected by lower ground beef prices. Management has said it expects traffic estimations to stay at a 3% decline.
- Management does not plan on stopping their current opening pace of new stores, as new openings are living up to their expectations.
- Red Robin sees potential in their $6.99 menu as a way to bring "everyday value" back as a focus for the company.
What Management Said
Let's start with the following comment by former CEO and Director Stephen Carley, addressing his retirement:
I would like to thank the board and the entire Red Robin team for six great years at the company. I've had the pleasure of assembling a fantastic talented team at Red Robin over that time period. Today, we have a deep bench of exceptional executive talent. And we've worked, worked hard, had fun and I am so proud of what we have accomplished.
Current CEO, Denny Marie Post, on taking market share again:
Together we are charting a confident course forward with the support of our home office, field and franchise teams in the Unites States and Canada. We can and we will regain momentum and take share again. We will do so by setting a new pace for innovation in service models, menu and experience.
Red Robin also looks to be getting in the delivery and catering business. Post said the following:
So the bottom-line, we are going to immediately refresh and update our equities in speed and value. We're going to go all-in on multiple to-go, catering and delivery pilots to set ourselves up for next year, and we'll support it all with targeted, higher-impact marketing.
CEO Denny Marie Post, on how Red Robin plans on bringing value to the customer:
Next, on the value front, we introduced happy hour in over half of our locations to further incentivize off-hour visits with $1 off our everyday value pricing on beer, wine and mixed drinks and half prices on some of our most popular appetizers.
After ten years without investing in any technology, Post said, "Over the past five years, we have had to catch up on fundamental systems and technology after a decade of zero investment. We have prioritized non-guest-facing foundational systems such as labor scheduling, human capital management, Kitchen Display and table management. The new food cost and supply chain management team is now in a single store pilot, and is the last key fundamental investment. All of these tools, all of them, are critical to streamlining the daily workload for our restaurant managers, so we can get them out of the office and on to the floor, where they can interact positively with guests and coach team members real-time."
Looking Ahead
Despite all the experimentation management has tried with limited time "endless offerings", customers still favor and value the original bottomless sides and beverages. Right now, Red Robin's biggest challenge is declining casual dining, which has been negative for the last six quarters. With a 3.8% decline in earnings per share since the second quarter of 2015, revenue declined 3.2% compared to a 2.9% increase last year.
Additionally, the company is still seeing growth in its Red Robin Royalty rewards program, which now has 5.8 million registered members. As Post said, the renewed focus on the bottomless concept is also expected to bring in customers, as the company is honing in on the delivery to the guest through both fast drink refills as well as bottomless refills.
The company is still committed to cutting costs, but at the same time they are also focused on building and opening new restaurants while investing in local restaurant marketing. It may take some time to see costs come down and to see revenue from these new openings realized.
For now, the company remains profitable and has the innovation -- and the focus -- to serve and bring value to the customer. While the past two years have been rough for Red Robin, the continuos opening of new stores and the introduction of new menu items will propel the business even higher. But considering that the company is receptive and reacts to value and the needs of the customers, it can still make a comeback.
Disclosure: No position in the stock mentioned.
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