Red Robin Gourmet Burgers Inc.
) recently announced the acquisition of an existing Red Robin
franchised unit in Clifton, New Jersey from UBA Enterprises and
included it in the company-owned operations. The transition to
company-owned model affirms management's confidence in its core
business model. The purchase consideration of the deal is around
The recent spurt in growth in the franchised entity has made it
a lucrative acquisition target. According to Red Robin management,
the acquired eatery will likely have annual sales of about $3.9
million. Hence, we view the deal as strategically positive in an
industry that depends largely on franchising.
The acquired unit is the fourth company owned Red Robin site in
New Jersey. This Seattle-based company has been catering to the New
Jersey market since 2004 and envisions further expansion prospect.
Red Robin will shortly come up with another company-owned unit in
Woodbridge, New Jersey. Post-acquisition, Red Robin has only one
franchised unit in New Jersey serving the market at Hamilton.
The company increased its company-owned unit expansion based on
improving unit-level economics. It opened 11 company-owned
restaurants in fiscal year 2010 and 13 units in 2011 and remains on
track to unveil a net of 11 units in 2012. At the end of
first-quarter 2012, there were 466 units in the Red Robin
portfolio, out of which 330 are company-owned and the rest
Red Robin is not the only company which has followed this
business strategy. The trend to transition to a company-based model
is fast picking up, although most companies still prefer
Others who followed suit include
Panera Bread Co.
), which acquired businesses from its New Jersey and Milwaukee
franchisees as well as bought back 16 bakery-cafes in the
Raleigh-Durham-Chapel Hill market from one of its franchisees in
the Carolinas. There is also
Buffalo Wild Wings Inc.
) which took hold of 15 franchised units in Ohio and South Carolina
in early December 2011.
Red Robin currently retains a Zacks #3 Rank, which translates
into short-term Hold rating. We are also maintaining our long-term
Neutral recommendation on the stock.
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