We are maintaining our long-term Neutral recommendation on
Red Robin Gourmet Burgers, Inc.
), a casual dining restaurant chain operating more than 450
The Seattle, Washington- based company reported earnings of 71
cents per share in the first quarter of 2012, breezing past the
Zacks Consensus Estimate of 66 cents as well as last year's 58
cents per share. Results in the quarter benefited from cost
improvement resulting due to margin expansion.
Total revenue jumped 4.4% year over year to $299.5 million,
benefiting from a 4.7% leap in restaurant sales, partially offset
by a 8.8% decline in franchise royalties and fees revenue.
Comparable restaurant sales inched up 0.5% year over year at
company-owned restaurants in the reported quarter, due to a dip of
3.6% in guest count. Restaurant operating margin at company-owned
restaurants expanded 140 bps to 21.2%.
The company's Project RED, which focuses on revenue growth, expense
control and capital deployment, continues to drive the performance
of the company. To drive revenue, the company implemented a guest
loyalty program called Red Royalty with a goal to increase customer
frequency. Moreover, it took initiatives to rebuild the bar
business by recapturing adult guests and improving beverage sales
through the enhancement of audio-visual packages and revamping the
It also encouraged the sale of gift cards and deployed a Limited
Time Offer (LTO) strategy supported with television advertising as
well as a social media campaign to drive traffic and create brand
recognition. The company's loyalty program has achieved early
success and has been implemented at 49 franchised restaurants along
with all the company-owned restaurants. In 2012, the company plans
to expand the program across the franchise system. Moreover, with
the Olympics in the summer and the national election in the fall,
2012 will be a significant year for building the brand for future
growth through media.
To control expenses and expand margins, the company is taking a
host of initiatives, and targets a cost cut of $16-18 million by
the end of 2012. In 2011, the company achieved savings of $12
million from its goal of $16 million to $18 million by end of 2012,
much ahead of its target. The company expects to surpass its cost
saving target in 2012 and enhance restaurant level operating
margins by 20-30 bps.
We are also encouraged by Red Robin's plan to use its capital for
the development of new restaurants, enhancement of shareholder
value as well as for future refinancing activities. In 2012, the
company expects to open 13 to 15 restaurants, which would include
four additional smaller prototype units, seven to eight full-sized
restaurants and two to three midsized prototypes. We believe that
small size restaurants will accelerate the company's growth into
non-traditional locations and also improve return on invested
However, we remain cautious on the stock based on the continuous
deterioration in guest count. The guest count has been negative for
four straight quarters. In the first quarter of 2012, the company
reported a dip of 3.6% due to poor performance of Red Robin's
promotional activities and hefty discounting environment,
particularly during lunch. Thus, a turnaround in traffic remains
challenging. Going forward, sales comparisons will also become
tough. Moreover, for 2012, Red Robin trimmed down its guidance for
comps growth to up to 1% from the earlier projection of
Furthermore, like all restaurant companies, Red Robin is
susceptible to higher food costs. The company expects commodity
inflation to continue in 2012. Red Robin expects cost of sales to
increase in 2012, as ground beef and other commodity prices
continue to rise, partially offset by lower average dairy and
produce prices, along with the benefits from supply-chain
initiatives. A spike in labor expense and tax rate is also
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Additionally, there are also concerns stemming from the uncertain
economic environment, resulting in lower consumer spending and
cut-throat competition from peers like
Brinker International Inc.
Chipotle Mexican Grill Inc (
particularly related to price.
The Zacks Consensus Estimates have not budged in the 7 days,
implying no clear directional pressure on the stock.