Red Robin Banks on Sales Building Efforts, High Costs Rife

Red Robin Gourmet Burgers Inc.RRGB has been bearing the brunt of high costs and soft consumer demand that is currently characterizing the U.S. restaurant space. In order to counter these challenges, the company has undertaken various sales driving and cost cutting initiatives that seem encouraging.

Recently, this burger giant reported fourth-quarter 2017 results , where adjusted earnings of 78 cents per share surpassed the Zacks Consensus Estimate of 55 cents by 41.8% and jumped a significant 122.9% year over year. The company has a good track record of earnings surprises in the recent past, wherein reported earnings have beat/met consensus estimates in three of the trailing four quarters, with an average beat of 23.17%.

Also, Red Robin's shares have increased 18.6% in the past year, outpacing the industry 's gain of 11.9%. Given its prudent growth initiatives, the Zacks Rank #3 (Hold) company should keep performing well in the quarters ahead. You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

Initiatives to Increase Traffic & Sales Encouraging

With a viable business strategy, Red Robin has seen an uptick in revenues over the past few years. Despite a sluggish economic environment, the company has been posting year-over-year revenue growth since 2013.

This is attributable to the company's various traffic and sales building efforts, which also include consistent digital initiatives. In fact, owing to menu innovation, value offerings, increasing service speed, effective marketing strategy, remodeling programs and online ordering business, the company witnessed 17.5% year-over-year revenue growth in the fourth quarter of 2017.

To drive traffic and sales, Red Robin has improved its seating efficiency and lowered guests' waiting times. Moreover, it has rolled out its Kitchen Display System (KDS) that is linked to table management software. This is expected to result in annual sales growth of approximately $50 million as kitchens can handle higher peak volumes.

The company's remodeling initiatives are expected to boost its potential as a brand as well as improve guest experience, which in turn should drive revenues. Among the brand revitalization initiatives, the company is focused on menu innovation, operational improvement and making a better customer service platform.

In addition, Red Robin focuses on promotional and limited-time offers to increase revenues. Moreover, key long-term growth driver for the company is its guest loyalty program - Red Robin Royalty - initiated in 2011 with a goal to increase guest count. The company engages its guests through this program with offers designed to increase frequency of visits.

Furthermore, the company is set to grow its off-premise, online-ordering business via carry-out, delivery and catering. The growing demand for off-premise orders are resulting in higher traffic. In the fourth quarter of 2017, Red Robin delivered 8.3% mix in off-premise, up 45% year over year.

On the delivery front, the company has partnerships with Amazon, DoorDash and GrubHub. In fact, it is working with each provider to better integrate into its POS and KDS systems and ease the intricacy in operations teams. Also, curbside delivery is now available at more than 60% of its locations. The company is thus moving smartly on new revenue streams and expects off-premise orders to become growth engine in the long run as it begins to actively promote the new offerings, reach more guests, thereby driving improved profitability.

Strategic Moves to Counter High Costs

Red Robin witnessed rising costs and expenses throughout the majority of 2017, mainly due to higher labor costs. The company is also investing heavily in several sales building initiatives like advertising and technical upgrades, which will result in elevated costs. Remodeling and restaurant maintenance also add to the already rising expenses.

In order to cut these high costs and improve margins, Red Robin outlined a go-forward plan known as RED2. The primary objective of this initiative is doubling the company's EBITDA by 2020. The company is focusing on new supply chain management software, replacing its older manual system. This would result in improved control of waste and cost of goods, significantly reducing inventory levels at the restaurants.

Notably, in the last reported quarter, restaurant-level operating profit margin expanded 70 basis points (bps) to 20.5% due to controlled expenses under the company's strategic plans.

Limited International Presence & Domestic Contraction Pose Concerns

American dining brands are keen to expand in the fast-growing emerging markets outside the United States. While several other restaurateurs, including Yum! Brands YUM , McDonald's MCD and Domino's DPZ , have opened their outlets in the emerging markets; Red Robin seems to be weak on this front. Also, due to insufficient profit generation, the company has given up on its Burger Works fast-casual concept, a small non-traditional prototype with limited menu and services.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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