Red Robin (RRGB) Down 54% in a Year: What's Hurting the Stock?

Shares of Red Robin Gourmet Burgers, Inc. RRGB have declined 54.2% in the past year against the industry’s growth of 1%. The company’s performance is ailing from soft comparable restaurant revenues primarily driven by declining guest count and menu mix. This, along with increasing costs and expenses and high debt levels, are additional concerns to its prospects.

This Zacks Rank #5 (Strong Sell) company reported fourth-quarter fiscal 2023 results, with earnings missing the Zacks Consensus Estimate. The company reported an adjusted loss per share of 66 cents, wider than the Zacks Consensus Estimate of a loss of 43 cents. The company reported an adjusted loss per share of $1.38 in the prior-year quarter.

In the past 60 days, earnings estimates for fiscal 2024 have widened from a loss of $1.31 to a loss of $1.48. Let’s discuss the factors hurting the company’s performance.

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Primary Concerns

Red Robin has been witnessing rising costs and expenses in recent quarters. The company is investing heavily in several sales-building initiatives like advertising and technical upgrades, which will result in elevated costs. Remodeling, restaurant maintenance and staffing costs will also contribute to rising expenses. During the fiscal fourth quarter, restaurant labor costs increased 14.4% year over year to $114.7 million. As a percentage of restaurant revenues, the metric increased 210 basis points to 38.1%. The upside was primarily caused by investments in hourly and management labor, payroll taxes and incentive compensation, partially offset by group insurance.

The company anticipates inflation to persist for some time. In the fiscal 2024, it expects inflation across the entire cost basket, such as commodities, wages and operating expenses, to be in the 3-4% range.

Dismal comps performance has been hurting investors’ confidence. During the fiscal fourth quarter of 2023, comparable restaurant revenues fell 2.7% year over year. The downside was due to the shift away from deep discounting and marketing promotions. Also, the Guest count declined 7.6% during the quarter.

The company underscores its decision to discontinue the virtual brands introduced in 2020. Despite their relevance at the time, the introduction of multiple brands, products and procedures caused undue complications for operators. While these virtual brands yielded minimal profits, their presence exerted a comparable restaurant sales headwind. The company anticipates comparable restaurant sales to be under pressure in the range of 200-250 basis points till the third quarter of fiscal 2024. In the fiscal 2024, the company expects comparable restaurant revenue to decline by a low single-digit percentage.

High debt remains a concern for the company. Long-term debt (less current portion) at the end of the fiscal fourth quarter came in at $182.6 million compared with $182.1 million reported in the previous quarter. Its debt to capitalization at the end of fourth-quarter fiscal 2023 came in at 112.6%, up from 105% reported in the previous quarter. The company ended the fiscal fourth quarter with cash and cash equivalents of $23.6 million (compared with $48.6 million in the previous quarter), which may not be enough to manage the high debt level.

Key Picks

Some better-ranked stocks in the Zacks Retail-Wholesale sector include:

Brinker International, Inc. EAT carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 212.7% on average. Shares of EAT have surged 26.2% in the past year. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for EAT’s 2024 sales and earnings per share (EPS) indicates 4.9% and 30.7% growth, respectively, from the year-ago period’s levels.

Texas Roadhouse, Inc. TXRH carries a Zacks Rank #2. It has a trailing four-quarter negative earnings surprise of 3.9%, on average. The stock has gained 35.6% in the past year.

The Zacks Consensus Estimate for TXRH’s 2024 sales and EPS suggests rises of 14.1% and 25.8%, respectively, from the year-ago period’s levels.

Shake Shack Inc. SHAK carries a Zacks Rank #2. It has a trailing four-quarter earnings surprise of 92.6%, on average. SHAK’s shares have surged 81.2% in the past year.

The Zacks Consensus Estimate for SHAK’s 2024 sales and EPS indicates 14.6% and 91.9% growth, respectively, from the year-ago period’s levels.

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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.

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