Red Robin Ready To Fly?

By Chad Henage - June 7, 2012 | Tickers: EAT, BWLD, RRGB | 0 Comments

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To be blunt, I've always been more impressed with Red Robin's (NASDAQ: RRGB) restaurants than their stock. My biggest issue with Red Robin was, the company carried too much debt, and didn't utilize the idea of franchising their restaurants enough. While their burgers are great, the financials were not and I stayed away. The company recently reported quarterly earnings, and I'm happy to say that it looks like management is beginning to fix some of these issues.

Headline Numbers:

The headline numbers for the quarter looked better on the bottom line than the top line. With only 466 total restaurants I would expect to see faster revenue growth from a chain like this. Red Robin only reported 4.4% growth in revenues, which was helped by a 0.5% increase in same store sales. The remainder of the increase was from an increase in the average check per guest. The company's profit margin also improved, moving up from 19.8% a year ago to 21.2%. Three new Red Robin restaurants and 1 new Red Robin's Burger Works were opened during the quarter. Beyond the headline numbers, there are several trends as well.

Strengths:

Red Robin is not relying solely on comparable sales and new restaurants to grow earnings. The company is implementing several cost savings initiatives as well. The company realized that by switching their distributor for hot sauce they could save $50,000 a year. In addition, by controlling the portion size for side dressings, the company expects to save about $500,000 a year. The company is also focusing on its Red Royalty program, where diners get free items and visits based on certain criteria. To help grow earnings per share, the company also bought back 4.2% of outstanding shares versus last year's count. Red Robin also addressed a critical issue, which was their long-term debt. In the last year, they have paid down about $20 million in long-term debt. This helped to lower their debt-to-equity ratio from 0.46 to 0.38. With less debt and more equity, the company should be in a better position to weather any economic storm that could come. With all of these positives, there are several things that Red Robin can work on going forward.

Weaknesses:

When you hear that same store sales increased due to a higher average check, on the surface that sounds good. However, when you hear that same store sales would have been higher except for a 3.6% decrease in guest count, that's a problem. In plain English, less people are eating at Red Robin, but those who do are spending more. The company said specifically that guest traffic softened in the second half of the quarter. This was blamed on higher promotional activity by competitors. Chili's for instance, owned by Brinker International (NYSE: EAT) is offering a $20 dinner for 2 deal. This type of value dinner for two helps customers who are trying to watch their pennies. Red Robin has responded by offering items like their $6.99 Tavern Double (double cheeseburger) with unlimited fries, but that appeals to just one segment of diners. The company needs to offer multiple choices from their menu as these 2 person dinner deals are becoming more popular and will continue to be a competitive pressure.

A second weakness is, the company is not leveraging its franchised restaurant model. For example, in the recent quarter, 98.39% of revenue was from company-owned restaurants, only 1.6% came from franchises. However, at company-owned restaurants same store sales were up just 0.5%. When you compare these results to the franchises results of 2.2%, same store sales growth in the U.S., and 7.2% growth in Canada, clearly the franchisees are doing something different to grow their business. The company needs to learn from the franchisees so they can improve the results at company-owned stores. Aside from these challenges, what else can investors expect from Red Robin?

2012 Outlook & Conclusion:

For the year, the company expects same store sales to increase 1%. This doesn't sound that bad until you consider that competitor Buffalo Wild Wings (NASDAQ: BWLD) showed between 7% and 9% same store sales growth in the first quarter this year. In addition, Red Robin is only planning 9 Red Robin restaurants and 4 Red Robin Burger Works for 2012. With 466 stores, this represents new store growth of less than 3%. If the company is only going to produce 1% same store growth, this combination is going to make it tough for the company to meet the 17% EPS growth analysts are expecting. With the company selling at about 16.5 times forward earnings, the stock seems fairly priced, assuming the company meets estimates going forward. The fact that the company has beaten earnings in 4 of the last 4 quarters, should give investors some reassurance. Red Robin is cutting its debt, cutting expenses, and trying to win more customers through its loyalty programs. I liked the restaurant first, it might be time to re-consider the stock.

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