This Bird Is Beginning to Sing

By Chad Henage - September 5, 2012 | Tickers: EAT, BWLD, RRGB | 0 Comments

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Anytime I'm introduced to a new restaurant concept, one of the first questions that pops into my mind is, is this a public company? The problem is, just because the company is public and the restaurant is busy, doesn't necessarily mean it's a good investment. Initially my perception of Red Robin (NASDAQ: RRGB) was a positive one. The restaurant offered multiple types of burgers along with other reasonably priced entrees, as well as some unique drink offerings and popular side dishes. However, when I found out the company was public, I initially was turned off by the relatively high amount of long-term debt, and seemingly lackluster growth. I am pleased to report that based on the company's recent earnings release the story has improved.

For those who aren't aware, Red Robin operates two different chains. Their trademark chain is the largest, but the company is also rolling out a newer concept called Red Robin Burger Works. The traditional chain offers a reasonably priced, traditional sit down dining experience. The newer concept fits more into the fast casual type of chain. In my opinion, two of the company's most direct competitors are Brinker International (NYSE: EAT) and Buffalo Wild Wings (NASDAQ: BWLD). Brinker owns the popular Chili's chain, and Buffalo Wild Wings offers a similarly priced dining experience. The biggest differences between the three companies are the size of their current operations and future growth opportunities. Where Red Robin is relatively small and can expand significantly domestically, Buffalo Wild Wings is a bit larger and more established. Brinker is probably nearing saturation domestically and must look overseas for continued growth. With all three companies fighting for consumers hard earned dollars, let's look at where Red Robin has improved, and how they can compete more effectively going forward.

In the company's most recent quarter, revenues increased 3.7%. This sales increase was driven by comparable sales up 0.8%, which was primarily due to increased guest counts. The company managed its costs well and increased EPS by 8.3%. Where the company's sales and earnings are concerned, one thing I noticed was the drastic difference in revenues between the company-owned restaurants and franchise locations. The difference between company-owned revenue and franchise revenue is significant. Red Robin generated over $664,000 in revenue from each company-owned restaurant in the current quarter. By contrast, the company's franchised restaurants generated just $28,500 per store. This works out to the equivalent of about 4.3% franchised revenues versus company owned revenues. Buffalo Wild Wings by comparison generated over 8% franchised revenues versus company-owned revenues in their most recent quarter. What this tells me is, Red Robin has the ability to increase the financial commitment from their franchisees to improve the company's earnings and revenue in the future. While this is something the company can address over time, Red Robin management is already making significant progress by improving the company's financials.

There are several factors that lead me to believe that Red Robin could be an attractive investment at the current time. The most impressive is the company's current operating margin which came in at 21.1%. This performance is significantly better than either Buffalo Wild Wings or Brinker International, which recorded operating margins of 9.17% and 7.39% respectively. While the company's relatively weak balance sheet was one of my initial problems with the stock, management is addressing this issue, cutting long-term debt by nearly 18% in the last six months. Through positive cash flow, Red Robin has retired 4.38% of its diluted share count on a year-over-year basis. In the current quarter, the company repurchased 255,000 shares at an average price of $30.20. With less shares outstanding and a history of beating earnings estimates, if the company continues these improvements investors should be happy with the results. Unlike when I first discovered the company, on a relative basis, Red Robin seems like a good value.

If you look at Red Robin versus Buffalo Wild Wings and Brinker International, there is an apparent value gap between the three. Both Buffalo Wild Wings and Brinker sell for a premium versus their expected earnings growth. While it's true that Buffalo Wild Wings is expected to grow at over 20%, which is a bit faster than Red Robin, the latter's higher operating margin would seem to argue for a better valuation. Investors can buy Red Robin for about 16.6 times full-year earnings and analysts expect earnings growth of roughly 17.5%. Given that over the last year or so Red Robin has improved its organic growth, balance sheet, and decreased outstanding shares, it seems the market isn't giving the company enough credit yet. Check out Red Robin for yourself, and see if this chain can help your portfolio soar to new heights.

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