Red Robin Gourmet Burgers Inc. (RRGB) announced that it plans to test a smaller prototype restaurant model as opposed to its current 5,600 square feet casual dining format. The square footage of the smaller prototype will range from 2,000 and 4,000 square feet. The new format will provide additional flexibility including a modified menu and service format. By year end, Red Robin expects to open at least one smaller location apart from the planned 10 full-sized company-owned restaurants.
Management at Red Robin anticipates that the smaller footprint will expedite its entry into non-traditional locations. The new model will also come in handy where space constraints the company’s expansion.
Several locations suitable for the smaller prototype have already been identified, primarily in the Denver area. Colorado-based Red Robin will forge ahead with its plans after evaluating the operating performance and unit level economics of the new model.
From an investment perspective, this smaller concept is expected to garner attractive rates of return by leveraging low opening as well as operating costs. Many of Red Robin’s peers like The Cheesecake Factory Inc. (CAKE), Chipotle Mexican Grill Inc. (CMG) and Denny's Corporation (DENN) are showing inclination for smaller prototype locations in order to better penetrate top quality sites in new and existing markets. Chipotle’s smaller locations called ‘A’ models are being opened in its strongest markets in order to build overall share. These models are also recording sales volumes at par with the usual new-store sales run rate.
Red Robin is trying to turn around its business through Project RED, which focuses on revenue growth, expense control, a Limited Time Offer (LTO) strategy supported with television advertising and capital deployment. In order to drive revenue at the new location, Red Robin is also concentrating on a guest loyalty program called Red Royalty, designed to provide dining benefits. We believe the opening of the new format restaurant is also a part of the company’s turnaround initiatives.
Red Robin currently retains a Zacks #1 Rank (short-term Strong Buy rating). We are also maintaining our long-term Outperform recommendation on the stock.
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