Colorado-based casual dining restaurant operator Red Robin Gourmet Burgers Inc.’s (RRGB) shares surged 15.5% in the trading session after the company’s third-quarter earnings comfortably beat the Zacks Consensus Estimate.
The company’s adjusted earnings of 50 cents per share beat the Zacks Consensus Estimate of 33 cents by 51.5% and increased 56.3% year over year. Adjusted earnings excluded an after-tax acquisition cost of 3 cents per share and tax credit of 4 cents. Earnings in the quarter were boosted by strong comps growth and lower share count
Although revenues grew 15.9% year over year to $267.4 million, it missed the Zacks Consensus Estimate of $264 million by a meager 0.2%, partly due to sluggish comps. The year-over-year growth in revenues reflected robust comps growth.
Behind the Headline Numbers
During the quarter, restaurant revenues went up 16.3% year over year to $263.9 million, led by positive comps growth. Franchise royalties and fee revenues decreased 8.8% to about $3.5 million.
Company-owned restaurants’ comps grew 0.9%, lower than prior-quarter comps growth of 1.2%, due to 2.3% decline in average guest count partly offset by 3.2% rise in average guest check.
Restaurant-level operating profit margin declined 90 basis points (bps) to 19.5%. Excluding acquired restaurants, restaurant-level operating profit margins decreased 30 bps to 20.1%, primarily due to higher food and beverage costs as a percentage of sales.
Cost of sales was 25.3%, a 70 bps increase from the year-ago quarter, mainly due to a hike in ground beef costs and higher labor expenses.
General and administrative costs were $20.1 million, down 2.6% year over year, mainly due to a decrease in incentive compensation.
Pre-opening and acquisition costs in third-quarter fiscal 2014 were $2.6 million, up 4% year over year. Acquisition costs totaled $0.6 million in the quarter related to the purchase of 32 Red Robin franchised restaurants.
Store Update
At the end of the third quarter of 2014, Red Robin operated 507 restaurants, of which 402 were company owned, 7 were Red Robin Burger Works – the company’s simpler prototype restaurant – and 98 were franchised. In the reported quarter, the company opened six Red Robin units, while closing one.
On Jul 14, 2014, Red Robin completed the acquisition of 32 franchised restaurants in the U.S. and Canada for approximately $40 million.
2014 Outlook
For 2014, Red Robin expects comps to be up about 3%. Restaurant-level operating profit margins in fiscal 2014 are expected to be approximately 21.3%.
Capital investments in fiscal 2014 are expected to be more than $100 million, excluding approximately $51 million related to acquisitions. The company also plans to remodel at least 65 Red Robin restaurants as part of its brand transformation initiative.
General and administrative costs are expected to be approximately $93 million, marginally down from the prior guidance of $94 million. Selling expenses are expected to be approximately 3.3% of sales in view of increased gift card sales. Pre-opening and acquisition costs are expected to total nearly $8.5 million in fiscal 2014, which includes $2.5 million acquisition and integration costs.
The casual dining restaurant operator remains on track to unveil 19 units along with 3 Red Robin’s Burger Works in 2014, resulting in operating week growth of approximately 6% in fiscal 2014. The newly acquired restaurants are expected to add $24 million in revenues in the fourth quarter of 2014 and will reduce franchise royalties by approximately $0.7 million.
Our Take
Although many restaurant stocks have had a difficult time in the current market, Red Robin appears to be finally reversing the downtrend. The company has shown great turnaround since the last quarter, which fell short of the earnings estimates, with menu innovation and unit growth.
However, we remain concerned about the food cost inflation in the U.S. as well as the intense competition in the restaurant industry. The sluggish economic recovery in the U.S., which is lowering consumers’ discretionary spending, further adds to the woes.
Red Robin currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. (BJRI), Ruby Tuesday, Inc. (RT) and Jack in the Box Inc. (JACK). All these stocks sport a Zacks Rank #1 (Strong Buy).
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