Casual dining restaurant operator Red Robin Gourmet Burgers Inc. (RRGB) reported adjusted earnings of 24 cents per share in the third quarter of 2011, surpassing the Zacks Consensus Estimate of 22 cents and the year-ago quarter' earnings of 8 cents.
However, including asset impairment and executive transition costs, GAAP net income in the reported quarter came in at $2.1 million or 14 cents per share. Results benefited from the upside in revenue arising from comparable sales growth and margin expansion.
The company reported total revenue of $206.2 million in the third quarter, up 5.9% year over year and marginally ahead of the Zacks Consensus Estimate of $206.0 million.
Performance Highlights
During the quarter, restaurant sales leaped 5.8% from the year-ago quarter to $202.7 million and franchise royalties and fees revenue increased 8.6% to $3.3 million, driven by additional operating weeks during the quarter and comparable sales growth.
Comparable restaurant sales spiked 2.1% year over year at company-owned restaurants in the reported quarter, driven by a 5.3% increase in average guest check, partially offset by a 3.2% drop in guest count. Comparable sales at franchise restaurants in the U.S. climbed 2.1% year over year.
Restaurant operating margin at company-owned restaurants expanded 130 basis points (bps) to 18.8%, due to a 200-bp drop in labor costs and 80-bp decline in other operating costs, partially compensated by a 110-bp increase in food and beverage cost and a 30-bp rise in occupancy costs.
Excluding executive transition costs, selling, general and administrative expenses in the quarter climbed 10.3% year over year to $22.4 million, due to higher variable compensation costs and increased infrastructure investments.
Financial Aspects
Red Robin ended the quarter with cash and cash equivalents of $27.1 million, total outstanding debt of $157.1 million and shareholders’ equity of $292.7 million. Total debt stood at $157.1 million, including $10.8 million outstanding for capital leases.
During the quarter, the company repurchased 681,000 shares for $20.3 million. The company’s share repurchase authorization extends up to $50 million through December 31, 2012.
Store Update
During the quarter, Red Robin opened two company-owned restaurants. The company currently operates 460 restaurants, out of which 323 are company owned and the rest are franchised.
Outlook
For fiscal 2011, the company expects to focus on driving revenues, managing expenses and deploying capital. During the fourth quarter of 2011, Red Robin expects comps to grow in the low-single-digit range and restaurant operating profit margins to expand 150 to 160 bps, benefiting from lower labor and other operating costs, partially offset by higher commodity cost.
Additionally, the company foresees a cost inflation of 3% to 5% for 2012 due to a higher ground beef costs. Furthermore, labor expense is estimated to jump 20-30 bps in 2012, due to laps of accretive initiatives taken in 2011 and rise in minimum wages across a number of states, particularly in the west.
To mitigate input cost pressure, the company has implemented a price rise and is also making efforts to control cost. Red Robin will mostly use its capital for developing new restaurants and enhancing shareholder value through share repurchases.
Red Robin expects to open 12 full size company-owned restaurants and 3 franchised restaurants in fiscal 2011. The company also plans to open its first smaller prototype restaurants in the fourth quarter of 2011. In 2012, the casual dining restaurant operator will likely launch 12 to 15 restaurants.
Our Take
We expect estimates to move up in the coming days, as the company’s Project RED initiative has succeeded in generating improved comparable sales and margin outlook. The Zacks Consensus Estimates for 2011 and 2012 are pegged at $1.49 and $1.81, respectively.
The company retains a Zacks #3 Rank, which translates into a short-term Hold rating. We also have a long-term Neutral recommendation on the stock.
One of Red Robin’s competitors, Domino's Pizza Inc. (DPZ) reported third quarter 2011 adjusted earnings of 35 cents per share, which outpaced the Zacks Consensus Estimate by 2 cents and the year-ago quarter adjusted earnings by 8 cents. The upbeat result was attributable to strong international and domestic performance.
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