On Jul 1, 2014, we issued an updated research report on Red Robin Gourmet Burgers Inc. (RRGB).
We believe Red Robin is positioned for a surge after investors became bullish on the stock on stellar first-quarter 2014 results (announced on May 20).
Despite the harsh weather weighing down on the overall restaurant industry in the beginning of the quarter, Red Robin’s first-quarter earnings as well as revenues comfortably beat our estimates and eclipsed its year-ago results.
Moreover, the fact that Red Robin did not sacrifice its margins to achieve the result is commendable. In fact, the company's operating margin expanded 90 basis points to 22.4%. Such a strong quarter amid the rough macroeconomic backdrop shows that Red Robin is expanding responsibly and driving traffic to its stores.
Moreover, amid a sluggish economic environment, the company has been posting positive comparable sales growth over the past three years, which validates its strong fundamentals. In fact, despite inclement weather in the beginning of the first quarter of 2014, comps grew 5.4% driven by 4.9% rise in average guest check and a 0.5% rise in guest traffic.
We believe Red Robin is well poised to sustain its growth momentum driven by improving traffic trends and innovative offerings. Owing to an improved mix and higher sales from remodeling, the company expects comps to increase in a low single-digit range in 2014.
Apart from unit expansion, the restaurateur is concentrating on its remodeling initiative undertaken in 2012. It intends to remodel an additional 50 units by the end of 2014. The company’s remodeling initiative will invigorate its potential as a brand and help augment client experience, going forward.
Overall, we believe that the company’s initiatives including menu innovation, effective marketing strategy, and unit expansion and remodeling programs to reinvigorate its brands position it well.
However, we remain concerned about incremental labor costs and commodity inflation, which might hurt operating margins in the upcoming quarters. Also, weak consumer spending due to government budget cuts, high tax rates and still-tightened credit availability remain headwinds. As a result, cash-conscious customers are either dining at home or spending less per meal.
Other Stocks to Consider
Red Robin Gourmet sports a Zacks Rank #1 (Strong Buy). Some other stocks worth considering in the restaurant industry include Chipotle Mexican Grill, Inc. (CMG), Carrols Restaurant Group, Inc. (TAST) and BJ's Restaurants, Inc. (BJRI). All these stocks have a Zacks Rank #2 (Buy).
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