Casual dining restaurant operator Red Robin Gourmet Burgers Inc. (RRGB) reported adjusted earnings of 48 cents per share in the second quarter of 2011, handily beating the Zacks Consensus Estimate of 36 cents and the year-ago quarter earnings of 29 cents.
However, including executive transition and severance expense, GAAP net income in the reported quarter was $6.9 million or 44 cents per share. Results benefited from the upside in revenue arising from comparable sales growth and margin expansion.
The company reported total revenue of $215.8 million in the second quarter, up 7.2% year over year and ahead of the Zacks Consensus Estimate of $213.0 million.
Performance Highlights
During the quarter, restaurant sales leaped 7.1% from the year-ago quarter to $212.1 million and franchise royalties and fees revenue increased 7.0% to $3.3 million, attributable to more operating weeks during the quarter and comparable sales growth.
Comparable restaurant sales spiked 3.1% year over year at company-owned restaurants in the reported quarter, driven by a 4.5% increase in average guest check, partially offset by a 1.4% drop in guest counts. Comparable sales at franchise restaurants in the U.S. climbed 2.6% year over year and 3.4% in Canada.
Restaurant operating margin expanded 250 basis points (bps) to 20.8%, due to a 180-bp drop in labor costs, 40-bp decline in occupancy costs and a 90-bp decline in other operating costs, partially offset by a 60-bp increase in food and beverage cost.
Selling, general and administrative expenses in the quarter climbed 22.5% year over year to $24.5 million, due to higher television media campaign, performance-based bonus expenses and legal and corporate governance costs.
Financial Aspects
Red Robin ended the quarter with cash and cash equivalents of $42.5 million, total outstanding debt of $159.1 million and shareholders’ equity of $310.2 million. Total debt includes $148.1 million in borrowings under its $150 million term loan and $11.0 million outstanding for capital leases.
During the quarter, the company repurchased approximately 0.03 million shares for $0.8 million.
Store Update
During the quarter, Red Robin opened six company-owned and one franchised restaurants. The company currently operates 458 restaurants, out of which 321 are company owned and 137 franchised.
Outlook
For fiscal 2011, the company expects to focus on driving revenues, managing expenses and deploying capital.
Additionally, the company foresees a cost inflation of 5% to 5.5% for 2011 due to a spike in ground beef costs. However, labor expense is estimated to drop 100-120 bps in 2011, on the back of several initiatives undertaken by the company like lower training cost and better leverage. To mitigate input cost pressure, the company has raised prices and is also making efforts to control cost. Red Robin will mostly use its capital for the development of new restaurants and enhancement of shareholder value through share repurchases.
Red Robin expects to witness positive comps in the upcoming quarter as it reported a 0.5% comps growth at company-owned restaurants through August 7, 2011. Moreover, the company expects to spend $12 million to $13 million on TV advertising in 2011.
Red Robin expects to open 12 full size company-owned restaurants and 3 to 4 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 anticipates launching 12 to 15 restaurants. Management projects capital expenditure in the range of $43 million to $45 million for fiscal 2011.
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. Additionally, the recent appointment of Stuart B. Brown as the senior vice president and chief financial officer will further drive growth in the long term.
The Zacks Consensus Estimates for 2011 and 2012 are pegged at $1.59 and $1.92, respectively.
The company retains a Zacks #2 Rank, which translates into a short-term Buy rating. We also have a long-term Outperform recommendation on the stock.
One of Red Robin’s competitors, Domino's Pizza Inc. (DPZ) reported second quarter 2011 earnings of 40 cents per share, which outpaced the Zacks Consensus Estimate by 4 cents due to higher international royalty revenues, international expansion and lower interest expense.
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