Balanced View on Red Robin Gourmet - Analyst Blog

On Apr 3, 2014, we issued an updated research report on Red Robin Gourmet Burgers Inc. RRGB.

On Feb 14, this casual dining chain reported fourth quarter results with earnings of 62 cents beating the Zacks Consensus Estimate and increasing year over year owing to margin expansion. Revenues came in line with the consensus mark but were up year over year driven by higher franchise royalties, fees and other revenues.

Amid a sluggish economic environment, the company has been posting positive comparable sales growth over the past three years, which validates its strong fundamentals. During the quarter, company-owned restaurants comps grew 3.7% driven by a 5.1% rise in average guest check. Margins benefitted due to the decline in local marketing expense and supply costs.

We believe the company is well poised to sustain its growth momentum driven by improved guest traffic and innovative offerings. Owing to an improved mix and higher sales from re-modeling, the company expects comps to increase in low single digit in 2014. The company thereby expects a high single-digit increase in total revenue in 2014 mostly gaining from restaurant openings and positive comps growth.

Apart from unit expansion, the company is also concentrating on its remodeling initiative started 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, unit expansion and remodeling programs to reinvigorate its brands would keep the company well-positioned.

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 remains a headwind for the company. As a result, cash-conscious customers are either dining at home or spending less per meal.

Other Stocks to Consider

Red Robin Gourmet holds a Zacks Rank #3 (Hold). Some better-ranked stocks worth considering in the restaurant industry include Ignite Restaurant Group, Inc. IRG, The Wendy's Company WEN, and Jack in the Box Inc. JACK. All these stocks sport a Zacks Rank #1 (Strong Buy).