Red Robin Shares Surge on Earnings Beat - Analyst Blog

Colorado-based casual dining restaurant operator Red Robin Gourmet Burgers Inc.'s RRGB shares surged 12.45% after it reported first-quarter 2014 results which comprehensively beat expectations.

The company's earnings of 82 cents per share comfortably beat the Zacks Consensus Estimate of 73 cents by 12.3%. Further, the reported figure was above year-ago quarter's earnings of 66 cents by 24.2%. Earnings in the quarter benefited from higher revenues.

Despite the inclement weather in the earlier part of the quarter, revenues grew 11.1% year over year to $340.5 million, driven by increased restaurant revenues as well as higher franchise royalties, fees and other revenues. Further, quarterly revenues were above the Zacks Consensus Estimate of $334 million.

Behind the Headline Numbers

During the quarter, restaurant revenues went up 11.2% year over year to $335.0 million, led by positive comps growth. Franchise royalties and fee revenues increased 9.0% to about $5.5 million.

Company-owned restaurants' comps grew 5.4%, higher than the fourth-quarter comps growth of 3.7% due to a 0.5% and 4.9% rise in guest count and average guest check, respectively.

Restaurant-level operating profit margin expanded 90 basis points to 22.4%, buoyed by higher average check and effective labor management.

Store Update

As of the end of the first quarter of 2014, the company had a total of 496 restaurants – among them were 362 company-owned Red Robin restaurants, 5 Red Robin's Burger Works and 129 franchised Red Robin restaurants. In the reported quarter, the company opened four Red Robin restaurants while closing one full-service and one Red Robin's Burger Works restaurant.

In March, Red Robin acquired four franchised restaurants in New York State for roughly $8.0 million. In addition, the company has an agreement to acquire an additional 32 franchised restaurants in the U.S. and Canada for approximately $40 million, expected to close in the later part of summer.

2014 Outlook

Red Robin expects comps to increase in a low single-digit range in 2014. In 2014, restaurant operating margins are estimated to be slightly above 21%. General and administrative costs are expected to be approximately $93 million, while selling expenses are expected to be approximately 3.2% of sales.

The casual dining restaurant operator remains on track to unveil 20 units along with 5 Red Robin's Burger Works in 2014. Additionally, the restaurateur intends to remodel 50 restaurants this year.

Our Take

Red Robin's strong earnings growth and margin expansion are quite impressive. Operational strategies such as menu innovation, effective marketing strategy, unit expansion and remodeling programs have been the strength of this Zacks Rank #2 (Buy) stock. Also, its foray into the smaller prototype restaurant concept — Red Robin's Burger Work — is an added positive.

However, we remain concerned about the incremental labor costs and food inflation. Additionally, we are concerned about the sluggish economic recovery in the U.S., which is lowering consumers' discretionary spending.

Other Stocks to Consider

Some other stocks in the restaurant industry include Fiesta Restaurant Group, Inc. FRGI, Burger King Worldwide, Inc. BKW and Jack in the Box Inc. JACK. All these stocks carry a Zacks Rank #2.