Red Robin (RRGB) Downgraded to Strong Sell on Dismal Q2

On Aug 16, 2014, Zacks Investment Research downgraded Red Robin Gourmet Burgers Inc. RRGB to a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Red Robin witnessed sharp downward estimate revisions after reporting dismal results in the second-quarter 2014. Shares of the company also declined almost 19% in the trading session on Thursday, last week, as the company missed the Zacks Consensus Estimate for both earnings and revenues in the second quarter.

On Aug 14, Red Robin reported second-quarter adjusted earnings of 68 cents per share which missed the Zacks Consensus Estimate of 90 cents by 24.4% and declined 11.7% year over year. Earnings were affected by lower-than-expected revenues and lower restaurant-level operating profit margins.

The company's revenues of $256.1 million also missed the Zacks Consensus Estimate by 3%, due to sluggish comps. Comps grew only 1.2%, much lower than prior-quarter comps growth of 5.4%, due to 2.5% decline in average guest count partly offset by a 3.7% rise in average guest check.

Additionally, the company's earned lower franchise royalties and fee revenues in the quarter due to the acquisition of 32 franchised restaurants in the U.S. and Canada.

Further, an 11% year-over-year hike in ground beef costs increased cost of sales by 60 basis points (bps) from the year-ago quarter. Therefore, restaurant-level operating profit margin declined 110 bps to 22.2%. Apart from this, increased food and beverage expenses, higher other operating costs and occupancy as a percentage of sales lowered the margins.

Not surprisingly, analysts lowered their earnings estimates significantly for Red Robin. Therefore, the Zacks Consensus Estimate for fiscal 2014 declined 8.8% to $2.58 per share over the last 7 days. For 2015, the Zacks Consensus Estimate nosedived 7.4% over the same time frame.

Other Stocks that Warrant a Look

Some better-ranked stocks in the restaurant industry include BJ's Restaurants, Inc. BJRI, Chipotle Mexican Grill, Inc. CMG and Jamba, Inc. JMBA. All these stocks sport a Zacks Rank #1 (Strong Buy).