Why Did Two Analysts Slam Red Robin's Stock?

Red Robin Gourmet Burgers, Inc. RRGB received a pair of thumbs down from leading analysts following the restaurant chain’s newly published second-quarter earnings, which President and CEO Paul J. B. Murphy III ruefully acknowledged was “below our expectation.”

The View From Raymond James Brian M. Vaccaro, equity research analyst for the restaurant industry at Raymond James, reiterated an Outperform rating for Red Robin while lowering the price target from $50 to $40.

“2Q margins were weighed down by costs related to ongoing re-staffing efforts, some of which should prove transitory assuming labor market conditions gradually normalize (end of enhanced UI benefits, eviction moratoriums; back to school should also help),” he wrote.

“We are lowering our '21 EBITDA estimate by $20M reflecting the 2Q miss and lower 2H store margins, partially offset by slightly higher sales estimates,” he added.

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The View From Wells Fargo: Jon Tower, senior equity analyst at Wells Fargo Securities ranked Red Robin as Underweight and lowered its price target from $24 to $23.

“Shares have pulled back by ~27% over the past 3 months (vs. the S&P 500 +6.6%),” he wrote, predicting that the lackluster quarterly results coupled with rising costs for food and labor could “throw a monkey-wrench in the LT margin recovery.”

Tower predicted the Red Robin shares will “trade at a discount to peers” while other stocks within the casual dining sector will be seen as more attractive by investors. He also observed that while the chain’s eateries were operating at 100% indoor capacity and the company is planning for 400 new locations by 2023, it was still struggling with staffing shortages despite its hiring of roughly 1,900 hourly employees.

“Our $23 price target equates to 5.1x our 2022E EBITDA and ~10% FCF yield, and represents a discount to the casual dining peer group,” Tower wrote. “This discount is warranted, in our view, given the company's low relative margin and ROIC performance balanced against potentially improving cash flows post COVID-19.”

Photo: Mike Mozart / Flickr Creative Commons.

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