Red Robin (RRGB) Now A Buy On Solid Growth Initiatives

On May 18, we upgraded Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) by a notch to a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Notably, shares of the company rallied over 23% in yesterday’s trading session, after the company reported better-than-expected first-quarter 2017 results on May 16, after market close. Moreover, for full-year 2017, Red Robin anticipates earnings in the band of $2.80 to $3.10 per share, up from the earlier guided range of $2.70 to $3.00.

We note that 2016 was indeed a tough year for Red Robin given the impact of acquiring lower-margin franchise restaurants and higher labor cost that hurt margins. Further, soft industry trends added to the woes.

However, in the recent months, various initiatives undertaken by the company like efficient menu innovation, focus on increasing speed of service, effective marketing strategy and remodeling programs to reinvigorate brands have begun to yield results as evident by increased investor confidence.

Resultantly, Red Robin’s shares have outperformed the Zacks categorized Retail-Restaurants industry over the past three months. The stock surged 49.2%, as compared with the industry’s gain of 9.4% during the same time period.

Upward estimate revisions further raise optimism regarding the stock’s prospects. The Zacks Consensus Estimate for 2017 and 2018 earnings moved north by 1.9% and 1.3%, respectively, over the last 60 days.

Initiatives

Red Robin is looking to improve its seating efficiency and lower the guest waiting times to boost revenues. Additionally, it looks forward to perk up its alcohol and beverage mix as well as its to-go business compared with the industry. Meanwhile, the company has rolled out its Kitchen Display System, which is linked to table management software. This is expected to result in annual sales growth of roughly $50 million, as kitchens can handle higher peak volumes.

Moreover, in Nov 2016, the company announced the installation of new technologies – DineTime platform and ConnectSmart Kitchen – from QSR Automations at over 450 of its restaurants nationally. While, DineTime provides seating management and a method for accepting online reservations as well as connecting with more guests, ConnectSmart Kitchen is expected to aid Red Robin in increasing table efficiency and speed of service.

On the expense front, the company plans to introduce new supply chain management software, which will replace its older manual system. This would result in a 30-bps opportunity in margin improvement starting 2017. Management also expects to reduce expenses by about 20 bps annually, as part of the five-year strategic plan.

Moving ahead, the company plans to deploy more capital to shareholders once it completes its brand transformation remodeling in all the restaurants.

Apart from boosting revenues and lowering expenses, all these initiatives would also accelerate earnings growth at Red Robin in the coming quarters.

The closing of not-so-profitable “Burger Works” restaurants is also anticipated to help the company grow its earnings, as these newer concept outlets were not generating sufficient profits.

Furthermore, Red Robin is set on growing its off-premise, online-ordering business via carry-out, delivery and catering. It is moving smartly on new revenue streams and expects off-premise orders to become a growth engine in the back half of the year as it begins to actively promote the new offerings, reach more guests more often and thereby drive improved profitability.

Meanwhile, when some restaurateurs like McDonald’s Corporation (NYSE:MCD) , Jack in the Box Inc. (NASDAQ:JACK) and The Wendy's Company (NASDAQ:WEN) are moving to a franchised business model to reduce capital requirement, Red Robin continues to focus on company-owned restaurants. This allows the company to have full control over operations and also keep the profits.

Bottom Line

Notably, the current challenging sales environment in the restaurants space, which the company apprehends will continue to affect business in first-half 2017, has led Red Robin to lower its pace of unit expansion. Although it plans to open roughly 17 new Red Robin locations in 2017, it is also looking forward to close down nine existing ones in the year.

Nonetheless, initiatives undertaken to improve sales and regain market share as the year progresses, bodes well and should keep the growth story on track.

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