Red Robin (RRGB) Strong On Growth Initiatives, Costs A Concern

On Aug 28, we issued an updated research report on Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB) .

The company posted better-than-expected second-quarter 2017 results on Aug 8 wherein both earnings and revenues surpassed the Zacks Consensus Estimate.

Though the company has solid long-term growth potential but the risks from near-term headwinds might restrict its growth momentum.

Initiatives

Red Robin has undertaken several brand revitalization initiatives such as menu innovation, operational improvement and introducing a better customer service platform to enhance guest experience and drive revenues. Additionally, it looks to improve its seating efficiency and lower the guest waiting times to boost the top line.

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 November 2016, the company announced the installation of new technologies – DineTime platform and ConnectSmart Kitchen. 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, in turn, would result in a 30 basis points 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.

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

Furthermore, the company is concentrating on its remodeling initiatives that are anticipated to boost its potential as a brand as well as improve client experience.

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

Challenges

However, Red Robin’s shares have declined 17.2% in the last three months compared with the industry’s fall of 5.1%. Over the last 60 days, current-quarter and current-year earnings estimate have moved down by 39.6% and 2.1%, respectively. This reflects analysts’ pessimism on the stock’s prospects.

Meanwhile, the collapse of the Republican-led bill, which was intended to replace Obamacare, means that the Affordable Care Act is here to stay. This means that the restaurant operators like Red Robin that have more company-owned units and laborers will have to continue shouldering increased labor costs, which, in turn, will hurt margins.

Meanwhile, Red Robin is investing heavily in several sales building initiatives like advertising and technical upgrades, which will result in elevated costs. Remodeling, restaurant maintenance and pre-opening costs also add to the already rising expenses.

Going forward, a slowdown in company’s 2017 unit growth plan given the soft consumer spending environment in the U.S. restaurant space and a rising costs scenario might weigh on the company’s performance, thus reflecting on its share price.

Zacks Rank & Stocks to Consider

Red Robin currently carries a Zacks Rank #3 (Hold). Better-ranked stocks in this sector include Papa John's International, Inc. (NASDAQ:PZZA) , Domino's Pizza, Inc. (NYSE:DPZ) and Bravo Brio Restaurant Group, Inc. (NASDAQ:BBRG) . All the three stocks carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

In the trailing four quarters, Papa John's, Domino's and Bravo Brio pulled off an average positive earnings surprise of 5.10%, 6.75% and 28.27%, respectively.

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