Red Robin Gourmet Burgers Inc. RRGB recently announced preliminary results for fourth-quarter fiscal 2016, ended Dec 25, 2016.
The company expects total revenue of roughly $290.8 million, when it reports quarterly results on Feb 21. This is lower than the Zacks Consensus Estimate of nearly $300 million for the quarter. It also anticipates comps to decrease 4.5% year over year, which is wider than the prior-quarter comps decline of 3.6%. Meanwhile, comparable guest count is expected to fall 2.9%.
We note that 2016 was indeed a tough year for Red Robin as the stock plunged drastically after weak first-quarter results in May. Since then, shares of the company have been largely underperforming the Zacks categorized Retail–Restaurants industry.
A number of reasons led to such a dismal performance – the impact of acquiring lower-margin franchise restaurants and higher labor cost that hurt margins; higher pre-opening and remodeling costs coupled with expenses related to aggressive domestic expansion strategies and soft industry trends.
However, in the recent months, the company has been undertaking various initiatives to turn around its business and gain investor confidence.
To boost revenues, the company is making efforts to improve its seating efficiency, lower guest waiting time and also improve ticket timings and table management. Also, it is looking to perk up its alcohol and beverage mix as well as its to-go business compared with the industry. 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 approximately $50 million, as kitchens can handle higher peak volumes.
Moreover, the company is set on growing its off-premise, online-ordering business via carry-out, delivery and catering. Its new packaging has been under tests along with a large party carry-out and catering menu, which is developed and ready for selective implementation.
On the expense front, the company plans to introduce new supply chain management software to replace its older manual system. This would result in margin improvement of 30 basis points (bps) starting from 2017. Management also expects to reduce expenses by about 20 bps annually, as a part of its five-year strategic plan. In addition, 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 are also expected to help the company grow its earnings, as these new concept outlets were not generating sufficient profits.
Meanwhile, when some companies like YUM! Brands, Inc. YUM and McDonald’s Corporation MCD are moving to a franchised business model to reduce capital requirement, others like Red Robin and Brinker International, Inc. EAT are focusing on company-owned restaurants. This would allow Red Robin to have full control over its operations and also keep the profits.
Red Robin is faced with numerous headwinds including a sluggish sales environment and limited international presence compared to some of its peers. However, efficient menu innovation, focus on increasing speed of service, effective marketing strategy, unit expansion and remodeling programs to reinvigorate brands are aiding the company to gain back market share and should thus boost growth significantly.
Evidently, investors have already started noticing this potential of the company as shares have started to move in the positive territory, outpacing the industry’s growth at large. Over the past three months, the stock has gained 13.4% compared to the industry’s dip of 0.8%.
Moreover, the company also outperformed casual dining industry traffic trends by 243 bps in the fourth quarter and saw further improvement in guest service ratings. Thus, after a somewhat disappointing 2016, Red Robin believes that prudent growth strategies, particularly its off-premise initiatives, along with rising investor confidence will help the company grow in 2017 and beyond.
Red Robin currently has a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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