Red Robin Rides On Menu & Brand Innovation, High Costs Ail

Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) banks on various sales-building efforts like continual focus on menu innovation, value offerings, increasing service speed, effective marketing strategy, remodeling programs and online ordering business to drive its top-line growth. Effective cost-cutting efforts are also on the company’s priority list.

However, higher expenses from increased investments currently pose a threat to the company’s bottom line. The company’s first-quarter 2018 earnings not only missed the Zacks Consensus Estimate but also declined 22.5% year over year. Revenues in the quarter however rose a meager 0.2% from the prior-year quarter, driven by new restaurant openings and the favorable impact of foreign currency that overshadowed the decline in comps. Shares have lost 29% in the past year, widely underperforming the industry’s decline of 1.8%. Earnings estimates for 2018 have also declined 3.9% over the past month, reflecting analysts’ concern surrounding the company’s future earnings potential.

Sales-Building Efforts Bode Well

In order to drive incremental traffic, Red Robin has been undertaking initiatives that have improved its restaurants’ seating efficiency and lowered guests’ waiting times. The company has rolled out its Kitchen Display System (KDS) that is linked to the table management software. This is expected to result in annual sales growth of approximately $50 million, as kitchens can handle higher peak volumes. Meanwhile, Red Robin is focusing on expanding its productivity and service models, and also increasingly supporting To-Go and catering services to drive greater guest check.

Red Robin is set to grow its off-premise, online-ordering business via carry-out, delivery and catering. In the first quarter of 2018, the company delivered 9.4% mix in the off-premise business, up 40% year over year. Notably, all the company restaurants currently have online ordering available and 98% also have call center support. Red Robin’s strategy of moving call-in ordering to a centralized call center is also yielding positive results and is thus slowly expanding its reach to ensure quality experience. On the delivery front, the company partnered with Amazon (NASDAQ:AMZN), DoorDash and GrubHub. Also, third-party delivery is now available at more than 70% of its locations.

Apart from brand revitalization and digital efforts, Red Robin is focused on menu innovation and operational improvement to make it a better-customer service platform. The company continues to launch a variety of salads, appetizers, innovative desserts and adult beverages, as well as kids’ menu. Notably, the company’s marketing strategy focuses on driving traffic with everyday value advertising of premium burgers, appetizers, beverage and desserts.

In addition, the company focuses on promotional and limited-time offers to increase its revenues. Moreover, a key long-term growth driver for the company is its guest-loyalty program — Red Robin Royalty — initiated in 2011 with a goal to increase guest count. The company engages its guests through this program, with offers designed to increase their frequency of visits. It also informs its enrolled guests about new menu items to generate awareness and for trials. Driven by such sincere efforts, the restaurant chain has been witnessing an uptick in revenues since 2013.

High Expenses Hurt Despite Strategic Plan RED2

During its ICR Investor Conference in Orlando in 2016, Red Robin outlined its go-forward plan known as RED2. The primary objective of this initiative is doubling the company’s EBITDA by 2020. The initiative aims to focus mainly on three areas — revenue growth, expense management and efficient capital deployment.

However, Red Robin is investing heavily in several sales-building initiatives like advertising and technical upgrades, resulting in elevated costs. Remodeling and restaurant maintenance are also adding to the already rising expenses. In the first quarter of 2018, restaurant-level operating profit margin contracted 130 basis points (bps) to 20%. The downturn was due to a 90-bps increase in the cost of sales, 70-bps rise in other restaurant operating expenses and 40-bps surge in occupancy costs.

Nonetheless, to curb expenses, the company is focusing on a new supply chain management software, replacing its older manual system. This would result in improved control of waste and cost of goods, significantly reducing inventory levels at the restaurants.

Zacks Rank & Stocks to Consider

Currently, Red Robin carries a Zacks Rank #3 (Hold). Some better-ranked restaurants include Darden (NYSE:DRI) , Dine Brands (NYSE:DIN) and Denny’s (NASDAQ:DENN) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Darden, Dine Brands and Denny’s earnings for 2018 are projected to grow 18.7%, 23.1% and 12.1%, respectively.

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