Red Robin Gourmet Burgers, Inc.
RRGB
will likely benefit from its menu innovation, Donatos expansion and digital initiatives. Also, emphasis on the new prototype configuration bodes well. However, inflationary pressures and supply chain disruptions are a concern.
Let’s discuss the factors highlighting why investors should retain the stock for the time being.
Catalysts Driving Growth
Red Robin’s efforts to improve sales and regain market share via efficient menu innovation, focus on increasing service speed and effective marketing strategy bode well. Despite scaling down its menu (from pre-pandemic levels), it reported solid performance of Cheesy Bacon Fondue Burger and Scorpion Gourmet Burger. Also, it has been witnessing positive customer feedback related to its limited time offer (LTO) menu items. During the fiscal first quarter, the company reported solid performance with respect to its LTO’s comprising cheese levers (featuring Cheesy Bacon Fondue Burger and Mozzarella Cheese Sticks) and the Whiskey River Backyard barbecue menu lineup (including Smokehouse Brisket Burger and Tequila Sunset Cocktail). The company intends to focus on creative recipes to drive higher checks and margins.
Red Robin still considers Donatos as a key growth driver. During the first quarter of fiscal 2022, the company initiated Donatos at approximately 200 restaurants. During the quarter, Donatos generated sales worth $7 million. The company stated that for restaurants with Donatos, comparable restaurant revenues increased by more than 5% over restaurants that did not yet have Donatos. Also, guest checks that included Donatos Pizza were more than $10 (on average) compared with those that did not include pizza. The company anticipates rolling out Donatos to approximately 50 restaurants in 2022 and 150 restaurants in 2023. It intends to leverage Donatos to enhance the Red Robin dine-in experience growth and drive long-term incremental transactions through catering and delivery. Red Robin is optimistic about the success of this partnership.
Red Robin continues to focus on its digital platform to drive growth. During the first quarter of fiscal 2022, the company emphasized on enhancements regarding integration and a seamless digital ecosystem. To this end, the company launched a new website experience with user-friendly enhancements to presentation, navigation and online ordering. It reported increased order conversion on account of the same. Backed by solid customer engagement, the company is optimistic regarding its digital ecosystem and expects it to drive incremental frequency, traffic and guest checks. The company stated that enhancements related to geofencing (which will inform restaurants when the guest is near for pickup) and additional payment options (such as Apple Pay and Google Pay) are in the pipeline to support the same.
During the fiscal fourth quarter of 2021, the company initiated a new prototype configuration comprising design enhancements (to improve dine-in, off-premises and curbside execution) and an optimized kitchen layout (to boost efficiency). Following the opening, the company reported solid average weekly sales and stated that it is on track to achieve more than $4 million in terms of annual sales. The company intends to develop a real estate pipeline by leveraging its enhanced prototype design and focus on targeting high-return markets to drive growth.
Concerns
Red Robin has been persistently shouldering increased expenses, which are denting margins. During the fiscal first quarter, the company cited concerns about restaurant labor cost inflation. During the quarter, labor costs as a percentage of restaurant revenue increased 130 basis points year over year to 36.3%. The increase was primarily driven by higher labor inflation and staffing costs, partially offset by sales leverage. In 2022, the company anticipates commodity and restaurant labor cost inflation to be in the mid-to-high single digit.
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Shares of Red Robin have plunged 52.5% so far this year, compared with the
industry
’s 19% fall. The dismal performance was primarily caused by the coronavirus crisis. Notably, pandemic-induced staffing challenges and supply chain disruptions had taken an enormous toll on the company. Although most dining services are open, traffic is still low compared with pre-pandemic levels. The company intends to monitor the situation regularly to gauge the impacts of COVID-19.
Zacks Rank & Key Picks
Red Robin currently carries a Zacks Rank #3 (Hold). You can see
the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Some better-ranked stocks in the Zacks
Retail-Wholesale
sector are
Dollar Tree Inc.
DLTR
,
Yum! Brands, Inc.
YUM
and
Arcos Dorados Holdings Inc.
ARCO
.
Dollar Treesports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 13.1%, on average. Shares of the company have gained 18.1% so far this year.
The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and earnings per share (EPS) suggests growth of 6.7% and 40.5%, respectively, from the year-ago period’s levels.
Yum! Brands carries a Zacks Rank #2 (Buy). Yum! Brands has a long-term earnings growth of 11.7%. Shares of the company have decreased 15.7% so far this year.
The Zacks Consensus Estimate for Yum! Brands’ 2022 sales and EPS suggests growth of 4.8% and 3.8%, respectively, from the year-ago period’s levels.
Arcos Dorados carries a Zacks Rank #2. Arcos Dorados has a long-term earnings growth of 34.4%. Shares of the company have risen 9.5% so far this year.
The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 83.3%, respectively, from the year-ago period’s levels.
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