Earnings Preview: Red Robin

Zacks

Casual dining restaurant operator Red Robin Gourmet Burgers Inc. (RRGB) is scheduled to announce its first quarter 2012 results on May 16. The current Zacks Consensus Estimate for the first quarter is 66 cents on revenue of $307.0 million.

Earnings Surprise

With respect to earnings surprises over the trailing four quarters, Red Robin has outperformed the Zacks Consensus Estimate in all the four quarters. The earnings surprise ranges from 13.6% to 141.7%, with the average at 54.4%. This indicates that the company has surpassed the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Prior Quarter Highlights

Red Robin posted fourth quarter 2011 adjusted earnings of 28 cents per share, way ahead of the Zacks Consensus Estimate of 20 cents as well as the year-ago quarter earnings of 13 cents per share. However, including asset impairment and restaurant closure costs, GAAP net income in the reported quarter came in at $2.9 million or 20 cents per share.

Revenues in the fourth quarter rose 7.0% year over year to $206.0 million. During the quarter, restaurant sales increased leaped 7.0% year over year to $202.5 million and franchise royalties and fees revenue crept up 1.0% to $3.1 million on comparable sales growth.

Comparable restaurant sales improved 4.8% year over year at company-owned restaurants in the reported quarter and restaurant operating margin at company-owned restaurants expanded 290 bps to 19.9%.

Outlook

In 2012, Red Robin expects comps to grow in the low-single-digit range and restaurant operating margin to expand modestly year over year, benefiting from lower operating costs and price increase, partially offset by higher commodity costs.

Additionally, the company expects cost of sale to increase 60–80 basis points in 2012 due to a higher ground beef costs. Furthermore, labor expense is estimated to jump 20-30 bps in 2012, riding on a number of accretive initiatives taken in 2011 and a rise in minimum wages across a number of states, particularly in the west.

In 2012, the company plans to open 13 to 15 new restaurants.

Zacks Consensus

The analysts covered by Zacks expect Red Robin to post earnings of 66 cents per share for the first quarter of fiscal 2012, higher than the prior-year earnings of 58 cents. Currently, the Zacks Consensus Estimate ranges between 62 cents and 72 cents a share.

Earnings Estimate Revisions – Overview

Estimates have not budged in the last 7 days, implying that the analysts do not view any surprises ahead of the earnings release. Of the analysts covering the stock, 67% are positive, 11% are neutral and 22% are negative on the stock.

Estimate Revision Trend

Out of the nine analysts providing estimates for the upcoming quarter, 2 analysts reduced the estimates; but none moved in the opposite direction in the last 30 days. The analysts have slashed the estimates due to the overall slowdown in same-store sales toward the end of the first quarter. For both fiscal 2012 and 2013, one analyst raised the estimate and one analyst trimmed the same in the last 30 days, indicating no directional movement.

None of the analysts made any estimate revision over the last 7 days, implying the absence of any meaningful catalysts.

Magnitude of Revisions

Estimates for the first quarter of 2012 have remained static at 66 cents over the last 30 days due to the insignificant estimate revisions by the analysts on the stock. The estimate for 2012 also remained unchanged at $1.88 over the last 30 days. Therefore, the analysts expect the company to report in line. However, for 2013, estimates have fallen by 3 cents to $2.18 over the last 30 days.

Our Take

We are pleased with the progress of Red Robin’s effort to turnaround its business by Project RED,which focuses on revenue growth, expense control and capital deployment. The pace of the company’s ongoing cost saving initiatives is faster than expected.Moreover, the loyalty program is tremendously successful. Also, the company is experiencing same-store sales growth based on its marketingand promotional activities. In addition, the company’s focus on franchising, unit growth, store remodeling, investments to improve operational efficiency and enhancing shareholder value also augur well for its earnings.

However, stiff competition from other quick-service restaurant operators and cost escalation along with no price increase will keep margins under pressure.

One of its peers, Chipotle Mexican Grill Inc. (CMG) has reported first-quarter 2012 earnings of $1.97 per share, surpassing the Zacks Consensus Estimate of $1.93 as well as the year-earlier earnings of $1.46.

Red Robin currently retains a Zacks #3 Rank, which translates into a short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.

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