Here's Why You Should Retain Red Robin (RRGB) Stock for Now
Red Robin Gourmet Burgers, Inc. RRGB is likely to benefit from menu innovation, Donatos expansion and strategic acquisitions. Its focus on sales-boosting initiatives bode well. However, inflationary pressures are a concern.
Let’s discuss why investors should retain the stock for now.
Catalysts Driving Growth
Robin continues to focus on menu innovation to drive growth. Although the company has scaled down its menu from pre-pandemic levels, it has been witnessing positive customer feedback regarding its limited-time offer (LTO) menu items complemented by everyday value, including affordable prices, generous portions, signature bottomless sides and drinks. The company intends to launch new menu items in line with its barbell strategy. The items include St. Louis-style pork ribs with the signature Whiskey River barbecue sauce, panko-breaded tsunami shrimp and crispy parmesan Brussels sprouts.
Red Robin considers Donatos a key growth driver. Red Robin installed 25 Donatos in first-quarter fiscal 2023. As of Jul 9, 2023, it completed the installation of Donatos in 272 company-owned restaurants. The company is optimistic about the success of this partnership. It anticipates annual pizza sales to be more than $60 million and profitability above $25 million by 2024.
Increased focus on acquisitions bode well. In the second quarter of fiscal 2023, RRGB acquired five Red Robin restaurants in the northeastern United States from a retiring long-term franchisee for $3.5 million. This acquisition is expected to contribute approximately $1 million in net annual EBITDA in 2023.
Meanwhile, the company emphasized the upgrading of its cooking techniques. This includes transitioning from the existing conveyor belt cooking system to a more traditional flat-top cooking method. The company stated that the process is simpler and quicker for execution, eliminating significant maintenance and repair costs associated with the cooking platform. The initiative supports greater quality products and value offerings to its guests. So far, the company has enabled the flat-top cooking method in 300 restaurants and reported positive feedback with respect to the same.
On Jan 9, 2023, the company launched its North Star five-point plan to help it drive long-term shareholder value and enhance its competitive positioning in the market. The plan focuses on developing an operations-focused restaurant company, upgrading customer experience and engagement, reducing costs, along with driving growth in comparable restaurant revenues and unit-level profitability. This plan is anticipated to help the company drive growth in 2023 and beyond.
Image Source: Zacks Investment Research
Shares of Red Robin have gained 30.8% so far this year against the industry’s decline of 3.8%.
Concerns
The company is persistently shouldering higher expenses, which have been detrimental to margins. During the second quarter of fiscal 2023, labor costs rose 7.9% year-over-year to $109.7 million, while as a percentage of restaurant revenues, the metric increased 220 basis points to 37.4%. The increase was primarily due to investments in hourly labor, payroll taxes and incentive compensation, partially offset by group insurance and sales leverage. During the quarter, commodity inflation and hourly wage inflation both increased 5% year over year. Moving ahead, the company anticipates inflationary pressures to persist for some time. Per our model, the cost of sales in fiscal 2023 are expected to rise 3.1% year-over-year to $315.9 million.
Zacks Rank & Key Picks
Red Robin currently carries a Zacks Rank #3 (Hold).
Some better-ranked stocks in the Zacks Retail-Wholesale sector are:
Carrols Restaurant Group, Inc. TAST currently sports a Zacks Rank #1 (Strong Buy). It has a trailing four-quarter earnings surprise of 67.9%, on average. Shares of TAST have gained 277.3% in the past year. You can see the complete list of today’s Zacks Rank #1 stocks here.
The Zacks Consensus Estimate for TAST’s 2024 sales and EPS indicates an 2.9% and 4.1% growth, respectively, from the year-ago period’s levels.
Arcos Dorados Holdings Inc. ARCO currently carries a Zacks Rank #2 (Buy). It has a trailing four-quarter earnings surprise of 35%, on average. The stock has gained 29.5% in the past year.
The Zacks Consensus Estimate for Arcos Dorados’ 2023 sales and EPS suggests rises of 19.2% and 13%, respectively, from the year-ago period’s levels.
FAT Brands Inc. FAT currently carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 28.7% on average. Shares of FAT have increased 31.6% so far this year.
The Zacks Consensus Estimate for FAT’s 2024 sales and EPS indicates 36.3% and 29.6% growth, respectively, from the year-ago period’s levels.
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Red Robin Gourmet Burgers, Inc. (RRGB) : Free Stock Analysis Report
Carrols Restaurant Group, Inc. (TAST) : Free Stock Analysis Report
Arcos Dorados Holdings Inc. (ARCO) : Free Stock Analysis Report
FAT Brands Inc. (FAT) : Free Stock Analysis Report
