Off-Premise Business Model Aids Red Robin (RRGB), Costs Ail
Red Robin Gourmet Burgers, Inc. RRGB will likely benefit from its off-premise business model, technological enhancements and Donatos expansion. Also, the emphasis on Menu Innovation 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 continues to benefit from its robust off-premise sales. During second-quarter fiscal 2022, the company delivered the ninth consecutive quarter of off-premises sales dollars at more than double pre-pandemic levels. As a percentage of total off-premise sales, the company reported solid contributions from third-party delivery (54.3%), to-go (35.3%), catering (6.3%) and Red Robin Delivery (4.1%). The company intends to maintain the momentum by focusing on modifications with respect to its processes, staffing, floor plans and technology. It is initiating an expanded floor plan space to support its off-premises and catering orders without impacting the dine-in business.
Red Robin continues to focus on its digital platform to drive growth. During the second quarter of fiscal 2022, the company unveiled automated and push notifications along with Apple and Google Pay options. It also emphasized on enhancing the ordering experience by reducing clicks and offering a more intuitive royalty integration. The company also stated plans to pilot an online waitlist in late 2022. The company is optimistic regarding its digital ecosystem and expects it to drive incremental frequency, traffic and guest checks in the upcoming periods.
Red Robin still considers Donatos as a key growth driver. During the second quarter of fiscal 2022, Donatos generated sales worth $6.2 million. The company stated that nearly 200 restaurants serving Donatos pizza outperformed non-Donatos locations by 8.4% in comparable restaurant revenues compared with 2019. 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’s efforts to improve sales and regain market share via efficient menu innovation, focus on increasing service speed and effective marketing strategy bode well. Also, it has been witnessing positive customer feedback related to its limited time offer (LTO) menu items. During the fiscal second quarter, the company reported solid performance with respect to its LTO’s comprising cheese levers (featuring Savory Steakhouse Burger, Baked Potato Fries, two alcoholic beverage choices and a Pumpkin Spice Milkshake) and the Whiskey River Backyard barbecue menu lineup (including Smokehouse Brisket Burger, Pineapple Upside-Down Cake Milkshake and Tequila Sunset Cocktail). The company intends to focus on creative recipes to drive higher checks and margins. Also, it emphasized on testing other value programs around specific day parts (such as Happy Hour) and lunch specials to drive growth.
Concerns
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Red Robin has been persistently shouldering increased expenses, which are denting margins. In second-quarter fiscal 2022, the restaurant-level operating profit margin shrunk 210 basis points year over year to 13.6% due to commodity and wage rate inflation, partly offset by sales leverage and other labor costs. During the quarter, the cost of sales rose 17.4% year over year to $72.7 million, while as a percentage of restaurant revenues, the metric increased 240 basis points to 25.2%. While other operating costs, as a percentage of restaurant revenues, jumped 80 basis points to 18%, occupancy costs increased 10 basis points to 8%. For 2022, the company expects pricing in the mid-single digit. It foresees a mid-doubl- digit commodity cost inflation compared with its prior view of low double-digits. It anticipates restaurant labor cost inflation in the mid-to-high single digit.
Shares of Red Robin have plunged 55.6% this year, compared with the industry’s 18.9% fall. The dismal performance was primarily caused by the coronavirus crisis. Notably, pandemic-induced staffing challenges and supply chain disruptions have 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 other top-ranked stocks in the Zacks Retail-Wholesale sector are Wingstop Inc. WING, Yum China Holdings, Inc. YUMC and Sprouts Farmers Market, Inc. SFM.
Wingstop sports a Zacks Rank #1. Wingstop has a long-term earnings growth of 11%. Shares of the company have declined 20.7% in the past year.
The Zacks Consensus Estimate for Wingstop’s 2023 sales and earnings per share (EPS) suggests growth of 17.7% and 17.4%, respectively, from the year-ago period’s levels.
Yum China sports a Zacks Rank #1. Yum China has a long-term earnings growth of 10%. Shares of the company have declined 18.2% in the past year.
The Zacks Consensus Estimate for Yum China's 2023 sales and EPS suggests growth of 19.9% and 86.8%, respectively, from the year-ago period’s levels.
Sprouts Farmers Market carries a Zacks Rank #2 (Buy). The company has a trailing four-quarter earnings surprise of 15.6%, on average. Shares of the company have increased 22.3% in the past year.
The Zacks Consensus Estimate for Sprouts Farmers Market’s 2023 sales and EPS suggests growth of 5.9% and 7.9%, respectively, from the year-ago period’s levels.
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