Red Robin Gourmet Burgers Inc. (RRGB) recently announced the acquisition of an existing Red Robin franchised unit in Clifton, New Jersey from UBA Enterprises and included it in the company-owned operations. The transition to company-owned model affirms management’s confidence in its core business model. The purchase consideration of the deal is around $3.2 million.
The recent spurt in growth in the franchised entity has made it a lucrative acquisition target. According to Red Robin management, the acquired eatery will likely have annual sales of about $3.9 million. Hence, we view the deal as strategically positive in an industry that depends largely on franchising.
The acquired unit is the fourth company owned Red Robin site in New Jersey. This Seattle-based company has been catering to the New Jersey market since 2004 and envisions further expansion prospect. Red Robin will shortly come up with another company-owned unit in Woodbridge, New Jersey. Post-acquisition, Red Robin has only one franchised unit in New Jersey serving the market at Hamilton.
The company increased its company-owned unit expansion based on improving unit-level economics. It opened 11 company-owned restaurants in fiscal year 2010 and 13 units in 2011 and remains on track to unveil a net of 11 units in 2012. At the end of first-quarter 2012, there were 466 units in the Red Robin portfolio, out of which 330 are company-owned and the rest franchised.
Red Robin is not the only company which has followed this business strategy. The trend to transition to a company-based model is fast picking up, although most companies still prefer franchisees.
Others who followed suit include Panera Bread Co. (PNRA), which acquired businesses from its New Jersey and Milwaukee franchisees as well as bought back 16 bakery-cafes in the Raleigh-Durham-Chapel Hill market from one of its franchisees in the Carolinas. There is also Buffalo Wild Wings Inc. (BWLD) which took hold of 15 franchised units in Ohio and South Carolina in early December 2011.
Red Robin currently retains a Zacks #3 Rank, which translates into short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.
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