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Red Robin (RRGB) Banks on Off-Premise Sales, Traffic Dismal

Zacks Equity Research
·4 mins read

Red Robin Gourmet Burgers, Inc. RRGB is benefiting from operational enhancements, off-premise sales and other digital initiatives. However, dismal traffic due to the social-distancing protocols along with high labor and restaurant operating expenses remain concerning. In the past three months, shares of the company have declined 18.5% against the industry’s 11.7% growth

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Catalysts

Red Robin’s off-premise sales have increased sharply compared with the pre-COVID-19 levels. During the second quarter of 2020, off-premise sales increased 208.7% and accounted for 63.8% of total food and beverage sales. Notably, the increase was primarily attributed to its focus on all off-premise sales channels, carry-out, third-party and Red Robin delivery (or last mile). Also, reductions in menu along with refined operating processes resulted in timely pickup and delivery.

Meanwhile, the company’s initiative of moving call-in ordering to a centralized call center is yielding positive results and is thus slowly expanding its reach to ensure quality experience.

Apart from brand revitalization efforts, Red Robin has been investing significantly in technology and data infrastructure. The company is set to grow off-premise, online-ordering business via carry-out, delivery and catering. On the delivery front, the company has partnered with Amazon, DoorDash and GrubHub. In fact, the company is working with each provider to better integrate into its POS and KDS systems, and ease the intricacy in operations teams.

Red Robin continues to focus on three areas — revenue growth, expense management and efficient capital deployment — to drive profitability. On the expense front, the company is focusing on a new supply chain management software, replacing its older manual system. This might result in improved control of waste and cost of goods, significantly reducing inventory levels at its restaurants. It would also allow restaurant managers to interact more with guests, resulting in enhanced guest experience.

With dining rooms reopened, the company has accelerated the implementation of its new hospitality model, TGX or Total Guest Experience, to better customer experience. Moreover, to boost sales from its dine-in services, restaurant operators have initiated the opening and expansion of patios around the perimeter of its restaurants to attract more guests. Notably, the initiative enables the company to increase its seating capacity and serve more guests, while maintaining social-distancing protocols.

Furthermore, the company intends to reduce costs and improve efficiency at both the restaurant and corporate levels as well as redesign its restaurant prototype and remodel to enhance the off-premise experience.

Concerns

The coronavirus outbreak has rattled the Retail - Restaurants industry, and Red Robin is not immune to the aftereffects. Although the company has reopened majority of its restaurants, it is likely to witness dismal traffic due to the social-distancing protocols. Moreover, with increased state and local restrictions, dining rooms in California have been closed again. We believe that the coronavirus pandemic will continue to hurt traffic and sales through the remainder of fiscal 2020.

Red Robin has been witnessing rising costs and expenses in recent quarters. Additionally, the company is investing heavily in several sales-building initiatives like advertising and technical upgrades, which are resulting in elevated costs. Also, remodeling and restaurant maintenance are adding to expenses.

In second-quarter fiscal 2020, restaurant-level operating profit margin came in at 2% in the quarter compared with 18.2% growth in the year-ago period. Restaurant labor costs (as a percentage of restaurant revenue) rose 400 basis points year over year to 39.2% in the fiscal second quarter. The increase was primarily driven by sales deleverage and higher wage rates, partially offset by lower restaurant manager incentive compensation.

Key Picks

Some better-ranked stocks in the same space include Jack in the Box Inc. JACK, Papa John's International, Inc. PZZA and El Pollo Loco Holdings, Inc. LOCO. Jack in the Box and Papa John's sport a Zacks Rank #1 (Strong Buy), while El Pollo Loco carries a Zacks Rank #2 (Buy).You can see the complete list of today’s Zacks #1 Rank stocks here.

Jack in the Box 2021 earnings are expected to surge 17.7%.

Papa John's has a three-five year earnings per share growth rate of 8%.

El Pollo Loco has a trailing four-quarter earnings surprise of 94.1%, on average.

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Jack In The Box Inc. (JACK) : Free Stock Analysis Report
 
Red Robin Gourmet Burgers, Inc. (RRGB) : Free Stock Analysis Report
 
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El Pollo Loco Holdings, Inc. (LOCO) : Free Stock Analysis Report
 
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