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Red Robin (RRGB) Focuses on Menu Innovation Amid High Costs

Zacks Equity Research

Red Robin Gourmet Burgers, Inc. RRGB is continuously relying on menu innovation, digital capability enhancement and expansion to revive top-line growth.

Despite such initiatives, the company is witnessing soft revenue trend and high costs, which are affecting overall profitability. Along with dented revenues, Red Robin’s earnings have also been declining of late. Further, earnings estimates for the current year have been revised downward by 11.3% over the past 30 days, reflecting analysts’ concern surrounding the company’s earnings potential.

Subsequently, Red Robin’s shares have lost 51.7% in the past year against the industry’s 20.5% rally.

 

Sales-Building Efforts Encourage

Red Robin is focused on menu innovation and operational improvement, and strives to make a better customer service platform. The company continues to launch a variety of salads, appetizers, innovative desserts and adult beverages as well as kids’ menu.

In addition, Red Robin focuses on promotional and limited-time offers to increase revenues. Moreover, a key long-term growth driver for the company is the guest loyalty program — Red Robin Royalty — initiated in 2011 with a goal to increase the guest count.

Red Robin has been investing more in technology and data infrastructure. The company is set to grow off-premise, online-ordering business via carry-out, delivery and catering. The growing demand for off-premise orders is resulting in higher traffic.

Red Robin has moved call-in ordering to a centralized call center, which is yielding positive results. On the delivery front, the company partnered with Amazon AMZN, DoorDash and GrubHub GRUB. In fact, it is working with each provider to better integrate into its POS and KDS systems, and ease the intricacy in operation teams. Also, third-party delivery is now available at most of its locations.

Concerns

Apart from a significant top-line pressure, Red Robin has been witnessing rising costs and expenses in the recent quarters. It is investing heavily in several sales-building initiatives like advertising and technical upgrades, which is resulting in elevated costs. Remodeling and restaurant maintenance are also adding to rising expenses. In the fourth quarter of 2018, restaurant-level operating profit margin contracted 110 basis points (bps) to 19.4%. This decline was due to 40-bps rise in other restaurant operating expenses and a 20-bps increase in occupancy costs.

In 2018, the company failed to maintain year-over-year traffic growth in off-premise businesses via carry-out, delivery and catering, which further adds to the concern.

Zacks Rank & Stock to Consider

Red Robin currently carries a Zacks Rank #3 (Hold). A better-ranked stock in the industry is Dine Brands DIN, currently carrying a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Dine Brands’ earnings for 2019 are expected to grow 33.5%.

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