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Why Red Robin Can Recover

Red Robin Gourmet Burgers Inc. (NASDAQ:RRGB) is set to strengthen its competitive position through its continued investment in new technology.

The quick-service restaurant is also making changes to its staffing in order to further differentiate itself from rivals, while its pivot to higher-margin products could make it more profitable.

After the stock's 13% decline in the last year, it could offer recovery potential.

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Investing in technology

The company's ongoing investment in new technology could improve its efficiency and enhance the customer experience. In the most recent quarter, the business deployed additional technology tools such as headsets for its staff members that aid communication, as well as server-handheld Point of Service (PoS) devices that are present in one-third of its restaurants. The PoS devices have improved the company's order execution and accuracy, with Red Robin expecting their rollout to be completed by the end of its current fiscal year.

In addition, the business is set to widen the delivery coverage areas of its restaurants. This will increase the size of its delivery service's total addressable market. It is also in the process of testing outsourced last mile delivery for orders placed directly with the company by its guests. This is expected to allow Red Robin to have greater control over the order experience from start to finish, as well as provide the company with valuable order and guest history. This can be used to personalize its customer offers in order to increase engagement levels and sales.

Refreshed strategy

Red Robin's focus on improving the experience of its customers could differentiate its offering from rivals. The company is focusing on increasing the presence of its managers on the dining room floor of its restaurants in order to reduce customer wait times, improve cleanliness and quickly resolve common problems. This strategy has contributed to an improvement in the company's overall guest satisfaction scores. They have shown a steady improvement in the current fiscal year following a decline throughout the previous fiscal year.

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The business is focusing on changing its staffing levels to increase throughput on its busiest shifts, while reducing its staff numbers during quieter periods. This has helped improve ticket times by 80 seconds in the second quarter of the current year compared to the same period from the previous year. Red Robin's faster and more efficient service could strengthen its competitive advantage and help to build a more loyal customer base.

Potential risks

Recent sales have been relatively disappointing. In the most recent quarter, the company reported a decline in comparable restaurant revenues of 1.5%. This was driven by its 6.4% fall in guest traffic, and coincided with its operating margin decline of 110 basis points to 18.2%. Its lower operating margin was largely due to a rise in its restaurant labor costs of 90 basis points to 35.2% of its total sales, with higher wage rates due primarily to a shortage of labor. This trend could continue in the near term, with a labor shortage occurring in general across the quick-service restaurant industry. Additionally, the business is yet to appoint a permanent CEO. This may mean that investors adopt a cautious stance towards its valuation in the near term.

The company's decline in comparable sales and guest traffic in the most recent quarter was largely due to its decision to pivot away from value deals in favor of higher-margin products. This is expected to contribute to a decline in its sales in the short run, but the company expects it to increase profitability in the long run. In addition, it expects comparative store sales to improve through the remainder of the current year, assisted by a new brand campaign.

Outlook

Red Robin is forecast to return to profit in its current fiscal year. Its earnings per share are expected to be $1.09 for fiscal 2019, from a loss of 78 last year.

Its forward price-earnings ratio of 29 suggests it could offer fair value for money, given its plans to improve the customer experience, focus on higher-margin products and investment in new technology.

This may lead to a successful stock price recovery for Red Robin following its 11% underperformance of the S&P 500 in the last year.

Disclosure: the author has no position in any stocks mentioned.

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This article first appeared on GuruFocus.