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On Jun 11, 2013, we reverted our recommendation on the casual dining restaurant chain, Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), back to Neutral from Outperform. The company is seeing a sluggish economic environment that is affecting demand on the one hand and escalating costs on the other. Red Robin carries a Zacks Rank #3 (Hold).

Why Back to Neutral?

Red Robin has been consistently posting positive same-store sales growth over the past 11 quarters. Red Robin's management has undertaken several initiatives such as menu innovation, improving kitchen efficacy, continuous expansion and a better service platform to significantly drive its revenues by 2015.

Red Robin continues to make efforts to reduce its costs to augment its profitability. Red Robin is focused on trimming the administrative and restaurant level costs and supply chain expenses to boost its margin, going forward.

In spite of a promising growth story, Red Robin will be exposed to higher beef and labor costs in the coming quarters. Although Red Robin’s earnings of 66 cents per share in the first quarter beat the Zacks Consensus Estimate by a penny, they declined 7% year over year.

Quarterly revenues also missed the Zacks Consensus Estimate. We believe that a decline in traffic hurt both earnings and revenues in the quarter.

The company’s aggressive sales building initiatives are scheduled for the later part of the year and will thus hurt margins in the second half. The benefits of these investments will however, not be realized before 2014. Lack of international presence and stiff competition resulting in higher discounting rates remain other headwinds. 

Restaurants Stocks That Warrant a Look

Some other restaurateurs worth considering are AFC Enterprises Inc. , The Wendy’s Co. (WEN - Analyst Report) and Burger King Worldwide Inc. (BKW - Analyst Report), all carrying a Zacks Rank #2 (Buy).

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