Casual dining restaurant operator Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), which currently boasts more than 480 restaurants across the United States and Canada, is set to open a new restaurant in Peoria, Ill. shortly.
At present, this gourmet burger maker has about 21 units in Illinois, which makes the state a relatively newer market for Red Robin compared to California, which has as many as 70 units.
As per the National Restaurant Association, Illinois’s restaurant industry contributes considerably to the state’s revenues. According to the research organization, Illinois’s restaurants are expected to record $21.7 billion in sales in 2013. Illinoisans’ inclination toward eating out frequently is favorable for the growth of the sector, which, we believe, has caught the attention of Red Robin.
Red Robin has been on an expansion spree for quite some time. Red Robin’s units are mostly located in California, Colorado, North Carolina, Ohio, Virginia, and Washington. While the company seems comfortable expanding in familiar territory, we also foresee expansion in relatively new markets to avoid market saturation.
This Colo.-based company is striving hard to explore new development opportunities in the untapped markets of Florida, New York, New Jersey, Chicago and Texas and further enhance its presence in the U.S.
That’s not all. This Zacks Rank #3 (Hold) company is also keen to expand its other formats. The company’s smaller prototype restaurants, Burger Works, will likely accelerate its growth in non-traditional locations and also improve return on invested capital. At present, ‘Burger Works’ is witnessing an average sales increase of about 6%. The company expects to open 15 additional Red Robins this year and many more Burger Works in the second half of the year.
While we appreciate the company’s effort to move beyond its barriers, investors should note that entry into under-penetrated markets always involves some risks initially. There will be an attendant headwind of higher pre-opening costs in these areas compared with matured trade areas, in which the company already has support infrastructure. This can limit margin expansion in the initial stages of operation.
Other Stocks to Consider
Some other players in the restaurant industry, which look attractive at current levels, include The Wendy’s Co. (WEN - Analyst Report), Domino’s Pizza Inc. (DPZ - Analyst Report) and Burger King Worldwide Inc. , all carrying a Zacks Rank #2 (Buy).