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On Oct 4, we upgraded our recommendation on Red Robin Gourmet Burgers, Inc. (RRGB - Analyst Report) from Neutral to Outperform based on better-than-expected earnings growth in the second quarter of 2013.

Why the Upgrade?

In its recently concluded second-quarter 2013, Red Robin reported adjusted earnings of 77 cents per share beating the Zacks Consensus Estimate of 66 cents by 16.7% and the year-ago quarter’s earnings of 52 cents by 48.1%. Results in the quarter benefited from decent top-line growth and margin expansion.

Following a better-than-expected margin performance in the second quarter, the company expects restaurant operating margin to be 21.3% in 2013, up from the previous estimate of 20.9%.

Following the release of the second-quarter results, the Zacks Consensus Estimate for 2013 has gone up 2.3% to $2.27 per share during the past 60 days. Similarly, the Zacks Consensus Estimate for 2014 improved 3.5% to $2.66 per share during the same time frame. With the Zacks Consensus Estimate for both the years moving north, Red Robin now has a Zacks Rank #1 (Strong Buy).

Reason for Positive Bias

In addition to strong second-quarter results, Red Robin’s growth story also looks attractive. Since 1969, Red Robin has remained one of the most recognized restaurant chains in the casual dining segment. Initiated in 2011, the company’s guest loyalty program – Red Robin Royalty – now caters to 2.5 million customers with a goal to boost traffic.  

Unruffled by the prevailing economic weakness, the company has been consistently witnessing a rise in its comps over the past three years, which validates the company’s strong fundamentals.

Red Robin has outlined a set of initiatives including menu innovation, effective marketing strategy and remodeling programs to reinvigorate its brands. Moreover, Red Robin is focused on expanding company-owned unit to augment its business. Foray into the smaller prototype restaurant concept, Red Robin’s Burger Work, is also a positive for the stock.

Other Stocks to Consider

Other players in the restaurant industry that look attractive at the current level include AFC Enterprises Inc. , Jack in the Box Inc. (JACK - Snapshot Report) and Domino's Pizza, Inc. (DPZ - Analyst Report). All these stocks carry a Zacks Rank #2 (Buy).

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