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On Nov 29, we reverted to a Neutral recommendation on the casual dining restaurant chain, Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), from Outperform. Despite strong third-quarter 2013 results, we remain on the sideline due to increasing pressure on costs and lingering macroeconomic uncertainty.

Why Back to Neutral?

Red Robin posted solid third-quarter 2013 results on Nov 5, 2013 beating the Zacks Consensus Estimate for both earnings and revenues.

Amid a sluggish economic environment, the company has been posting positive same-store sales (comparable sales) growth over the past three years. Following a better-than-expected performance in the first half, the restaurateur raised its comps outlook for 2013.

Series of sales building initiatives including menu innovation, effective marketing strategy, unit expansion and remodeling programs are the other positive factors which should prove beneficial for the company over the long term.

However, despite these enthusiastic facts, some concerns prevent us from being too optimistic on the stock. The company has been witnessing higher expenses for the past three quarters due to increasing labor costs and commodity inflation, thus hurting margins.

Moreover, the company is investing heavily in several sales building initiatives, such as advertising, technical upgrades and improved supply chain, which are not expected to boost sales before 2014 or 2015, thus pressurizing the current bottom line. 

Government budget cuts, high tax rates and still-tightened credit availability are limiting consumer spending which in turn hampering the company’s overall growth. Lack of international presence and stiff competition resulting in higher discounting rates remain other headwinds.

Restaurants Stocks That Warrant a Look

Red Robin carries a Zacks Rank #2 (Buy). Investors interested in the restaurant industry may consider stocks like Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report), DineEquity, Inc. (DIN - Snapshot Report) and Famous Dave's of America Inc. (DAVE - Snapshot Report). All these companies hold a Zacks Rank #2.

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