Some Good Results at Red Robin

Red Robin Gourmet Burgers' (RRGB - Analyst Report) distinct family-friendly atmosphere, and strong value proposition has created a loyal customer base, which supported high-teens unit expansion, healthy same-store sales, and robust EPS growth for several years until its entry into new markets in 2006 dampened traffic.

RRGB is trading at 18x our estimate of 12-month forward earnings. Valuations in the casual dining sector have contracted owing to slowing traffic and rising food and labor costs, which have caused missed estimates and sector rotation away from restaurants.

The stock's forward P/E multiple has contracted and is a discount to its five-year average of 21x. Until the company shows an ability to sustain traffic improvements while re-accelerating growth, we think it deserves its current discount to our estimate of its growth rate.

Management has dramatically scaled back unit expansion while it has improved returns on its new-market restaurants through a national advertising campaign and lower construction costs among other efforts and intends to reaccelerate unit growth in 2008. Initial results are positive, and traffic has improved.

However, we think the current valuation assumes that the company will sustain traffic improvements while re-accelerating growth, without incorporating the risk of flawed execution, heightened in the current stagflationary environment. For the fiscal year 2008, management anticipates revenue to be in the range of $880 million to $893 million, comparable sales of 2% to 3.5%, and EPS to be around $2 to $2.20. We rate the shares of RRGB a Hold with a $42 price target.

Read the full analyst report on RRGB.

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