Red Robin Flies, But Not Too High

Red Robin Gourmet Burgers Inc.'s (RRGB - Analyst Report) distinct family-friendly atmosphere, and strong value proposition have 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.

The management 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 re-accelerated unit growth in 2008. Initial results have been positive and traffic has improved.

However, we think the current valuation assumes that the company will sustain traffic improvements while reaccelerating growth, without incorporating the risk of flawed execution, heightened in the current environment.

Red Robin has a strong value proposition with a lower average check and a distinct concept that appeals to higher-income families. A high proportion of higher income customers should lessen the negative effects of higher gas prices. The management also plans to re-accelerate unit growth in 2008 in the range of 30-32 restaurants.

RRGB is trading at 10.3x our estimate 2009 earnings estimate. RRGB's forward P/E multiple has contracted and is at a substantial discount to its mid-teens growth rate. However, our estimates and those of the Steet's contain substantial downside risk should the economic slowdown become more severe or protracted than current expectations. In turn, until the company shows the ability to sustain traffic improvements while re-accelerating growth, we think it deserves its current discount to our estimate of its growth rate.

Read the full analyst report on RRGB