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Year 2016 was a tough one for Red Robin as the stock plunged drastically after weak first-quarter results in May. Since then shares of the company had been underperforming the Zacks categorized Retail-Restaurants industry.
A number of reasons were responsible for such a dismal performance - the impact of acquiring lower-margin franchise restaurants and higher labor cost that hurt margins; higher pre-opening and remodeling costs coupled with expenses related to aggressive domestic expansion strategies and soft industry trends.
However, in the recent months, the various initiatives undertaken by Red Robin have begun to show signs of improvement in the form of increased investor confidence.
Initiatives
To boost revenues, the company is looking to improve its seating efficiency and lower the guest waiting times. It is also looking to perk up its alcohol and beverage mix as well as its to-go business compared with the industry. The company has rolled out its Kitchen Display System, which is linked to table management software. This is expected to result in annual sales growth of approximately $50 million, as kitchens can handle higher peak volumes.
Moreover, the company is set on growing its off-premise, online-ordering business via carry-out, delivery and catering. It has new packaging under tests along with a large party carry-out and catering menu, which is developed and ready for selective implementation.
On the expense front, the company plans to introduce a new supply chain management software, which will replace its older manual system. This would result in a 30-bps opportunity in margin improvement starting 2017. Management also expects to reduce expenses by about 20 bps annually, as part of the five-year strategic plan.
In addition the company plans to deploy more capital to shareholders once it completes its brand transformation remodeling in all the restaurants. It has remodeled seven restaurants during the third quarter, totaling to over 400 remodeled restaurants in its chain.
The closing of not-so-profitable “Burger Works” restaurants is expected to help the company grow its earnings, as these newer concept outlets were not generating sufficient profits.
Apart from boosting revenues and lowering expenses, all these initiatives would also accelerate earnings growth at Red Robin in the coming quarters.
Investors have already started noticing this potential of the company as shares have started to move in the positive territory, outpacing the industry’s growth at large. Over the past three months, the stock has gained 27.5% while the industry grew just 2.7%.
Reasonably Valued
Shares of Red Robin look reasonably valued to us. Stock of the company is currently trading at a trailing 12-month P/E metric of 17.3 while the industry’s average stands at 24.81. This means it is reasonably undervalued compared to its peers and the current level could prove to be a good entry point.
The company is also undervalued in terms of P/S ratio. While Red Robin’s P/S ratio stands at just 0.56, the industry’s average is 1.27.
Moreover, the company generated a return on equity (in the last 12 months) of 12.35% while the industry’s average was 8.6%.
All of these reasons are why the company has a Value Style score of ‘A’ and Growth grade of ‘A’. This works towards giving RRGB a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success.
Bottom Line
Red Robin is faced with numerous headwinds including a sluggish sales environment and limited international presence as compared to some peers. However, efficient menu innovation, focus on increasing speed of service, effective marketing strategy, unit expansion and remodeling programs to reinvigorate brands are likely to boost growth significantly.
Meanwhile, when some restaurateurs like YUM! Brands, Inc. (YUM - Free Report) and McDonald’s Corporation (MCD - Free Report) are moving to a franchised business model to reduce capital requirement, companies like Red Robin and Brinker International, Inc. (EAT - Free Report) are focusing on company-owned restaurants. This would allow Red Robin to have full control over operations and also keep the profits.
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Red Robin (RRGB) Stock Raised to Buy on Growth Initiatives
On Jan 3, we upgraded Red Robin Gourmet Burgers & Restaurants, Inc. (RRGB - Free Report) by a notch to a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
Year 2016 was a tough one for Red Robin as the stock plunged drastically after weak first-quarter results in May. Since then shares of the company had been underperforming the Zacks categorized Retail-Restaurants industry.
A number of reasons were responsible for such a dismal performance - the impact of acquiring lower-margin franchise restaurants and higher labor cost that hurt margins; higher pre-opening and remodeling costs coupled with expenses related to aggressive domestic expansion strategies and soft industry trends.
However, in the recent months, the various initiatives undertaken by Red Robin have begun to show signs of improvement in the form of increased investor confidence.
Initiatives
To boost revenues, the company is looking to improve its seating efficiency and lower the guest waiting times. It is also looking to perk up its alcohol and beverage mix as well as its to-go business compared with the industry. The company has rolled out its Kitchen Display System, which is linked to table management software. This is expected to result in annual sales growth of approximately $50 million, as kitchens can handle higher peak volumes.
Moreover, the company is set on growing its off-premise, online-ordering business via carry-out, delivery and catering. It has new packaging under tests along with a large party carry-out and catering menu, which is developed and ready for selective implementation.
On the expense front, the company plans to introduce a new supply chain management software, which will replace its older manual system. This would result in a 30-bps opportunity in margin improvement starting 2017. Management also expects to reduce expenses by about 20 bps annually, as part of the five-year strategic plan.
In addition the company plans to deploy more capital to shareholders once it completes its brand transformation remodeling in all the restaurants. It has remodeled seven restaurants during the third quarter, totaling to over 400 remodeled restaurants in its chain.
The closing of not-so-profitable “Burger Works” restaurants is expected to help the company grow its earnings, as these newer concept outlets were not generating sufficient profits.
Apart from boosting revenues and lowering expenses, all these initiatives would also accelerate earnings growth at Red Robin in the coming quarters.
Investors have already started noticing this potential of the company as shares have started to move in the positive territory, outpacing the industry’s growth at large. Over the past three months, the stock has gained 27.5% while the industry grew just 2.7%.
Reasonably Valued
Shares of Red Robin look reasonably valued to us. Stock of the company is currently trading at a trailing 12-month P/E metric of 17.3 while the industry’s average stands at 24.81. This means it is reasonably undervalued compared to its peers and the current level could prove to be a good entry point.
The company is also undervalued in terms of P/S ratio. While Red Robin’s P/S ratio stands at just 0.56, the industry’s average is 1.27.
Moreover, the company generated a return on equity (in the last 12 months) of 12.35% while the industry’s average was 8.6%.
All of these reasons are why the company has a Value Style score of ‘A’ and Growth grade of ‘A’. This works towards giving RRGB a Zacks VGM score—or its overarching fundamental grade—of ‘A’. (You can read more about the Zacks Style Scores here >>)
Our VGM Score identifies stocks that have the most attractive value, growth, and momentum characteristics, and a good VGM score can increase your odds of success.
Bottom Line
Red Robin is faced with numerous headwinds including a sluggish sales environment and limited international presence as compared to some peers. However, efficient menu innovation, focus on increasing speed of service, effective marketing strategy, unit expansion and remodeling programs to reinvigorate brands are likely to boost growth significantly.
Meanwhile, when some restaurateurs like YUM! Brands, Inc. (YUM - Free Report) and McDonald’s Corporation (MCD - Free Report) are moving to a franchised business model to reduce capital requirement, companies like Red Robin and Brinker International, Inc. (EAT - Free Report) are focusing on company-owned restaurants. This would allow Red Robin to have full control over operations and also keep the profits.
Zacks' Top 10 Stocks for 2017
In addition to the stocks discussed above, would you like to know about our 10 finest tickers for the entirety of 2017?
Who wouldn't? These 10 are painstakingly hand-picked from 4,400 companies covered by the Zacks Rank. They are our primary picks to buy and hold. Be among the very first to see them >>