New Red Robin Unit in California

Red Robin Gourmet Burgers Inc. ( RRGB - Analyst Report ) , a chain of casual dining restaurants, recently announced that it plans to open a new restaurant in Arcadia, California on January 9, 2012. Earlier, in July this year, the company opened a new restaurant in Lakewood, California. Currently, Red Robin has more than 72 locations in California.

We believe that the core Californian market, which was badly hit during the housing downturn, has begun to turnaround. The gradual recovery in this market, which is one of the major operational locations for the company, should be a key growth driver going forward.

The new restaurant will come up at 400 S. Baldwin Ave. at the Westfield Santa Anita Mall. Given the strategic location of this new restaurant, we believe that it will drive significant growth in the coming days. Apart from its popular offering of gourmet burgers, entrees, salads and beverages, the menu will offer an interesting variety for children.

Furthermore, to drive revenue at the new location, the burger chain intends to implement a guest loyalty program called Red Royalty, focused on retaining guests by providing dining benefits. The company will also use a Limited Time Offer (LTO) strategy supported with television advertising to drive traffic and create brand recognition.

Colorado-based Red Robin primarily focuses on expediting food orders in a colorful and family-friendly atmosphere that appeals to women and children. As a result, 30% of its customers are aged under 18.

Red Robin, which currently operates more than 460 restaurants across the United States and Canada, remains on track to open 12 full-size restaurants and its first smaller prototype restaurants in 2011 followed by 12 to 15 in 2012, including both full-sized and smaller prototype units. We believe that small-size restaurants will drive growth in non-traditional locations and also improve return on invested capital.

The company is also expanding through franchise, as it reduces capital requirement of the company and ensures a stable growth profile. Currently, the restaurant base is 70% company-operated and 30% franchised. To further encourage franchising, the company will also charge less franchisee fee from existing franchisees if they build new restaurants. The company expects to roll out three new franchised restaurants in 2011.

Red Robin currently has a Zacks #3 Rank, which implies a Hold rating over the short term. We also reiterate our long-term Neutral recommendation on the stock, given the company’s efforts to turn around its business in 2011 by focusing on revenue growth, expense control by cost-cutting initiatives and capital deployment.

However, commodity cost pressure and an uncertain economic environment resulting in lower traffic and stiff competition from peers such as BJ’s Restaurants Inc. ( BJRI - Analyst Report ) and The Cheesecake Factory Inc. ( CAKE - Analyst Report ) make us cautious.Additionally, labor expense, which primarily hampers margin upside, is also expected to rise in 2012.