Red Robin Reports Mixed 1Q

Red Robin Gourmet Burgers Inc. ( RRGB - Analyst Report ) reported earnings of 71 cents per share in the first quarter of 2012, breezing past the Zacks Consensus Estimate of 66 cents as well as the year-ago quarter adjusted earnings of 58 cents per share. Results in the quarter benefited from cost improvement resulting in margin expansion.

The company reported total revenue of $299.5 million in the first quarter, up 4.4% year over year but below the Zacks Consensus Estimate of $307.0 million.

Quarter Highlights

During the quarter, restaurant sales leaped 4.7% from the year-ago quarter to $294.6 million but franchise royalties and fees revenue slipped 8.8% to $4.8 million.

Comparable restaurant sales inched up 0.5% year over year at company-owned restaurants in the reported quarter, driven by a 4.1% increase in average guest check, partially offset by a 3.6% dip in guest count. The guest count suffered due to the failure of its promotional activities and hefty discounting environment.

Restaurant operating margin at company-owned restaurants expanded 140 bps to 21.2%, due to a drop of 90 bps in labor costs and a decline of 110 bps in other operating costs, partially compensated by a 50 bps increase in food and beverage cost and 20 bps hike in occupancy costs.

Selling, general and administrative expenses in the quarter climbed 5.9% year over year to $32.0 million,due to higher equity-based compensation costs, new information technology development costs and higher costs related to gift card sales, partially offset by a decrease in severance costs.

Financial Aspects

Red Robin ended the quarter with cash and cash equivalents of $38.0 million, total outstanding debt of $137.9 million and shareholders’ equity of $308.5 million. During the quarter, the company did not repurchase any shares, but repaid $18.8 million of term loan.

Store Update

During the quarter, Red Robin opened three full-size prototype restaurants and its second small prototype restaurantRed Robin’s Burger Works. The company also closed one company-owned restaurant during the first quarter. Red Robin currently operates 466 restaurants, out of which 330 are company owned and the rest franchised.

Outlook

In 2012, Red Robin expects comps to grow 1% and restaurant operating margin to expand 20% year over year, benefiting from lower operating costs and cost of sales.

In 2012, the casual dining restaurant operator expects to open 13 new company owned restaurants, including 4 additional Red Robin’s Burger Works.

Our Take

Red Robin’s Project RED initiative, which focuses on revenue growth, expense control and capital deployment is progressing quite well and going forward will continue to focus on these areas to increase the profitability of the company. We expect movement in estimates to remain unclear in the coming days, as the company reported mixed results. The Zacks Consensus Estimates for 2012 and 2013 stands at $1.88 and $2.18, respectively.

However, we remain cautious on the stock based on cost inflation, lower consumer spending and intense competition from peers like Brinker International inc. ( EAT - Analyst Report ) and Domino's Pizza Inc. ( DPZ - Analyst Report ) with respect to price, service, location and concept in order to drive traffic.

The company retains a Zacks #3 Rank, which translates into a short-termHold rating. We also have a long-term Neutral recommendation on the stock.