Red Robin Buys Franchised Unit

Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) recently announced the acquisition of an existing Red Robin franchised unit in Clifton, New Jersey from UBA Enterprises and included it in the company-owned operations. The transition to company-owned model affirms management’s confidence in its core business model. The purchase consideration of the deal is around $3.2 million.

The recent spurt in growth in the franchised entity has made it a lucrative acquisition target. According to Red Robin management, the acquired eatery will likely have annual sales of about $3.9 million. Hence, we view the deal as strategically positive in an industry that depends largely on franchising.

The acquired unit is the fourth company owned Red Robin site in New Jersey. This Seattle-based company has been catering to the New Jersey market since 2004 and envisions further expansion prospect. Red Robin will shortly come up with another company-owned unit in Woodbridge, New Jersey. Post-acquisition, Red Robin has only one franchised unit in New Jersey serving the market at Hamilton.

The company increased its company-owned unit expansion based on improving unit-level economics. It opened 11 company-owned restaurants in fiscal year 2010 and 13 units in 2011 and remains on track to unveil a net of 11 units in 2012. At the end of first-quarter 2012, there were 466 units in the Red Robin portfolio, out of which 330 are company-owned and the rest franchised.

Red Robin is not the only company which has followed this business strategy. The trend to transition to a company-based model is fast picking up, although most companies still prefer franchisees.

Others who followed suit include Panera Bread Co. (PNRA - Analyst Report), which acquired businesses from its New Jersey and Milwaukee franchisees as well as bought back 16 bakery-cafes in the Raleigh-Durham-Chapel Hill market from one of its franchisees in the Carolinas. There is also Buffalo Wild Wings Inc. (BWLD - Analyst Report) which took hold of 15 franchised units in Ohio and South Carolina in early December 2011.

Red Robin currently retains a Zacks #3 Rank, which translates into short-term Hold rating. We are also maintaining our long-term Neutral recommendation on the stock.