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Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report) reported earnings of 52 cents per share in the second quarter of 2012, surpassing the Zacks Consensus Estimate of 50 cents as well as the year-ago quarter adjusted earnings of 48 cents per share. Results in the quarter benefited from cost improvement resulting in margin expansion and top-line growth.

The company reported total revenue of $223.7 million in the second quarter, up 3.7% year over year but below the Zacks Consensus Estimate of $225.0 million.

Quarter Highlights

During the quarter, restaurant sales leaped 3.7% from the year-ago quarter to $219.9 million and franchise royalties and fees revenue crept up 1.7% to $3.7 million.

Comparable restaurant sales inched up 0.8% year over year at company-owned restaurants in the reported quarter, driven by a 0.9% increase in guest count, partially offset by a 0.1% dip in average guest check.

Restaurant operating margin at company-owned restaurants enhanced 30 bps to 21.1%, due to a drop of 10 bps in labor costs and a decline of 60 bps in other operating costs, partially compensated by a 20 bps increase in food and beverages cost and 20 bps hike in occupancy costs.

Selling, general and administrative expenses in the quarter were flat at $25.6 million, due to higher equity-based compensation costs, new information technology development costs and higher costs related to gift card sales.

Liquidity

Red Robin ended the quarter with cash and cash equivalents of $29.9 million, total outstanding debt of $135.0 million and shareholders’ equity of $310.0 million. During the quarter, the company repurchased 255,000 shares for $7.7 million and currently, has $40.0 million remaining under its share repurchase authorization.

Store Update

During the quarter, Red Robin opened a small prototype restaurant, Red Robin’s Burger Works, and closed a company-owned restaurant. During the quarter, five franchised restaurants were also sold or closed. Red Robin currently operates 462 restaurants, out of which 331 are company-owned and the rest franchised.

Outlook

Through 2012, Red Robin expects comps to grow 0.5% as compared to the prior-year expectation of 1%, due to a dip in traffic, particularly at dinner as a result of the Olympic games. Restaurant operating margins are estimated to expand in between 20% to 20.5% (up from the prior projection of 20.0%), benefiting from lower operating costs and cost of sales.

In 2012, the casual dining restaurant operator expects to open 14 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 estimates to decrease in the coming days, as comparable restaurant sales growth are expected to suffer in the third quarter, as a result of the Olympics games. The Zacks Consensus Estimates for 2012 and 2013 stands at $1.84 and $2.10, 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-term Hold rating. We also have a long-term Neutral recommendation on the stock.

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