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Here's Why You Should Hold Onto Red Robin (RRGB) Stock Now

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Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) is likely to benefit from its off-premise business model, technological enhancements and Donatos partnership. This, along with the emphasis on virtual brands, bodes well. However, a decline in traffic from pre-pandemic levels as well as inflationary commodity and wage pressures remain concerns.

Let’s discuss the factors highlighting why investors should retain the stock for the time being.

Key Catalysts

Red Robin’s off-premise sales have increased sharply compared with pre-pandemic levels. During the fiscal third quarter of 2021, the company’s off-premise sales comprised 30.8% of the total food and beverage sales. Also, the company stated that off-premise sales have doubled more than pre-pandemic levels of approximately 14%. Going forward, the company intends to maintain the momentum by focusing on modifications with respect to its processes, staffing, floor plans and technology. Moreover, it is initiating an expanded floor plan space to support its off-premise and catering orders without impacting the dine-in business. These initiatives pave the path for effective and accurate executions. The company anticipates to complete reconfigurations in 2022.

Meanwhile, the company continues to strengthen its delivery program to drive off-premise sales. To this end, it announced the rollout of three new delivery-only brands: Chicken Sammy's, The Wing Dept. and Fresh Set. These brands will provide items from Red Robin as well as new products that are not available on the menu. The company is planning to invest more in these virtual brands and add more menu items in the future. During the fiscal third quarter, virtual brands contributed $5.9 million to restaurant sales. Solid contributions are being registered due to its high-quality menu items and variations in core product offerings.

Red Robin has been investing more in technology and data infrastructure. During the third quarter of fiscal 2021, RRGB made solid progress in its digital space in terms of a new loyalty platform (powered by Punchh), two new mobile apps (in iOS and Android platforms) and a new website. The company anticipates the integration of a loyalty program with its upcoming app and enhanced website to create a more user-friendly and efficient online ordering platform. The initiatives are likely to boost operational execution, drive higher-order conversion, increase guest frequency and royalty participation.

Red Robin still considers Donatos as a key growth driver. In 2018, Donatos Pizza partnered with Red Robin, offering its famous pizzas as part of Red Robin's menu offerings. Following the success in early launch markets, the two companies are adding more locations this year. In the third quarter of fiscal 2021, the company added Donatos to 38 restaurants. In the fourth quarter of 2021, the company will add Donatos pizza to nearly 40 locations. Red Robin is optimistic about the success of this partnership. It anticipates annual sales of pizza to be more than $60 million and profitability to be above $25 million by 2023. In fiscal 2021, the company is likely to add Donatos to nearly 120 restaurants.

Major Concerns

Zacks Investment ResearchImage Source: Zacks Investment Research

Shares of Red Robin have declined 24.8% in the past three months compared with the industry’s 4.7% fall. The dismal performance was primarily caused by the COVID-19 crisis. Pandemic-induced restrictions, labor challenges and supply-chain disruptions had taken an enormous toll on the company. Although the majority of dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation on a regular basis to gauge the impacts of COVID-19.

Red Robin has persistently been shouldering increased expenses, which are denting margins. During the fiscal third quarter, the company cited concerns related to inflationary commodity and wage pressures. During the quarter, hourly wage increases were in mid-single digits. The company incurred $3.1 million in transitory labor and other operating costs due to staffing issues. Going forward, the company anticipates commodity inflation at approximately 15% and wage inflation in the range of 7-8% for the fourth quarter of fiscal 2021.

Zacks Rank & Key Picks

Red Robin currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Some better-ranked stocks from the Zacks Retail-Wholesale sector include Arcos Dorados Holdings Inc. (ARCO - Free Report) , The Home Depot, Inc. (HD - Free Report) and Macy's, Inc. (M - Free Report) .

Arcos Dorados sports a Zacks Rank #1. It has long-term earnings growth of 42.9%. Shares of  Arcos Dorados have increased 6.8% in the past year.

The Zacks Consensus Estimate for ARCO’s 2022 sales and earnings per share (EPS) suggests growth of 10.4% and 255.6%, respectively, from the year-ago period’s levels.

Home Depot sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 12.1%, on average. Shares of Home Depot have surged 40.2% in the past year.

The Zacks Consensus Estimate for HD’s 2022 sales and EPS indicates a rise of 13.6% and 28.8%, respectively, from the year-ago period’s levels.

Macy's currently sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 313.5%, on average. Shares of Macy’s have increased 92.1% in the past year.

The Zacks Consensus Estimate for M's 2022 sales and EPS suggests growth of 39.6% and 320.4%, respectively, from the year-ago period’s levels.