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Here's Why Investor Should Retain Red Robin (RRGB) Stock

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Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) benefits from strong off-premise sales, robust digitalization and increased focus on Donatos. However, high costs continue to hurt the company. Let’s delve deeper.

Growth Drivers

The company’s off-premise sales have increased sharply compared with the pre-COVID-19 levels. Although more guests have started visiting restaurants, the company’s off-premise sales remain strong. During the second, the third and the fourth quarter of 2020, off-premise sales soared 208.7%, 127.2%, and 131.8%, respectively. The off-premise sales contributed 63.8%, 40.7% and 43.9% to total food and beverage sales in the second, the third and the fourth quarter of 2020, respectively.

Going forward, the company intends to maintain the momentum by focusing on modifications with respect to its processes, staffing, floor plans and technology. It is initiating an expanded floor plan space to support its off-premises and catering orders without impacting the dine-in business. Notably, the initiatives pave the path for effective and accurate executions. The company anticipates completing the reconfigurations in 2022.

Red Robin still considers Donatos as a key growth driver. The company recently announced the expansion of its partnership with Donatos Pizza. However, the financial terms of the deal have been kept under wraps. In 2021, the company rolled out Donatos to 120 restaurants. During the fourth quarter and full-year 2021, Donatos generated sales worth $4.8 million and $14.4 million, respectively. The company stated that guest checks that included Donatos Pizza were more than $10 (on average) compared with those that did not include pizza. The company anticipates rolling out Donatos to approximately 50 restaurants in 2022 and 150 restaurants in 2023. 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 2024.

In the past three months, shares of the company have declined 0.5% compared with the industry’s fall of 16.6%.

Zacks Investment Research
Image Source: Zacks Investment Research

Concerns

Red Robin has been witnessing rising costs and expenses in recent quarters. The company is investing heavily in several sales-building initiatives like advertising and technical upgrades, which will result in elevated costs. Remodeling and restaurant maintenance will also contribute to rising expenses. During the fiscal fourth quarter, the company cited concerns related to commodity and restaurant labor cost inflation. During the quarter, hourly wage increases were in the high-single digits. The company incurred $3.2 million in transitory labor and other operating costs due to staffing and supply chain challenges. Going forward, the company anticipates commodity and restaurant labor cost inflation to be in the mid-to-high single digit.

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.

Key picks

Some better-ranked stocks in the Zacks Retail-Wholesale sector are Genesco Inc. (GCO - Free Report) , Arcos Dorados Holdings Inc. (ARCO - Free Report) and Tapestry, Inc. (TPR - Free Report) .

Genesco sports a Zacks Rank #1. The company has a trailing four-quarter earnings surprise of 2,739.6%, on average. Shares of the company have gained 50.6% in the past year.

The Zacks Consensus Estimate for Genesco’s 2022 sales and EPS suggests growth of 35.5% and 677.1%, respectively, from the year-ago period’s levels.

Arcos Dorados carries a Zacks Rank #2 (Buy). ARCO has a long-term earnings growth of 24.7%. Shares of the company have surged 62.8% in the past year.

The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 35% and 120.8%, respectively, from the year-ago period’s levels.

Tapestry carries a Zacks Rank #2. The company has a trailing four-quarter earnings surprise of 28.2%, on average. Shares of the company have declined 8.8% in the past year.

The Zacks Consensus Estimate for Tapestry’s 2022 sales and EPS suggests growth of 17.5% and 22.9%, respectively, from the year-ago period’s levels.

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