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Red Robin Shuts Down 'Burger Works' Experiment in Chicago


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Red Robin Gourmet Burgers, Inc.’s (RRGB - Analyst Report) attempt to expand into the casual fast-dining market of Chicago came to a halt as the company closed all of its existing five ‘Burger Works’ restaurants in the city.

Red Robin is a popular full-service casual dining restaurant chain that serves an assorted range of burgers, salads, sandwiches and other entrées. However, in addition to these 6000 square feet restaurants, the company also introduced the concept of smaller 1800 square feet ‘Burger Works’ restaurants.

Burger Works restaurants are a smaller non-traditional prototype with a limited menu and limited service. Red Robin Burger Works restaurants compete with other fast-casual chains and are suitable for customers who need quality food and quick service.

By focusing more on its smaller prototype restaurants, the company expected to accelerate its growth in non-traditional locations and also improve return on investment. While lowering costs, these small-sized units were expected to enable the company to expand its footprint in densely populated urban areas.

This concept first debuted in Nov 2011 in Denver. Since then, it has expanded in Washington, D.C., Ohio and Illinois.

Chicago was one of the three U.S. test markets where the company opened Burger Works outlets, starting in 2014. Over the past two years, the company revealed five outlets in Chicago and Evanston, of which two were opened just six months back. However, due to insufficient profit generation, all of these outlets have now been shut.

The contraction is not limited to the Chicago market. Red Robin also shut down nine restaurants in Washington D.C. and Colorado. Nevertheless, the original 17 large-sized Red Robin units scattered around the suburbs of Chicago remain unaffected.


Company Outlook

Although there are over 540 Red Robin restaurants across the U.S. and Canada, the company loses out in terms of international presence. Whereas other restaurateurs like Yum! Brands, Inc. (YUM - Analyst Report) , McDonalds Corporation (MCD - Analyst Report) and Papa John’s International, Inc. (PZZA - Analyst Report) are following aggressive global expansion policies, Red Robin seems to be weak on this front.

Furthermore, after a posting weak second-quarter 2016 results wherein both the top and bottom lines missed the Zacks Consensus Estimate, the company lowered its guidance for 2016. Revenue growth is expected to be at 5%, down from previous expectation of 8%. The comps guidance was lowered to a decline of almost 2%, which compared unfavorably with the previous expectation of flat to slightly negative growth.

Moreover, the impact of acquiring lower-margin franchise restaurants and higher labor cost could continue to hurt margins in 2016. Also, higher pre-opening and remodeling costs coupled with expenses related to aggressive domestic expansion strategies are likely to hurt profits further.

However, the company’s initiatives such as menu innovation, focus on increasing speed of service, effective marketing strategies and remodeling programs could aid in improving top and bottom-line performance.

The company currently holds a Zacks Rank #5 (Strong Sell). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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