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Red Robin Faces Numerous Challenges: Should You Dump?

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On Oct 7, we issued an updated report on casual dining restaurant chain Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) .

Notably, Red Robin recently closed all of its existing five ‘Burger Works’ restaurants in Chicago, bringing its attempt to expand into the casual fast-dining market to a halt. Burger Works restaurants are a smaller non-traditional prototype with a limited menu and limited 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.

Chicago was one of the three U.S. test markets where the company opened Burger Works outlets, starting in 2014. 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.

Furthermore, 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 - Free Report) , McDonalds Corporation (MCD - Free Report) and Papa John’s International, Inc. (PZZA - Free Report) are following aggressive global expansion policies, Red Robin seems to be weak on this front.

Moreover, the impact of acquiring lower-margin franchise restaurants and higher labor cost might continue to hurt margins in the rest of 2016. Also, higher pre-opening and remodeling costs coupled with expenses related to aggressive domestic expansion strategies are likely to hurt profits further. Further, a soft consumer spending environment in the U.S. restaurant space adds to the concerns.

Nevertheless, 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.

RED ROBIN GOURM Price and Consensus

However, after posting weak second-quarter 2016 results on Aug 8, wherein both the top and bottom lines missed the Zacks Consensus Estimate, the company lowered its guidance for 2016 as well.

Revenue growth is now expected to be 5%, down from the previous expectation of 8%. The comps guidance was also lowered to a decline of almost 2%, which compared unfavorably with the previous expectation of flat to slightly negative growth.

Also, downward estimate revisions reflect pessimism regarding the stock’s prospects. The Zacks Consensus Estimate for 2016 earnings has moved south by 7.2%, over the last 60 days.

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