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Here's Why Investors Should Steer Clear of Red Robin (RRGB)

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Red Robin Gourmet Burgers Inc. (RRGB - Free Report) has been losing sheen of late. A limited exposure to international markets and the stiff competition have been plaguing its top line. Moreover, high costs of operations are denting margins.

In the last month, the company posted second-quarter 2018 results, wherein earnings met analysts’ expectations while revenues lagged the same. Earnings and revenues declined 24.6% and 0.6%, respectively, from the year-ago quarter. The downside was primarily due to weak restaurant revenues and soft comparable restaurant revenues.

A slowdown in revenues has also affected the company’s share price. Red Robin’s shares have lost 30.9% in the past year, underperforming the industry’s collective growth of 8.5%.




Higher Costs Affect Margins

Higher labor costs have led Red Robin to witness rising expenses throughout 2017. Also, the company is investing heavily in several sales-building initiatives like advertising and technical upgrades, which are resulting in elevated costs. Remodeling and restaurant maintenance also add to the already rising expenses. In the second quarter of 2018, restaurant-level operating profit margin contracted 150 basis points (bps) to 19.3%. The downturn was due to a 40-bps increase in the cost of sales, 90-bps rise in other restaurant operating expenses and 50-bps surge in occupancy costs.

Subsequently, Red Robin’s trailing 12-month net profit margin is 1% compared with the industry’s 4%.

Lack of Focus on Franchising Hurts Earnings

Unlike most of its peers, Red Robin remains focused on the company-owned restaurants that allow it to have the total control over operations and also keep generating profits. However, this limited focus on franchising also burdens the company with increased costs, which could have been transferred on to franchisees, had there been a franchise business model.

We believe that this no franchise business increases Red Robin’s capital requirements and is also slightly detrimental to earnings growth. Consequently, the Zacks Consensus Estimate for the current year earnings is pegged at $1.91, suggesting a 23.3% decline from the prior year.

Limited International Presence Poses Concern

American dining brands are keen on expanding in the fast-growing emerging markets outside the United States. While several other restaurateurs, including Yum! Brands (YUM - Free Report) , McDonald’s (MCD - Free Report) and Domino’s (DPZ - Free Report) , have opened their outlets in the emerging markets; Red Robin seems to be weak on this front. Amid such fierce competition, Red Robin is unable to drive traffic and is witnessing softer restaurant comps. The consensus estimate also predicts revenues for 2018 to fall1.9% year over year.

Red Robin currently carries 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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