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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 witnessing soft comps and lower dine-in traffic of late. Despite undertaking several initiatives to drive performance, the company’s shares have declined 38% year to date, underperforming the industry’s collective growth of 7.9%.

Let’s delve deeper and try to assess what’s causing this Zacks Rank #5 (Strong Sell) company to decline.

Trimmed Guidance Raises Concern

Red Robin has been witnessing a year-over-year decline in earnings over the past few quarters. In fact, in the third quarter of 2018, the bottom line declined 23.8% year over year.  Subsequently, the company lowered its EPS guidance for 2018. It anticipates earnings of $1.60-$1.80 per share, down from $1.80-$2.20 mentioned earlier.

Moreover, downward estimate revision raises analysts’ concern surrounding the company’s future earnings potential. In the past 30 days, the Zacks Consensus Estimate for earnings in 2018 and 2019 has declined by 9.9% and 12.3% to $1.72, and $1.86, respectively. Moreover, the consensus mark for fourth-quarter 2018 also moved down 39.7% to 38 cents.

Soft Revenues Hurt

Since the past two quarters, the company has been experiencing lower revenues on the back of soft comps and lower dine-in traffic. In the third quarter of 2018, Red Robin’s revenues missed estimates for the third straight quarter and declined 3.5% from the prior-year quarter. The company also remains bearish about its revenue revival in the upcoming quarters.

Rising Costs Put Pressure on Margins

The company has been bearing the brunt of increased costs, which are hurting margins. In the third quarter of 2018, restaurant-level operating profit margin contracted 180 basis points (bps) to 16.8%. The decline was due to 120 bps rise in other restaurant operating expenses and a surge of 60 bps in occupancy costs. Rise in other operating costs was due to increase in technology costs, repairs and maintenance expenses, third-party delivery fees, higher utility costs and supplies.

Limited Presence & Franchising

While several other restaurateurs — including Yum! Brands, McDonald’s and Domino’s Pizza — have opened their outlets in the emerging markets; Red Robin seems to be weak on this front. Moreover, limited focus on franchising burdened the company with increased costs. This could have been avoided with a franchise-based business model.

Meanwhile, the company focuses on various sales-building efforts like continual focus on menu innovation, value offerings, increasing service speed, effective marketing strategy, remodeling programs and online ordering to combat the above-mentioned headwinds.

Stocks to Consider

Some better-ranked stocks in the same space are The Habit Restaurants, Inc. (HABT - Free Report) and Papa Murphy's Holdings, Inc. (FRSH - Free Report) , carrying a Zacks Rank #1 (Strong Buy), along with BJ's Restaurants, Inc. (BJRI - Free Report) , carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

The Habit Restaurants reported better-than-expected earnings in two of the trailing four quarters, the average beat being 67%.

Papa Murphy's expects earnings growth rate of 160% for 2018.

BJ's Restaurants expects earnings growth rate of 67% for 2018.

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