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Is Red Robin (RRGB) Fated to Witness a Terrible 2019 Too?

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In 2018, the Retail-Restaurant industry gained 6.23% compared with the S&P 500’s decline of 4.3%. However, Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) , which belongs to the same industry, had a forgettable year. In the same time frame, the stock witnessed a sharp decline of 52.7%. The downside can be primarily attributed to soft comparable restaurant sales, weakness in dine-in traffic and decline in margin.

The company has also been witnessing soft earnings and revenues trend lately. 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. In the quarter, Red Robin’s revenues missed estimates for the third straight quarter.

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. The rise in other operating costs was due to increases in technology costs, repairs and maintenance expenses, third-party delivery fees, higher utility costs and supplies.

 

Can the Stock Stage a Comeback in 2019?

In order to drive traffic, Red Robin has been undertaking initiatives that have improved its restaurants’ seating efficiency and lowered guests’ waiting times. The company has rolled out its Kitchen Display System (KDS) that is linked to table management software.

This is expected to result in annual sales growth of approximately $50 million as kitchens can handle higher peak volumes. It should also significantly improve guest experience by lowering ticket times and improving the quality of food at tableside.

The digital wave has hit the U.S. fast casual restaurant space, as more and more restaurants are deploying technology to enhance the guest experience. In line with this, Red Robin too has been investing more in technology and data infrastructure. The company is set to grow its off-premise, online-ordering business via carry-out, delivery and catering.

Despite the aforementioned efforts, analysts are still not optimistic about the Zacks Rank #4 (Sell) company’s future earnings growth potential.  In the past 60 days, the Zacks Consensus Estimate for earnings in 2019 has declined 3.8% to $1.79. Per the consensus estimate, revenues in 2019 are likely to decline 0.3% to $1.34 billion.

Key Picks

Better-ranked stocks worth considering in the same space include Carrols Restaurant Group, Inc. (TAST - Free Report) , Cracker Barrel Old Country Store, Inc. (CBRL - Free Report) and Darden Restaurants, Inc. (DRI - Free Report) . All these stocks have a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Carrols Restaurant Group has an impressive long-term earnings growth rate of 20%.

Cracker Barrel Old Country Store has reported better-than-expected earnings in the trailing three out of four quarters, average being 0.7%.

Darden Restaurants’ earnings in the current year is likely to witness a growth of 17.9%.

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