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Red Robin's Strategic Efforts Bode Well: Should You Hold?

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Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) is banking on sales building efforts, menu innovation and digitalization to revive its performance. In the past six months, shares of Red Robin have lost 15.8% against the industry’s 15.3% rally. The underperformance can be primarily attributed to earnings and revenue decline over the past few quarters. Let’s delve deeper.

Strategic Efforts

Apart from brand revitalization efforts, Red Robin is focused on menu innovation, operational improvement and creating a better customer service platform. The company also consistently introduces a variety of salads, appetizers, innovative desserts and adult beverages as well as kids’ menu.  Its marketing strategy focuses on driving traffic with everyday value advertising of premium burgers, appetizers, beverage and desserts. In a bid to boost revenues, Red Robin banks on promotional and limited-time offers.

Moreover, this Zacks Rank #3 (Hold) company has been undertaking initiatives to drive incremental traffic. These, in turn, have improved its restaurants’ seating efficiency and lowered guests’ waiting times. The company has also 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.

Meanwhile, Red Robin is making efforts to expand its productivity and service models, and also increasingly supporting To-Go and catering services to drive greater guest check.

Furthermore, 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. Moving ahead, the company is set to grow its off-premise, online-ordering business via carry-out, delivery and catering.



Concerns

Dismal top-line performance, high expenses and limited international presence pose a challenge to the company. In first-quarter 2019, Red Robin’s top line has decreased 2.8%, following a 10.2%, 3% and 0.3% decline in the fourth, third and second quarter of 2018, respectively. Meanwhile, its earnings have declined 72.5% in first-quarter 2019. In the fourth, third, second and first quarter of 2018, the bottom line decreased 44.9%, 23.8%, 24.6% and 22.5%, respectively. Further, earnings estimates for the current quarter have been revised downward by 13.9% over the past 7 days, reflecting analysts’ concern surrounding the company’s earnings potential.

Red Robin has also been witnessing rising costs and expenses in the recent quarters. The Affordable Care Act, commonly known as Obamacare, would continue to have an adverse impact on restaurant operators. Meanwhile, Red Robin is investing heavily in several sales building initiatives like advertising and technical upgrades, which will result in elevated costs.

Remodeling and restaurant maintenance also add to the already rising expenses. In the first quarter of 2019, restaurant-level operating profit margin contracted 170 basis points (bps) to 18.3%, following a decline of 110 bps in the preceding quarter. The decline in the first quarter was due to a 60-bps rise in other restaurant operating expenses and a 30-bps increase in occupancy costs.

Key Picks

A few better-ranked stocks worth considering in the same space include Starbucks Corp. (SBUX - Free Report) , Chipotle Mexican Grill, Inc. (CMG - Free Report) and The Habit Restaurants, Inc. (HABT - Free Report) , each carrying a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Starbucks, Chipotle Mexican Grill and Habit Restaurants have an impressive long-term earnings growth rate of 12.8%, 19.2% and 20%, respectively.

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