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Here's Why You Should Hold on to Red Robin Stock for Now

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Red Robin Gourmet Burgers, Inc. (RRGB - Free Report) continues to focus on menu innovation, operational improvement and marketing strategy to revive the top line. In the past three months, shares of the company have gained 20.2% compared with the industry’s 13.3% growth. However, high labor costs as well as restaurant operating expenses raise concerns.

Let’s delve deeper into the factors that substantiate its Zacks Rank #3 (Hold).

Catalysts Driving Growth

Red Robin’s efforts to improve sales and regain market share via efficient menu innovation, focus on increasing service speed and effective marketing strategy bode well. On May 29, the company provided an operational update, whereby comparable restaurant revenues improved from the prior week. 

In fact, for the weeks ended Apr 26, May 3, May 10, May 17 and May 24, the decline in comparable restaurant revenues was 56%, 54.7%, 52.2%, 47.9%, and 47%, respectively, reflecting the improving trend. This was supported by continued growth in off-premise sales along with early traction in dine-in sales. Moreover, the company’s off-premise sales tripled from its pre-COVID-19 levels. 

Management expects the strong growth momentum to continue in the upcoming periods. To this end, it has accelerated re-opening of restaurants in its largest and highest volume markets in the Pacific Northwest and West Coast.

In order to drive incremental traffic, Red Robin has been undertaking initiatives that have improved its restaurants’ seating efficiency and lowered guests’ waiting times. The company rolled out its Kitchen Display System (“KDS”) that is linked to its table management software. It is expected to significantly improve guest experience by lowering ticket times and improving the quality of food.

Apart from brand revitalization efforts, Red Robin is focused on menu innovation, operational improvement and creating a better customer service platform. The company continues to launch a variety of salads, appetizers, innovative desserts and adult beverages as well as kids’ menu. Notably, the company’s marketing strategy focuses on driving traffic with everyday value advertising of premium burgers, appetizers, beverage and desserts. 

Meanwhile, Red Robin is expanding its productivity and service models and also increasingly supporting To-Go and catering services to drive guest check. To make its menu affordable to a varied range of customers and drive incremental traffic and sales, the company is banking on prudent pricing strategies. It is also focusing on promotional and limited-time offers to boost sales.

Of late, Red Robin has been investing significantly in technology and data infrastructure. The company is set to grow off-premise, online-ordering business via carry-out, delivery and catering. On the delivery front, the company has partnered with Amazon, DoorDash and GrubHub. 

Major Concerns

The coronavirus outbreak has rattled the Retail - Restaurants industry, and Red Robin has also fallen prey. Apart from the coronavirus-induced shutdowns, the company announced temporary pay cuts of 20% for all non-furloughed restaurant support centers and restaurant supervisory team members in an effort to reduce costs. Owing to the uncertainty of the crisis, the company has withdrawn its 2020 guidance as well as suspended its share repurchase programs.

Red Robin has been witnessing rising costs and expenses in recent quarters. Additionally, the company is investing heavily in several sales-building initiatives like advertising and technical upgrades, which are resulting in elevated costs. Also, remodeling and restaurant maintenance are adding to expenses. 

In the fourth quarter of fiscal 2019, restaurant-level operating profit margin contracted 50 bps to 18.9%. This decline was due to a 20-bps rise in labor costs and a 110-bps increase in other restaurant operating expenses.

Key Picks

Some better-ranked stocks in the Retail-Wholesale sector are Sprouts Farmers Market, Inc. (SFM - Free Report) , Domino's Pizza, Inc. (DPZ - Free Report) and Yum China Holdings, Inc. (YUMC - Free Report) . Sprouts Farmers sports a Zacks Rank #1 (Strong Buy), while Domino's and Yum China carry a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Sprouts Farmers has a three-five year earnings per share growth rate of 4.4%.

Domino's has a trailing four-quarter positive earnings surprise of 12.7%, on average. The company’s earnings beat the Zacks Consensus Estimate in the last four quarters.

Earnings in 2021 for Yum China are expected to surge 79.4%.

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