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Red Robin (RRGB) Research Report: Q1 CY2024 Update


Full Report / May 29, 2024

Burger restaurant chain Red Robin (NASDAQ:RRGB) fell short of analysts' expectations in Q1 CY2024, with revenue down 7% year on year to $388.5 million. On the other hand, the company's outlook for the full year was close to analysts' estimates with revenue guided to $1.26 billion at the midpoint. It made a non-GAAP loss of $0.80 per share, down from its profit of $0.26 per share in the same quarter last year.

Red Robin (RRGB) Q1 CY2024 Highlights:

  • Revenue: $388.5 million vs analyst estimates of $392.7 million (1.1% miss)
  • Adjusted EBITDA: $12.2 million vs analyst estimates of $16.5 million (26.1% miss)
  • EPS (non-GAAP): -$0.80 vs analyst estimates of -$0.62
  • The company reconfirmed its revenue guidance for the full year of $1.26 billion at the midpoint (also maintained adjusted EBITDA guidance)
  • Gross Margin (GAAP): 13.2%, down from 17% in the same quarter last year
  • Same-Store Sales fell 6.5% year on year (slight miss vs. expectations of down 6.2% year on year)
  • (8.6% in the same quarter last year)
  • Market Capitalization: $106.7 million

Known for its bottomless steak fries, Red Robin (NASDAQ:RRGB) is a chain of casual restaurants specializing in burgers and general American fare.

Initially started as a tavern called Sam’s, Red Robin Gourmet Burgers was founded in 1969 in Seattle, Washington. Today, the chain boasts a vast, customizable burger menu that includes everything from classic cheeseburgers to the daring Banzai burger featuring a Teriyaki-glazed patty topped with sweet grilled pineapple. For those who don’t love burgers, Red Robin also offers chicken entrees, salads, and kids’ meals such as corn dogs.

The core Red Robin customer is the everyday American family looking to celebrate a birthday, a little league victory, or a job promotion. With its reasonable prices for a sit-down restaurant, it can also serve as the destination for a family’s Thursday night dinner as well.

When you walk into a Red Robin, you'll typically find a spacious, lively setup. On average, these establishments cover anywhere from 4,000 to 5,500 square feet. Red Robin locations have ample seating, often using a mix of booths, tables, and a bar area, allowing for both intimate dinners and larger gatherings. To complete the look, there are typically bright colors (especially Red Robin’s signature red, warm woods, and playful memorabilia.

Sit-Down Dining

Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.

Competitors offering burgers and American fare in a sit-down restaurant format include Chili’s owner Brinker International (NYSE:EAT), Applebee’s owner Dine Brands (NYSE:DIN), Texas Roadhouse (NASDAQ:TXRH), and The Cheesecake Factory (NASDAQ:CAKE).

Sales Growth

Red Robin is larger than most restaurant chains and benefits from economies of scale, giving it an edge over its smaller competitors.

As you can see below, the company's revenue was flat over the last five years as it closed restaurants.

Red Robin Total Revenue

This quarter, Red Robin missed Wall Street's estimates and reported a rather uninspiring 7% year-on-year revenue decline, generating $388.5 million in revenue. Looking ahead, Wall Street expects revenue to remain flat over the next 12 months.

Same-Store Sales

Red Robin's demand within its existing restaurants has been relatively stable over the last eight quarters but fallen behind the broader sector. On average, the company's same-store sales have grown by 1.5% year on year. Given its declining physical footprint over the same period, this performance stems from increased foot traffic at existing restaurants, which is sometimes a side effect of reducing the total number of locations.

Red Robin Year On Year Same Store Sales Growth

In the latest quarter, Red Robin's same-store sales fell 6.5% year on year. This decline was a reversal from the 8.6% year-on-year increase it posted 12 months ago. We'll be keeping a close eye on the company to see if this turns into a longer-term trend.

Gross Margin & Pricing Power

Gross profit margins are an important measure of a restaurant's pricing power and differentiation, whether it be the dining experience or quality and taste of food.

Red Robin's gross profit margin came in at 13.2% this quarter. down 3.7 percentage points year on year. This means the company makes $0.15 for every $1 in revenue before accounting for its operating expenses.

Red Robin Gross Margin (GAAP)

Red Robin has poor unit economics for a restaurant company, leaving it with little room for error if things go awry. As you can see above, it's averaged a 14.5% gross margin over the last two years. Its margin has also been trending down over the last year, averaging 10.1% year-on-year decreases each quarter. If this trend continues, it could suggest a more competitive environment where Red Robin has diminishing pricing power and less favorable input costs (such as ingredients and transportation expenses).

Operating Margin

Operating margin is a key profitability metric for restaurants because it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.

In Q1, Red Robin generated an operating profit margin of negative 0.5%, down 1.6 percentage points year on year. This reduction was driven by weaker pricing power or higher ingredient/transportation costs, as indicated by the company's larger drop in gross margin.

Red Robin Operating Margin (GAAP)

The restaurant business is tough to succeed in because of its unpredictability, whether it be employees not showing up for work, sudden changes in consumer preferences, or the cost of ingredients rising thanks to supply shortages. Unfortunately, Red Robin has been a victim of these challenges over the last two years, and its high expenses have contributed to an average operating margin of negative 2.3%. However, Red Robin's margin has improved, on average, by 4.3 percentage points each year, an encouraging sign for shareholders. The tide could be turning.

EPS

We track the long-term growth in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company's growth was profitable.

Sadly for Red Robin, its EPS declined by 32.2% annually over the last five years while its revenue was flat. This tells us the company struggled because its fixed cost base made it difficult to adjust to its choppy demand.

Red Robin EPS (Adjusted)

We can take an even deeper look into Red Robin's earnings performance. Red Robin's operating margin has declined 1.4 percentage points over the last five years. This was the most relevant factor (aside from revenue) behind its lower earnings; taxes and interest expenses can also affect EPS but don't tell us as much about a company's fundamentals.

In Q1, Red Robin reported EPS at negative $0.80, down from $0.26 in the same quarter last year. This print missed analysts' estimates. Over the next 12 months, Wall Street expects Red Robin to improve its earnings losses. Analysts are projecting its EPS of negative $2.49 in the last year to advance to negative $1.04.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was its growth capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to how much money it has raised (debt and equity).

Red Robin's five-year average ROIC was negative 8.6%, meaning management lost money while trying to expand the business. Its returns were among the worst in the restaurant sector.

The trend in its ROIC, however, is often what surprises the market and moves the stock price. Over the last few years, Red Robin's ROIC averaged 9.9 percentage point increases each year. This is a good sign, and we hope the company can continue improving.

Balance Sheet Risk

As long-term investors, the risk we care most about is the permanent loss of capital. This can happen when a company goes bankrupt or raises money from a disadvantaged position and is separate from short-term stock price volatility, which we are much less bothered by.

Red Robin's $590.5 million of debt exceeds the $30.59 million of cash on its balance sheet. Furthermore, its 12x net-debt-to-EBITDA ratio (based on its EBITDA of $45.18 million over the last 12 months) shows the company is overleveraged.

At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Red Robin could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.

We hope Red Robin can improve its balance sheet and remain cautious until it increases its profitability or reduces its debt.

Key Takeaways from Red Robin's Q1 Results

We liked that Red Robin beat analysts' gross margin expectations this quarter. We were also glad its full-year revenue and adjusted EBITDA guidance was maintained and came in higher than Wall Street's estimates. On the other hand, the quarter itself was mediocre, with revenue and EPS missing analysts' expectations. Overall, this was a mixed quarter for Red Robin. The stock is up 7.7% after reporting and currently trades at $7.28 per share.

Is Now The Time?

When considering an investment in Red Robin, investors should take into account its valuation and business qualities as well as what's happened in the latest quarter.

We cheer for all companies serving consumers, but in the case of Red Robin, we'll be cheering from the sidelines. Its revenue has declined over the last five years, but at least growth is expected to increase in the short term. And while its projected EPS for the next year implies the company's fundamentals will improve, the downside is its declining EPS over the last five years makes it hard to trust over the long term. On top of that, its relatively low ROIC suggests it has historically struggled to find profitable business opportunities.

While we've no doubt one can find things to like about Red Robin, we think there are better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.

Wall Street analysts covering the company had a one-year price target of $15.25 per share right before these results (compared to the current share price of $7.28).

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