Burger restaurant chain Red Robin (NASDAQ:RRGB) reported results in line with analysts' expectations in Q3 FY2023, with revenue down 3.25% year on year to $277.6 million. The company's outlook for the full year was also close to analysts' estimates with revenue guided to $1.3 billion at the midpoint. Turning to EPS, Red Robin made a non-GAAP loss of $0.79 per share, improving from its loss of $1.03 per share in the same quarter last year.
Red Robin (RRGB) Q3 FY2023 Highlights:
- Revenue: $277.6 million vs analyst estimates of $275.7 million (small beat)
- EPS (non-GAAP): -$0.79 vs analyst estimates of -$0.85
- The company reconfirmed its revenue guidance for the full year of $1.3 billion at the midpoint
- Gross Margin (GAAP): 12.5%, down from 14% in the same quarter last year
- Same-Store Sales were down 3.4% year on year
- Store Locations: 500 at quarter end, decreasing by 20 over the last 12 months
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 annualized revenue growth rate over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was flat, or negative 0.66%, as it closed restaurants.
This quarter, Red Robin reported a rather uninspiring 3.25% year-on-year revenue decline, in line with Wall Street's estimates.
Number of Stores
A restaurant chain's total number of dining locations is a crucial factor influencing how much it can sell and how quickly company-level sales can grow.
When a chain like Red Robin is shuttering restaurants, it usually means that demand for its meals is waning, and the company is responding by closing underperforming locations to improve profitability. Since last year, Red Robin's restaurant count shrank by 20, or 3.85%, to 500 total locations in the most recently reported quarter.
Taking a step back, Red Robin has generally closed its restaurants over the last two years, averaging 3.19% annual declines in locations. A smaller restaurant base means Red Robin must rely on higher foot traffic, larger order sizes, or price increases at existing restaurants to fuel revenue growth.
Same-Store Sales
A company's same-store sales growth shows the year-on-year change in sales for its restaurants that have been open for at least a year, give or take. This is a key performance indicator because it measures organic growth and demand.
Red Robin's demand has outpaced the broader restaurant sector over the last eight quarters. On average, the company has grown its same-store sales by a robust 10.1% year on year. Given its declining physical footprint base 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.
In the latest quarter, Red Robin's same-store sales fell 3.4% year on year. This decline was a reversal from the 5.3% year-on-year increase it posted 12 months ago. A one quarter hiccup isn't material for the long-term prospects of a business, but we'll keep a close eye on the company.
Gross Margin & Pricing Power
We prefer higher gross margins because they not only make it easier to generate more operating profits but also generally indicate pricing power and differentiation, whether it be the dining experience or quality and taste of food.
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 below, it's averaged a 15% gross margin over the last two years. This means the company makes $0.15 for every $1 in revenue before accounting for its operating expenses. 
In Q3, Red Robin's gross profit margin was 12.5%, marking a 1.4 percentage point decrease from 14% in the same quarter last year. One quarter of margin contraction shouldn't worry investors as a restaurant's gross margin can often change due to factors outside its control, such as seasonality and changing input costs (think ingredients and transportation expenses). We'll continue tracking these dynamics.
Operating Margin
Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
In Q3, Red Robin generated an operating profit margin of negative 0.7%, up 4.4 percentage points year on year. This increase was encouraging, and since the company's gross margin actually decreased, we can assume the rise was driven by a magnificent improvement in cost controls.
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.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 1.28%. However, Red Robin's margin has improved, on average, by 1.7 percentage points each year, an encouraging sign for shareholders. The tide could be turning for Red Robin.EPS
These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.
In Q3, Red Robin reported EPS at negative $0.79, up from -$1.03 in the same quarter a year ago. This print beat Wall Street's estimates by 7.06%.
Between FY2020 and FY2023, Red Robin's adjusted diluted EPS flipped from negative to positive. This was a step in the right direction as restaurants need all the help they can get; they're arguably some of the hardest businesses to manage because of constantly changing consumer tastes, input costs, and labor dynamics. Profitability is vital to navigate these volatile conditions.
Over the next 12 months, however, Wall Street is projecting an average $0.43 year-on-year decline in EPS each quarter.
Return on Invested Capital (ROIC)
Red Robin's bottom-tier returns on capital suggest it's not only struggled to find compelling reinvestment opportunities but also made some mistakes along the way. The company's five-year average ROIC is negative 2.9%, among the worst in the restaurant sector.
We argue ROIC is one of the most important indicators of quality because it tells us how much return (profit) a company makes on the money it invests into its business, shedding light on its prospects and its management team's decision-making prowess. ROIC is also a helpful tool to benchmark performance versus peers, and just like how we focus on long-term investment returns, we care more about a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from Red Robin's Q3 Results
With a market capitalization of $128.9 million and more than $60.8 million in cash on hand, Red Robin can continue prioritizing growth.
It was good to see Red Robin slightly beat analysts' revenue expectations this quarter, driven by better-than-expected same-store sales growth. We were also happy its EPS narrowly outperformed Wall Street's estimates. On the other hand, its gross margin and adjusted EBITDA missed analysts' expectations. Overall, this was a mediocre quarter for Red Robin. The stock is up 2.49% after reporting and currently trades at $8.22 per share.
Is Now The Time?
Red Robin may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for everyone who's improving the lives of others, but in the case of Red Robin, we'll be cheering from the sidelines. And while its strong same-store sales growth has outpaced the broader restaurant sector, the downside is that its relatively low ROIC suggests suboptimal profitability prospects. On top of that, its operating margins reveal poor profitability compared to other restaurants.
Red Robin's price-to-earnings ratio based on the next 12 months is -8.9x. While we've no doubt one can find things to like about Red Robin, we think there might be better opportunities elsewhere in the market. We don't see many reasons to get involved at the moment.
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