Red Robin (RRGB)

Burger restaurant chain Red Robin (NASDAQ:RRGB) reported Q1 CY2025 results exceeding the market’s revenue expectations, but sales were flat year on year at $392.4 million. On the other hand, the company’s full-year revenue guidance of $1.22 billion at the midpoint came in 0.9% below analysts’ estimates. Its non-GAAP profit of $0.19 per share was significantly above analysts’ consensus estimates.

Company Overview

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

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).

A company’s long-term performance is an indicator of its overall quality. Any business can put up a good quarter or two, but the best consistently grow over the long haul.

With $1.25 billion in revenue over the past 12 months, Red Robin is a mid-sized restaurant chain, which sometimes brings disadvantages compared to larger competitors benefiting from better brand awareness and economies of scale.

As you can see below, Red Robin struggled to increase demand as its $1.25 billion of sales for the trailing 12 months was close to its revenue six years ago (we compare to 2019 to normalize for COVID-19 impacts). This was mainly because it closed restaurants.

This quarter, Red Robin’s $392.4 million of revenue was flat year on year but beat Wall Street’s estimates by 1.3%.

Looking ahead, sell-side analysts expect revenue to decline by 2.4% over the next 12 months, similar to its six-year rate. This projection doesn't excite us and implies its menu offerings will face some demand challenges.

Number of Restaurants

A restaurant chain’s total number of dining locations influences how much it can sell and how quickly revenue can grow.

Over the last two years, Red Robin has generally closed its restaurants, averaging 1.9% annual declines.

When a chain shutters restaurants, it usually means demand for its meals is waning, and it is responding by closing underperforming locations to improve profitability.

Note that Red Robin reports its restaurant count intermittently, so some data points are missing in the chart below.

Same-Store Sales

The change in a company's restaurant base only tells one side of the story. The other is the performance of its existing locations, which informs management teams whether they should expand or downsize their physical footprints. Same-store sales is an industry measure of whether revenue is growing at those existing restaurants and is driven by customer visits (often called traffic) and the average spending per customer (ticket).

Red Robin’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat. This performance isn’t ideal, and Red Robin is attempting to boost same-store sales by closing restaurants (fewer locations sometimes lead to higher same-store sales).

In the latest quarter, Red Robin’s same-store sales rose 3.1% year on year. This growth was a well-appreciated turnaround from its historical levels, showing the business is regaining momentum.

Gross profit margins tell us how much money a restaurant gets to keep after paying for the direct costs of the meals it sells, like ingredients, and indicate its level of pricing power.

Red Robin has bad unit economics for a restaurant company, signaling it operates in a competitive market and has little room for error if demand unexpectedly falls. As you can see below, it averaged a 13.5% gross margin over the last two years. That means Red Robin paid its suppliers a lot of money ($86.53 for every $100 in revenue) to run its business.

In Q1, Red Robin produced a 15.7% gross profit margin, marking a 2.4 percentage point increase from 13.2% in the same quarter last year. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as ingredients and transportation expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

Although Red Robin was profitable this quarter from an operational perspective, it’s generally struggled over a longer time period. Its expensive cost structure has contributed to an average operating margin of negative 1.7% over the last two years. 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 skyrocketing thanks to supply shortages.Red Robin was unfortunately a victim of these challenges.

Analyzing the trend in its profitability, Red Robin’s operating margin decreased by 3.2 percentage points over the last year. Red Robin’s performance was poor no matter how you look at it - it shows that costs were rising and it couldn’t pass them onto its customers.

In Q1, Red Robin generated an operating margin profit margin of 2.3%, up 2.9 percentage points year on year. The increase was encouraging, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

Red Robin has shown weak cash profitability over the last two years, giving the company limited opportunities to return capital to shareholders. Its free cash flow margin averaged 2.1%, subpar for a restaurant business.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Red Robin’s five-year average ROIC was negative 7.9%, meaning management lost money while trying to expand the business. Its returns were among the worst in the restaurant sector.

Debt is a tool that can boost company returns but presents risks if used irresponsibly. As long-term investors, we aim to avoid companies taking excessive advantage of this instrument because it could lead to insolvency.

Red Robin’s $544.3 million of debt exceeds the $24.15 million of cash on its balance sheet. Furthermore, its 10× net-debt-to-EBITDA ratio (based on its EBITDA of $54.44 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 pays down its debt.

We were impressed by how significantly Red Robin blew past analysts’ EPS and EBITDA expectations this quarter. We were also glad its full-year EPS guidance trumped Wall Street’s estimates. Zooming out, this was a blowout quarter as nearly all investors expected an earnings per share loss. The stock traded up 61.9% to $5.10 immediately following the results.

Updated: June 14, 2025 at 10:34 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in Red Robin.

We see the value of companies helping consumers, but in the case of Red Robin, we’re out. For starters, its revenue has declined over the last six years, and analysts expect its demand to deteriorate over the next 12 months. 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 six years makes it a less attractive asset to the public markets. On top of that, its relatively low ROIC suggests management has struggled to find compelling investment opportunities.

Red Robin’s EV-to-EBITDA ratio based on the next 12 months is 1.4x. This valuation tells us it’s a bit of a market darling with a lot of good news priced in - you can find better investment opportunities elsewhere.

Wall Street analysts have a consensus one-year price target of $9.88 on the company (compared to the current share price of $4.87).

Although the price target is bullish, readers should exercise caution because analysts tend to be overly optimistic. The firms they work for, often big banks, have relationships with companies that extend into fundraising, M&A advisory, and other rewarding business lines. As a result, they typically hesitate to say bad things for fear they will lose out. We at StockStory do not suffer from such conflicts of interest, so we’ll always tell it like it is.