We are upgrading our rating on Red Robin Gourmet Burgers, Inc. (RRGB), a casual dining restaurant chain, to Outperform from Neutral.

The rating upgrade is based on solid first quarter 2011 earnings, which were well ahead of the Zacks Consensus Estimate, primarily driven by top-line and bottom-line growth. Additionally, for fiscal 2011, the company intends to turn around its business by Project RED, which focuses on revenue growth, expense control and capital deployment. The project is progressing quite successfully, thereby boosting the outlook for sales and margins.

To drive revenues, the company implemented a guest loyalty program called Red Royalty with a goal of increasing customer frequency, repositioning the bar business by attracting adult guests and improving beverage sales. The company also intends to deploy a Limited Time Offer (LTO) strategy supported with television advertising to drive traffic and create brand recognition.

To control expenses and expand margins in 2011, the company is undertaking a host of initiatives and targets cost cut of $16–18 million by end of 2012. The company has reduced its administrative headcount, which will result in savings of $3 million annually. It has also reduced the number of distribution centers from 36 to 13, which should result in cost savings of $1 million this year and up to $2 million in additional savings over the next 12-24 months. The company also succeeded in reducing its labor cost by 110 basis points (bps) in the first quarter and expects labor cost savings of 80 to 100 bps in 2011. Red Robin has thus identified 200 plus diverse opportunities to cut cost. To expand its margin further and mitigate input cost pressure, the company also hiked its prices by 1.5% in April 2011.

We are also encouraged by Red Robin’s plan to use its capital for the development of new restaurants, enhancement of shareholder’s value as well as for future refinancing activities. Moreover, the company has slowed down its company-owned unit expansion and is now focusing on franchising, which are comparatively less capital intensive. For fiscal 2011, the company plans to open 10 new company-owned restaurants and 3 to 4 franchised restaurants.

Red Robin is also experiencing improvement in comparable sales and indicated that through May 15, 2011, company-owned comparable sales growth has improved 0.5%, despite of 230 bps plummet due to the calendar shift of Easter. The upside in comps was aided by loyalty program, pricing action, increased bar focus and social media efforts. In April, Red Robin also introduced a new menu featuring an enhanced design and new offerings. Moreover, with the launch of summer LTO promotion on television for four weeks at the end of May 2011, we expect the comps to improve further as the company is able to drive traffic based on its marketing and promotional activity.

First Quarter Results

Red Robin reported first quarter 2011 adjusted earnings of 58 cents per share, comprehensively beating the Zacks Consensus Estimate of 24 cents. Total revenue of $286.8 million in the first quarter was slightly ahead of the Zacks Consensus Estimate of $284.0 million.

Comparable restaurant sales inched up 1.9% year over year at company-owned restaurants in the reported quarter, driven by a 0.9% climb in guest count and a 1.0% rise in the average guest check. Comparable sales at franchise restaurants in the U.S. climbed 2.5% year over year but plunged 1.2% in Canada.

Restaurant operating margin expanded160 bps to 19.8%, due to a 120-bp drop in labor costs, 40-bp decline in occupancy costs and a 60-bp decline in other operating costs, partially offset by a 70-bp increase in food and beverage cost.

Earnings Estimate Revisions: Overview

Following the first quarter earnings release, the Zacks Consensus Estimate for the company has been on the rise, with the analysts remaining bullish on the stock. The strong first quarter results bolstered the analysts’ confidence. The earnings estimate details are discussed below.

Agreement of Estimate Revisions

A positive inclination can be witnessed among the analysts, who mostly remain bullish on Red Robin. Revision trends in the last 30 days drifted toward the positive side. For fiscal 2011, 7 out of the 8 analysts raised their estimates and for 2012, 9 out of 10 analysts covering the stock moved upwards. None of the analysts moved in the opposite direction.

The analysts have increased their estimates based on robust first quarter results and early success of the Project RED initiative, resulting in improved comps and margin outlook. The earnings are also expected to benefit from share repurchase activity. Over the last 7 days, there has been no movement in analysts’ estimates for 2011, but one analyst raised estimates for 2012.

Magnitude of Estimate Revisions

Over the last 30 days, earnings estimates rose 41 cents to $1.42 for fiscal 2011 and jumped 44 cents to $1.77 for 2012.

 
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