Casual dining restaurant operator Red Robin Gourmet Burgers Inc. (RRGB) recently reported its third quarter 2010 adjusted earnings of 11 cents per share, which missed the Zacks Consensus Estimate of 22 cents and were down 70.3% from 37 cents in the year-ago quarter. However, including the effects of a non-cash restaurant impairment charge, GAAP net loss during the quarter was $4.2 million or 27 cents per share. Results were affected by a rise in costs, negatively impacting margins.
Quarterly Performance
Total revenue in the quarter rose 4.2% year over year to $194.8 million. Red Robin’s total revenue comprises restaurant sales (up 4.2% from the year-ago quarter to $191.6 million), franchise royalties and fees (down 1.1% to $3.0 million) and other revenues (up more than 500.0% to $0.2 million).
Comparable restaurant sales inched up 0.9% year over year for company-owned restaurants in the reported quarter, driven by a 2.6% increase in guest count, partially offset by a 1.7% decrease in the average guest check. However, comparable restaurant sales are improving as compared with the slight rise of 0.1% in second quarter 2010, a fall of 2.3% in first quarter 2010, 10.5% in fourth quarter 2009 and 14.9% in third quarter 2009. Comparable sales for franchise restaurants in the U.S. spiked up 3.5% year over year, while it declined 0.6% in Canada.
Restaurant operating margin contracted 120 basis points (bps) to 17.5% due to a 100-bps expansion in food and beverage cost and a 70-bps rise in labor costs, partially offset by a 50-bps decline in occupancy costs.
Selling, general and administrative expenses in the quarter escalated 40.4% year over year to $22.6 million, due to investment in the company’s television media campaign as well as a rise in bonus expense.
In the reported quarter, the company realized an effective tax benefit of 41.3% compared with a tax rate of 16.3% in the previous-year quarter, primarily due to more favorable general business and tax credits.
Financial Aspects
Red Robin ended its third quarter with cash and cash equivalents of $11.2 million, total outstanding debt of $160.8 million and shareholders’ equity of $297.7 million. Total debt includes $104.0 million in borrowings under its $150 million term loan, $45.2 million of borrowings under its $150 million revolving credit facility and $11.6 million outstanding for capital leases.
Outlook
Red Robin has suspended its previous earnings and revenue guidance for fiscal 2010.
For fourth quarter 2010, the company expects comparable restaurant sales to drop due to absence of television media campaign aswell as tough year-over-year comparison. However, Red Robin indicated that for the month of October same store sales for company owned restaurants increased 4.3%, driven by a 4.2% rise in guest count. The company expects commodity and labor cost inflation to continue in the next quarter.
Red Robin remains on track to open 11 new company-owned restaurants, and 4 franchised restaurants in fiscal 2010. Management projects capital expenditure to be $34 million in fiscal 2010.
Our Take
As the company suspended its outlook for fiscal 2010 and remains apprehensive that negative same store sales as well as cost pressure will negatively impact margins for the next quarter, we expect estimates to move down in the coming days.
The company retains its Zacks #3 Rank on the stock, which translates into a short-term ‘Hold’ recommendation.
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