Casual dining restaurant operator Red Robin Gourmet Burgers Inc. (RRGB) recently reported its second quarter 2010 results. Quarterly earnings of 28 cents per share missed the Zacks Consensus Estimate of 37 cents and were down 32.0% from 41 cents last year.
The second quarter results were hurt as 25.0% of Red Robin restaurants are located in California and Arizona, which are facing the brunt of the economic slowdown. These markets have a high unemployment rate; thus traffic has sagged as budget-constrained consumers are trading down to lower-priced dining options.
Quarterly Performance
Total revenue in the quarter rose slightly 0.1% year over year to $201.0 million, but was below the Zacks Consensus Estimate of $207.0 million. Red Robin’s total revenue comprises restaurant sales (flat from the year ago quarter to $198.0 million), franchise royalties and fees (up 1.4% to $3.1 million) and other revenue (up more than 100.0% to $0.2 million).
Comparable restaurant sales dropped 1.2% for company-owned restaurants in the reported quarter, due to a 2.1% decline in the average guest check, partially offset by a 0.9% increase in guest counts. However, comparable restaurant sales are improving as compared with the dip 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. dropped 2.0% year over year, while Canada inched up 0.8% year over year.
Selling, general and administrative expenses in the quarter escalated 8.1% year over year to $20.0 million, due to investment in the company’s television media campaign, as well as management and government-related expenses, partially offset by a decline in bonus expense.
Operating profit of Red Robin plummeted 39.0% year over year to $6.0 million and operating margin was down 190 basis points (bps) to 3.8% in the quarter, due to a higher television advertising initiative to lure more guests.
The tax rate decreased to 9.1% from 23.2% in the previous year comparable quarter, primarily due to more favorable general business and tax credits.
Financial Aspects
Red Robin ended its second quarter with cash and cash equivalents of $11.9 million, total outstanding debt of $163.9 million and shareholders’ equity of $301.1 million. Total debt includes $108.7 million in borrowings under its $150 million term loan, $46.9 million of borrowings under its $150 million revolving credit facility and $8.3 million outstanding for capital leases.
Outlook
Red Robin reduced its revenue forecast for fiscal 2010 in the range of $866 million to $873 million from its previous expectation of $872 million to $880 million. The company also cut its 2010 earnings estimates to the range of 90 cents to $1.10 per share from its prior view of $1.10 to $1.30 per share.
The company expects comparable restaurant sales in a range of down 0.5% to up 0.5% in fiscal 2010. The company intends to stress more on brand awareness through a national advertising campaign. Management projects capital expenditure to be in a range of $35 million to $38 million.
In fiscal year 2010, Red Robin plans to open 11 new company-owned restaurants, and 4 to 5 franchised restaurants.
CEO Replacement
The company also announced that CEO Dennis Mullen will be replaced by Stephen Carley, a former chief executive of El Pollo Loco Inc., on September 13, 2010.
Our Take
As the company reduced its outlook, we maintain our Zacks #3 Rank on the stock, which translates into a short-term ‘Hold’ recommendation.
Red Robin’s close competitors Buffalo Wild Wings Inc. (BWLD) and BJ’s Restaurants Inc. (BJRI) reported their second quarter earnings, which were higher than the Zacks Consensus Estimates. Buffalo’s second quarter 2010 earnings of 50 cents per share were ahead of the Zacks Consensus Estimate of 42 cents. BJ’s second quarter earnings of 23 cents topped the Zacks Consensus Estimate of 20 cents. We maintain a Zacks #2 Rank on both the stocks, which translates into a short-term ‘Buy’ recommendation.
BJ’S RESTAURANT (BJRI): Free Stock Analysis Report
BUFFALO WLD WNG (BWLD): Free Stock Analysis Report
RED ROBIN GOURM (RRGB): Free Stock Analysis Report
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