Red Robin Upgraded to Neutral – Analyst Blog

We recently upgraded our recommendation on Red Robin Gourmet Burgers Inc. (RRGB) to Neutral from Underperform with a target price of $21.00. After a difficult year, the company now expects a turnaround in 2010 as the economy gradually revives.

 

Red Robin will now emphasize more on brand awareness through a national advertising campaign, and focus on cost control initiatives in fiscal year 2010. Moreover, to enhance the perception of value and drive traffic, the company is remodeling its restaurants. The company now expects revenue to grow between 5.5% and 6.4%, and comparable-store sales to rise between 2.4% and 3.4% in the current fiscal.

 

In response to a dipping restaurant operating margin, Red Robin has dramatically slowed its unit expansion. It opened 15 company-owned restaurants in fiscal year 2009 as against 31 in 2008. In fiscal year 2010, the company plans to open 11 to 13 restaurants. Given the sluggish economic conditions, we believe it is wise to move steadily rather than aggressively.

 

However, Red Robin’s fourth-quarter 2009 results were not impressive. The quarterly earnings of 10 cents a share missed the Zacks Consensus Estimate of 16 cents and fell 76.7% from 43 cents posted in the prior-year quarter.

 

Total revenue for the quarter tumbled 8.3% year-over-year to $182.2 million. Same-store sales fell 10.5% for company-operated restaurants, driven by a 9.3% decline in guest counts and a 1.2% fall in the average guest check.

 

Moreover, the stiff competition to lure budget constrained consumers and the presence of nearly 50% of the restaurants in areas impacted by the recent housing downturn are causes of concern. These may dampen the company’s growth potential. Given the pros and cons of the casual dining restaurant operator, we prefer to be Neutral on the stock.