Rising Star Sell: Red Robin Gourmet Burgers

This article is part of our Rising Star Portfolios Series.

Red Robin Gourmet Burgers (Nasdaq: RRGB  ) reported earnings last week, and while the numbers were decent, I'm more concerned by what lies ahead in 2012.

For the quarter, adjusted EPS was $0.28, compared to $0.13 in the year-ago period. We continued to see strong growth in restaurant-level operating margins, moving from 17% to 19.9%. And same-store sales came in at a strong 4.8%, even if that was driven by a 5.6% in average check against a 0.8% decline guest counts.

What has me worried is the 2012 outlook, and not because the business itself should perform poorly. The company expects low single-digit same-store sales growth. Costs of goods sold are expected to tick up, but that should be offset by tight control on operating expenses and price increases. And restaurant-level operating margins are supposed to be up slightly.

Rather, I'm concerned by the increasing tax rate, which the company projected at 22%-24% for the year, versus 6.8% for 2011. That should really increase the threshold for achieving profit growth in 2012, especially if costs are not abating, and we're not going to see margins improve substantially. And we know sales growth will be modest at best. This triangulates well with management not providing earnings guidance in its press release and upping store count growth for this year.

For these reasons, I'll sell all my shares in Red Robin tomorrow. As of Monday's market close, our two positions are up 65% and 67% in a little over a year. Let's take this money off the table.

Jim Royal, Ph.D., owns shares in Red Robin. The Motley Fool owns shares of Red Robin Gourmet Burgers. Motley Fool newsletter services have recommended writing covered calls in Red Robin Gourmet Burgers. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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