Will Red Robin's Quick-Serve Strategy Lead to More Value?

Red Robin Gourmet Burgers (NASDAQ: RRGB  ) has found success in the casual-dining space by capitalizing on consumers' desire for a better burger, a trend that has also led to fast growth in recent years for premium quick-serve burger operators, like In-N-Out Burger and Five Guys Burgers & Fries. 

While Red Robin sees more growth ahead for its traditional stores, it is also plotting a course in the quick-serve restaurant (QSR) space via its smaller, limited menu Burger Works outlets.  That strategy, though, has the company going up against the aforementioned niche operators, as well as a concentrated group of formidable multinational players like McDonald's, Burger King Worldwide (NYSE: BKW  ) , and Wendy's (NASDAQ: WEN  ) . So, will Red Robin be able to create value for investors?

What's the rationale?
Red Robin has found considerable success by offering customers a selection of roughly two dozen unique burgers at relatively inexpensive price points, evidenced by an average guest check of $11.73 in its latest fiscal year. Red Robin complements its trademark burgers, which account for nearly half of its sales, with popular complementary items, like its bottomless steak fries and Mad Mixology alcoholic-beverage lineup. The company's favorable long-run growth trajectory has largely been a byproduct of the favorable value proposition of its freshly prepared food, vis-a-vis its fast-food competitors, culminating in its current network of 485 stores throughout the U.S. and Canada.

In FY 2013, Red Robin has continued building on three straight years of top-line growth, reporting a 5.3% increase that was a function of higher comparable-store sales and modest additions to its store network. More importantly, the company's gross margin benefited from some relief in key commodity prices, as well as a greater percentage of sales from higher-margin alcoholic beverages, leading to an uptick in operating profitability. The net result for Red Robin was improved operating cash flow during the current period, providing funds to reimage a subset of stores while affording it the ability to invest in growth initiatives, like its Burger Works concept.

Burger giants go proactive
Of course, Red Robin's Burger Works unit is primarily competing against the major burger chains, which have anecdotally seemed to figure out that a big advertising budget and thousands of stores don't guarantee a higher stream of customers. Burger King and Wendy's, in particular, have made the hard decisions, undergoing radical reconstructions of their business operations in order to instill a sense of urgency and a renewed customer focus among their rank and file.

Burger King, the larger of the two, used a leveraged buyout in 2010 to kick start the rejuvenation process, which has included reimaging its North American store base and pursuing greater international store growth via lower-risk joint ventures. The company also sold off all but a few company-owned stores, thereby freeing it from management and allowing it to focus on menu development, including the introduction of healthier fare like salads, wraps, and smoothies.

In FY 2013, Burger King's efforts have been producing the desired results, with rising comparable-store sales and a sharp increase in operating profitability. While the company's North American segment has been a tough place to find top-line growth, solid performance in its international segments has offset the former segment's weakness. More importantly, Burger King's higher profitability has led to better operating cash flow, providing funds to accelerate its store reimage campaign, slated to be 40% complete by the end of 2015.

Not surprisingly, Wendy's has more recently copied Burger King's transformation blueprint, agreeing to sell off a large swath of company-owned stores and initiating a store reimage program of its own. In addition, the company has been spending some quality time in the kitchen developing new products, with several successful debuts in 2013, including its Pretzel Pub Chicken Sandwich and Bacon Portabella Melt. The net result for Wendy's has been a decent facsimile of Burger King's current year performance, with rising comparable-store sales and higher operating profitability.

The bottom line
Investors have certainly liked Red Robin's recent financial results, pushing its shares up sharply over the past 12 months. Part of the euphoria, rightly or wrongly, may be a belief that Red Robin can leverage its brand to success in the hamburger QSR segment through its Burger Works unit.

However, with the major burger chains trying to woo customers with premium burger menu options of their own, in addition to their traditional value-priced fare, the hamburger QSR segment seems to be getting a little too crowded, which will likely lead to lower profit margins for all participants. As such, Red Robin may be jumping into a frying pan with its strategy, and investors should probably start looking for an exit plan.

Put your money where your mouth is
Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

 


Read/Post Comments (0) | Recommend This Article (0)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2833378, ~/Articles/ArticleHandler.aspx, 12/18/2014 8:35:22 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement