This Tasty Burger Chain Is Booming: Should You Buy?

Source: Red Robin Gourmet Burgers.

In times when big global chains such as McDonald's (NYSE: MCD  ) and Burger King (NYSE: BKW  ) are having a hard time trying to generate sales growth, Red Robin Gourmet Burgers (NASDAQ: RRGB  ) is truly firing on all cylinders and outgrowing its bigger competitors by a considerable margin. Importantly, the company still has a lot of room for expansion.

Mouthwatering results
Red Robin operates somewhere between fast-casual and casual dining, striving for quick customer service but offering superior quality and fresher ingredients than fast-food companies at higher prices. The business has been booming lately; the company reported better-than-expected earnings for the first quarter of fiscal 2014 on Tuesday, and the stock jumped by almost 12.5% in response.

Sales during the quarter ended on April 20 increased 11.1% to $340.5 million, versus $306.3 million in the same quarter during the prior year, and the number was comfortably above analysts estimates of $334.8 million. Comparable-restaurant sales increased 5.4% during the period on the back of a 0.5% increase in guest counts and a 4.9% rise in the average guest check.

Source: Red Robin Gourmet Burgers.

Restaurant level operating margin was 22.4%, a 90-basis-point increase versus 21.5% in the first quarter of 2013. While cost of sales as a percentage of revenues increased 20 basis points to 25.1%, Red Robin delivered growing profitability as the company benefited from a lower impact of fixed costs on revenues and efficient labor management during the quarter.

Healthy sales growth and expanding profit margins are a winning combination for Red Robin: Net income increased by 26% to $11.9 million, while net earnings per share jumped 24.2% to $0.82, materially better than the $0.72 per share that Wall Street forecast on average.

As of the end of the last quarter, there were 362 company-owned Red Robin restaurants, five Red Robin's Burger Works, and 129 franchised Red Robin restaurants, for a total of 496 locations. The company plans to open 20 new Red Robin restaurants and five Red Robin's Burger Works during 2014.

Red Robin also acquired four franchised restaurants in New York state for approximately $8 million in March, and the company has a deal to acquire 32 franchised restaurants in the U.S. and Canada for approximately $40 million, which is expected to close in late summer.

Room for growth
Red Robin is materially smaller than industry juggernauts such as McDonald's and Burger King, and that means it's easier for the company to generate growth. In addition, customers seem to be more than willing to pay a few extra dollars in exchange for superior products and a better customer experience, since the fast-casual category has been materially outgrowing traditional fast-food chains lately. 

Red Robin is positioned on the right side of the trend when it comes to customer tastes, and the company has a lot of room for growth if it continues gaining market share versus bigger rivals.

McDonald's has delivered disappointing performance over the past several quarters. The company announced an annual increase of only 0.5% in global comparable revenues during the first quarter of 2014, while sales in the U.S. were particularly weak, with a decline of 1.7% in comparable sales in the country.

April performance is looking moderately better for McDonald's, as the fast-food giant delivered a 1.2% increase in global comparable sales, and comparable sales in the U.S. were flat during the month. Still, it's far too soon to identify any signs of a sustainable turnaround at McDonald's, and the company is clearly no match to Red Robin when it comes to growth.

Burger King is doing better than McDonald's on the international front, but the company is still generating stagnant sales in the United States. Burger King announced a 2% increase in global comparable sales excluding currency fluctuations during the first quarter of 2014, but comparable sales in the U.S. and Canada grew only 0.1% during the period. 

Successful menu innovations and a restructuring of its store base have been smart moves by management, and Burger King is outgrowing its main competitor, McDonald's. Still, Burger King pales in comparison with the level performance at Red Robin.

Foolish takeaway
Red Robin Gourmet Burgers delivered extraordinary performance during the last quarter, especially in comparison with much bigger players such as McDonald's and Burger King. The company has abundant room for growth if it continues gaining market share versus the competition, so this premium burger chain looks well positioned to capitalize on its appetizing growth opportunities in the years ahead.

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Andrés Cardenal

Andres Cardenal, CFA is a tenacious researcher of the best investment opportunities around the world. Andres is an economist and CFA Charterholder living in Buenos Aires, Argentina. Naturally flavored. Follow me on Twitter for more investment ideas:

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