Why Is Red Robin Soaring?

On May 20, 2014, Red Robin Gourmet Burgers  (NASDAQ: RRGB  ) announced its first-quarter 2014 earnings and blew away analysts' estimates. It reported the following results:

  • Revenues were $340.5 million, up 11.1% from the year-ago period.
  • Same-store revenue grew 5.4%.
  • Earnings per diluted share were $0.82, a 24.2% jump from $0.66 for the year-ago period.

Red Robin's earnings per share surpassed analysts' estimates by $0.10. The unexpectedly positive financials got a response from investors -- Red Robin's stock opened at $69.50 and closed at $71.80, a 12.45% one-day jump.

What's making this Robin rocking the financials? How does it compare against its competitors BJ's Restuarants  (NASDAQ: BJRI  ) and Ruby Tuesday  (NYSE: RT  ) ?

How did the Red Robin get there?
CEO and Director Stephen Carley said that Red Robin's impressive financials resulted from new product innovation and new guest initiatives.

In covering Red Robin's product innovation, Carley highlighted the permanent addition of its Damn Great Burger, or DGB, and the Black and Blue Burger. He also noted price points for customers that ranged from $6.99 for the Red's Tavern Double to $12.99 and above for its Black Angus Burgers.

Expanding on new guest initiatives, Carley noted that Red Robin's increased media advertising was driving in more customer traffic. Red Robin also refreshed 34 of its stores in a process called brand transformation. While brand transformation has taken up a large share of Red Robin's $70 million dedicated to growth investments this year, Carley explained that brand transformation resulted in an investment-worthy internal rate of return in the mid-to-high teens.

Red Robin expects to put at least 50 more restaurants through the brand transformation process this year, and up to 100 restaurants in 2015. Finally, its Red Robin Loyalty program enabled the restaurant chain to continue to engage its customers.

All of Red Robin's new products and guest initiatives have gotten the desired results. While guest count for the first quarter of 2014 grew a modest 0.5% compared to the same period last year, the average meal ticket grew 4.9%. 

So where will this Robin fly?
Red Robin is looking to expand its reach -- the company plans a $40 million acquisition of 32 franchised restaurants in the U.S. and Canada this year. In March 2014, Red Robin acquired four franchised restaurants for $8 million. It plans to open 20 new Red Robin restaurants and five Red Robin Burger Works restaurants this year. While the acquisitions and openings will negatively impact the company's earnings in 2014, the additional reach will help its 2015 earnings.

BJ's and its bearish same store sales results
On May 1, BJ's Restaurant announced its less impressive first-quarter 2014 financials: 

  • Revenues were $205.8 million, up 9.1% from the year-ago period.
  • Same-store sales declined 2.9%.
  • Earnings per diluted share were $0.20, a 31% drop from $0.29 for the year-ago period. 

While the EPS declined from the same period a year ago, BJ's EPS beat analysts estimates by $0.08.  BJ's stock also bounced up that day, opening a $28.70 and closing at $29.51 -- a 3.36% jump.

However, the same store decline tempered some of the enthusiasm. BJ's CEO,Greg Trojan pointed out while quarterly customer traffic grew, the average check was down due to the restaurant minimizing price increases and introducing more affordable items. 

Trojan noted that the restaurant needed improvement in terms of top line and margin perspective. To address those issues, BJ's retained an outside consultant to focus on cost optimization, while not impacting the overall quality and the value of the guest dining experience.  It remains to be seen if the outside consultant will improve BJ's future same-store sales.

Is it good buy or good bye, Ruby Tuesday?
Compared to the other two, Ruby Tuesday is facing an uphill battle. Ruby Tuesday announced its third-quarter financials on April 9:

  • Revenues were $295.6 million, down 3.8% from the year-ago period.
  • Same-store sales declined 1.9%.
  • Diluted loss per share was $0.07, a 30% improvement of from diluted loss per share of $0.10. 

Ruby Tuesday exceeded analysts estimates, which called for a diluted loss per share of $0.08.  The day after the third-quarter financial announcement, Ruby Tuesday's stock closed at $6.68 a share --12.08% jump from its opening price of $6.38 per share.

Ruby Tuesday CEO James Buettgen noted that its results were flattening out, an improvement from past quarters. In an effort to drive in more customer traffic, Ruby Tuesday focused on its brand transformation and the introduction of new menu items with an emphasis on affordable-entry level options.   Whether the branding and the new menu items will translate to better future same-store sales remains to be seen. I think it will be an uphill challenge to get a larger check when introducing new lower priced menu entrees.

When is the best time to get into the nest?
While Red Robin's competitors BJ's and Ruby Tuesdays have had stock price bounces after they announced their respective earnings, both of them have to address a decline in same-store sales. In contrast, Red Robin's same-store sales is improving and doesn't look like it'll slow down.

Red Robin is flying high now,  but its stock will take a hit later in the year. The costs of the company's acquisitions, expansions, and rebranding efforts will hurt its future financials, but Red Robin will not realize the returns from all of its activities until 2015, according to CFO Stuart Brown.

A long-term investor will see that a short-term hit to the stock price is a good opportunity to buy if the future prospects look good. Currently, Red Robin's P/E is 32.30, high compared to the industry's average P/E of 23.30. If you don't have a position in Red Robin right now, it might be worth waiting for Red Robin's stock to become more affordable later in the year. It may take a year, but it looks likely that Red Robin and its investors will see a payoff. 

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