Is This the 1 Burger Restaurant You Should Own?

After posting quarter after quarter of strong sales gains, Red Robin Gourmet Burgers looks to be the best bet for burger investors.

Jun 1, 2014 at 9:00AM

Lately, hamburger chains like McDonald's (NYSE:MCD) and Burger King Worldwide (NYSE:BKW) have been posting lackluster sales growth. Both McDonald's and Burger King blamed their results on intense competition and customers' preference for healthier options.

However, there is one hamburger chain that is defying the odds, and that is Red Robin Gourmet Burgers (NASDAQ:RRGB). After posting strong first-quarter sales and beating earnings expectations, could Red Robin Gourmet Burgers be a better bet for your portfolio?

L

Source: Red Robin Gourmet Burgers

An impressive first quarter from every angle
First-quarter revenue increased 11% from last year to slightly more than $340 million. Red Robin reported earnings per share of $0.82, which beat expectations by $0.10. Earnings were also higher by 24% compared to last year's first quarter. The profit margin improved as well. As a percentage of sales, the restaurant-level operating profit increased to 22.4% from 21.5% last year.

Red Robin Gourmet Burgers

Source: tripadvisor.com

Outperforming the competition
Where Red Robin really impresses me is with its comparable-restaurant sales growth. While other chains have been struggling, Red Robin outperformed in the latest quarter. Here you can see how the burger chains stack up in terms of comparable-restaurant sales in their most recent quarters for U.S. operations.

 

Latest Quarter

Red Robin

5.4%

McDonald's

-1.7%

Burger King

0.1%

Wendy's

0.6%

Jack in the Box

0.7%

Sonic

1.4%

For Red Robin, the latest quarter comes on the back of a 3.7% gain in comparable sales in its prior quarter as well. For me, I first highlighted Red Robin's sales growth in November after the company posted a 5.7% gain in comparable sales. The strong sales trend at Red Robin is for real and not a one-time event.

What makes Red Robin so different?
The biggest difference is that Red Robin is not a fast-food chain. It's in the casual-dining category, which is where diners sit down and order. The concept is more Cheesecake Factory with a focus on serving a variety of burgers. The average Red Robin location has about 19 different burgers on its menu in addition to chicken burgers, appetizers, soups, salads, entrees, wraps and sandwiches, desserts, milkshakes, and alcoholic beverages.

Red Robin

Source: Red Robin Gourmet Burgers

The focus at Red Robin is on making a better burger at an attractive price. Red Robin has three different sets of burgers at different price points. Red's Tavern Double starts at $6.99 everyday and Red Robin's Gourmet Burgers range in price from $8.99 to $10.49. At the top end of the range is Red Robin's Half Pound Black Angus Burgers, which start at $12.99.

The other difference is that while chains like McDonald's and Burger King have been trying to get out of owning restaurants and transitioning to a franchise business model, Red Robin has been focused on owning its own restaurants. At the end of the first quarter, Red Robin had 362 company-owned restaurants, five Red Robin's Burger Works, and 129 franchised Red Robin restaurants. Red Robin is adding to its company-owned restaurants by acquiring 32 franchised restaurants in the U.S. and Canada for $40 million by the end of the summer. 

What are McDonald's and Burger King up to?
Both McDonald's and Burger King have been trying all kinds of new menu items and promotions to revive sales growth. So far, nothing is working. McDonald's has tried the McD app, seasoned French fries, and it tried to battle Starbucks in coffee. Burger King has launched the Big King and expanded its breakfast menu. I think both chains need to simplify their menus and improve wait times and customer service. If that were to happen, I think you'd see sales start to rebound.

How do shares compare?

 

Market Cap

Forward P/E

EV/EBITDA

1 Year Return

Dividend Yield

Red Robin

$1.03B

20.93

10.40

36.46%

N/A

Burger King

$8.97B

23.18

16.75

37.17%

1.1%

McDonald's

$100.82B

16.32

11.06

1.71%

3.2%

Source: Yahoo! Finance

Foolish final thoughts
Considering the strong sales numbers that Red Robin continues to post, shares still look attractive. Instead of paying a dividend, the company is choosing to invest that money to expand. With only $86 million in debt and trading at 20 times next year's earnings, I see the company continuing to post strong sales gains and deliver strong returns for shareholders. Because of this, I see Red Robin outperforming both Burger King and McDonald's in the near future. That makes Red Robin the one burger restaurant to own.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide and McDonald's. Try any of our Foolish newsletter services free for 30 days. We Fools may not 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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