Everybody Missed the Real Reason Red Robin Is Delivering Gourmet Results

Hint: Burger King Worldwide explained why in a roundabout way.

Jun 5, 2014 at 6:30PM

Source: Red Robin Gourmet Burgers

While many casual-dining restaurants were buried under the snow this winter, Red Robin Gourmet Burgers (NASDAQ:RRGB) continued its same-store sales blastoff as if it were the only game in town. Well, sort of. Red Robin is doing a plethora of things right, but one primary reason in particular seemed to be what pushed sales into the black and you can find a hint about it from Burger King World (NYSE:BKW) of all chains.

Burger King?
Yes, Burger King. Burger King isn't a casual restaurant chain, of course. In fact, just about the only thing Burger King and Red Robin Gourmet Burgers have in common is that they both sell a lot of hamburgers and French fries, but that's where the similarities end. The clue comes from Burger King's ongoing and apparently successful ad campaign.

Recall that a few months back, Burger King launched the Big King sandwich. It succeeded and helped the fast-food chain achieve domestic same-store sales growth. Burger King then took the success a step further by increasing the size of the beef patties by around 25% in its Big King. It then started airing commercials, which are ongoing, that say "size matters."

So what does this have to do with Red Robin? Bear with me a moment.

The gourmet results
On May 20, Red Robin reported fiscal first-quarter results. Revenue flew 11.1% to $340.5 million. Same-store sales popped 5.4%. Earnings per diluted share jumped 24.2% to $0.82. Steve Carley, CEO of Red Robin, in the release credited the excellent quarter to the company's new line of Black Angus burgers as well as its increased media presence.

The conference call contained far more details and explanations. During the call, Carley gave further credit to "guest engagement initiatives," "new plating and presentation," more weeks of TV advertising, and certain changes in the menu. What the conference call revealed, however, that the press release failed to mention was that of the 5.4% rise in same-store sales, only 0.5% of it came from traffic.


Source: Red Robin Gourmet Burgers

No traffic jam
While 0.5% isn't terrible and it certainly beat much of the competition, you probably would have never suspected it from the way Red Robin was speaking of advertising and media causing the spike in sales. The reality is that over 90% of the growth actually came from a spike in average guest check, rather than more bodies coming in the door.

What caused the spike in guest checks? It probably had a lot to do with its new Half Pound Black Angus burgers, which are the biggest and most expensive items on the menu at $12.99 and up. That is where Burger King comes in. "Size matters" as Burger King says and that apparently applies to Red Robin too.

Some of the guests who normally came in for the cheaper burgers naturally upgraded to the new, more expensive ones. Guest checks jumped. Same-store sales jumped.

No excuses
Traffic, and potentially advertising and marketing, may arguably have even been poor during the quarter. Stuart Brown, CFO of Red Robin, said, "Remember that [we were] off media most of the first quarter of 2013." Red Robin only did around two weeks of advertising in the year-ago period. All of that marketing and advertising this quarter only led to a 0.5% bump in traffic? With all due respect, Red Robin, I'm less than impressed.

I know what you're thinking. Snow storms killed the casual-dining industry so any rise at all in traffic is excellent. The problem with that theory is that Red Robin executives have already gone on record with the statement that any negative effects from weather are typically followed by a spike in sales afterward as many people experience "cabin fever" and crave to get back into the Red Robin restaurants.

Foolish final thoughts
At the risk of contradicting myself, I must say that sometimes marketing initiatives, especially in-house ones such as new menus, have lagging positive effects that may remain to be seen. Burger King's Big King has been picking up momentum, for example, so it's certainly still possible that you'll see a lagging rise in traffic for Red Robin too in the second quarter of this year. The next quarterly result will bring a more even comparison in terms of media and TV advertising time. It will be interesting to see if traffic is down, up, or flat.

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Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Burger King Worldwide. 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.

A Financial Plan on an Index Card

Keeping it simple.

Aug 7, 2015 at 11:26AM

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