Can Red Robin Keep Grilling Up Profits for Investors?

Mr. Market has liked what he has seen from casual-dining chain Red Robin Gourmet Burgers lately, pushing its stock price up nicely over the past 12 months. Is there more upside ahead?

Jun 21, 2014 at 11:00AM

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Source: Red Robin Gourmet Burgers

Shareholders in casual-dining chain Red Robin Gourmet Burgers (NASDAQ:RRGB) have been enjoying the ride over the past year, as a rebound in the company's comparable-store sales growth has sparked a good performance for its share price, up approximately 30%. The company has found success by offering quality food at a reasonable price, a formula that has anecdotally allowed it to pick off customers from the fast-food burger chains, like McDonald's (NYSE:MCD) and Burger King Worldwide (NYSE:BKW).

Red Robin's latest financial update was another good data point, evidenced by double-digit gains in revenue and operating profit, which led to a strong subsequent pop in its share price. So, after a big price gain, is there more upside ahead for investors?

What's the value?
Red Robin has built a national chain of burger-oriented restaurants by tapping into its customers' desire for better burgers, currently operating a network of almost 500 locations across the U.S. and Canada. While the company's reasonably priced, signature burgers get customers into its restaurants, its evolving menu diversification efforts -- highlighted by its growing portfolio of Mad Mixology alcoholic beverages -- have allowed the company to increase per-customer spending; this has helped to offset a general rise in commodity costs. The net result for Red Robin has been consistent same-store sales growth and better store profitability, funding an expansion of its store base.

In its latest fiscal year, Red Robin continued building on its long-term growth trajectory, reporting a 4.1% top-line gain that was aided by its best comparable- store sales performance of the past five years. 

More importantly, the company took advantage of slightly lower food costs, courtesy of price relief in the key beef category, to generate an uptick in its average restaurant margin. Consequently, Red Robin enjoyed solid operating cash flow, providing the capital to deliver on its ambitious expansion plans, including an expected 4% addition to its network in 2014.

The fast-food giants get wise
Of course, the question for investors is whether Red Robin can continue its favorable financial performance going forward. Based on the results in the company's most recent fiscal quarter, the answer seems to be yes, judging by the 11.2% revenue increase and the better-than-expected operating profitability.

That being said, Red Robin is likely to face increasing pressure from the fast-food burger chains that have gotten wise to their customers' desire for upgrades in food quality and dining experiences. McDonald's, for its part, has been working hard to upgrade its physical image, currently going through the arduous task of renovating its U.S. store base, a process that is expected to be 45% complete by the end of the current fiscal year.

McDonald's also continues to try to improve the overall quality of its menu with new product introductions, like its McWrap and Egg White Delight McMuffin. While the company's efforts don't seem to have created the desired results yet, evidenced by a decline in comparable-store sales in its U.S. segment in its latest fiscal year, its strong operating cash flow gives it the flexibility to continue testing its product ideas in the hopes of finding some winners.

Not to be outdone, Burger King has been attempting to woo greater volumes of customers with an overhaul of its entire operation, including a reimaging of its North American store base.  Even more so than McDonald's, Burger King has been evolving its menu offerings to meet the discerning, health-conscious palettes of a new generation of customers, evidenced by the biggest slate of new product introductions in its history in 2012, including salads, wraps, and smoothies. 

More importantly, the company has been improving its balance sheet and operating efficiency, which should provide the capital to continue funding new menu offerings, a strategy that should be a headache for the better burger operators, like Red Robin.

The bottom line
Red Robin seems to be firing on all cylinders, with rising per-store sales and better store profitability, financial metrics that have led to a strong run for its stock price. More notably, the company finally generated an increase in customer volumes during its latest fiscal quarter, a positive development that should bode well for future comparable-store sales growth. While Red Robin isn't exactly cheap, with a P/E multiple of roughly 30, it appears to have a winning formula in the restaurant space and should be a good long-term bet.

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Robert Hanley 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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