Red Robin Gourmet Burgers Earnings: Why the Stock Is One of the Biggest Losers Today

Shares of Red Robin Gourmet Burgers are plummeting today. Here’s what you need to know.

Aug 14, 2014 at 6:00PM

Red Robin Gourmet Burgers (NASDAQ:RRGB) stock is getting killed today. Shares of the fast-casual eatery fell more than 21% to take second place for the highest price loss through midday trading. In dollar terms, the stock lost more than $13, standing at $50.90 apiece following the company's disappointing earnings announcement for its second quarter. Let's look at just how bad the quarter actually was and what it means for investors going forward.

Nail-biting results
The 15.5% decline in profit during the quarter was the biggest shocker for Red Robin shareholders. The company reported a generally accepted accounting principles profit of $9.5 million, or $0.65 per diluted share. This was a precipitous drop from the $0.77 per share the company generated during the same period a year ago. It is also more than 27% below the $0.90 per share that Wall Street had pegged Red Robin to earn in its second quarter.

Revenue also took a beating in the period, climbing just 7.5% to $256.1 million. This was also significantly lower than Wall Street's expectation for revenue of $263.4 million. In a letter to investors, Red Robin chief executive Steve Carley said, "Although we are satisfied with our top line performance through the first half of the year, we were disappointed that our marketing efforts in the second quarter did not produce the desired results in an intensely competitive environment."

Given these results, it would make sense for Red Robin to close underperforming restaurants and focus on boosting sales at more trafficked locations. However, this doesn't seem to be the plan. The company is instead employing what it calls "effective expansion," which involves opening as many as 25 new restaurants in fiscal 2014. In the second quarter, the chain opened three new Red Robin stores, two Red Robin Burger Works restaurants, and one franchised location.

Red Robin Burger

Source: Red Robin Gourmet Burgers.

Sure, new store openings should boost operating growth, though this could come at a steep cost to the company if new stores don't perform as planned. By aggressively expanding into new locations the company takes on the added risk of over extending itself. Red Robin had 502 restaurants in operation at the end of the second quarter including 365 company owned locations, 7 Red Robin Burger Works and 130 franchised stores. Nevertheless, there is no shortage of competition in the burger business these days from Five Guys, In-N-Out Burger, and other chains.

Red Robin's decision to acquire 32 of its franchised Red Robin stores is another factor to consider. Red Robin used $40 million in cash and debt to fund the purchase . The deal closed in July and the company says it will add $44 million in revenue to Red Robin's balance sheet in the second half of the year. That's good news for shareholders if it actually pans out. But it's also important to note that the company will lose $1.5 million in revenue in the remainder of the year because of the sizable loss of franchise royalties and fees. Collecting royalties through the franchise model helps Red Robin generate a steady stream of free cash flow regardless of weak or strong sales, so it's refreshing to know they will still have at least 100 franchised units regardless of the recent franchise acquisition. Looking ahead, Red Robin expects restaurant revenue growth in the low single digits in fiscal 2014.

Given these results and the company's underwhelming guidance for full-year revenue growth, it isn't surprising that Red Robin's stock was one of the market's biggest losers today. Investors may want to wait on the sidelines for now to see how the company's "effective expansion" plays out before taking a bite out of the stock.

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Tamara Rutter has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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