Red Robin's Feathers Ruffled

Red Robin Gourmet Burgers (NYSE: RRGB  ) is scheduled to report earnings in two weeks. With the company bedeviled by recent bad press and lowered earnings, is it time for value hounds to buy these shares?

The company's stock took a 26.3% swan dive on Wall Street Jan. 10 when it issued revised earnings guidance for the fourth quarter. Same-store sales increased 2.7% instead of the 3% to 4% forecast. Even worse, earnings were pegged at $0.29 to $0.32 a share instead of the $0.40 to $0.41 previously guesstimated. If the company's news wasn't pessimistic enough, analysts have decided that the company's 2005 full-year guidance of $1.71 to $1.73 was too rich, settling instead on a $1.68-per-share target.

Let's put the guesstimates in perspective. Guidance misses are never good, but the company earned $1.47 last year. Red Robin still predicts that earnings will grow by a strong 16.3%, using the low end of guidance. In addition, analysts expect it to earn $1.93 in 2006 -- a gain of at least 11.6%, provided that Red Robin holds true to guidance.

The stock is hurting today, following news that the SEC has initiated a formal investigation into irregularities in the chartered aircraft, travel, and entertainment expenses of Red Robin's former president and CEO. Although the company's internal review has been completed, and the former CEO has agreed to reimburse the company for the expenses, the SEC investigation suggests that the Red Robin's internal controls will get a closer examination.

Plaintiffs in California also announced a lawsuit against Red Robin, charging the company with failure to comply with wage and hour regulations. Red Robin claims it has a "meritorious defense" for these claims.

The news is bad, and the stock has been slaughtered. These are the times when value investors start sniffing for opportunities. The Red Robin business model has been one of balanced growth, where 17% to 20% unit/store growth and 2% to 3% same-store sales growth has historically yielded 20% earnings growth. The company recently implemented a 1% menu price increase to shore up the earnings erosion that appeared in the fourth quarter.

Analysts still expect Red Robin to meet its stated goal of 20% compounded five-year earnings growth. Sit-down restaurant competitors Applebee's (Nasdaq: APPB  ) and California Pizza Kitchen (Nasdaq: CPKI  ) trade for 18.4 and 23.1 times 2006 forecast earnings, respectively, yet they're expected to grow earnings less than 16% a year for the next five years; Red Robin trades at 20 times earnings.

Unless something is really wrong at Red Robin Gourmet Burgers that has not been reported, the company seems to be value-priced relative to its peers. That said, its recent corporate governance mishaps may be the first hints of even more unseen trouble.

Red Robin reports earnings on Feb. 16. If its business model is not broken, as this observer expects, the business update should start the shares bobbin' back up. Investors looking for a faster-growing restaurant chain without the bad-news background should consider Motley Fool Hidden Gems recommendation Buffalo Wild Wings (Nasdaq: BWLD  ) .

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Fool contributor W.D. Crotty does not own any shares in the companies mentioned. Clickhereto see The Motley Fool's disclosure policy.


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