One Fool's Beef With Red Robin

This article is part of our Rising Star Portfolios series.

Yes, Red Robin Gourmet Burgers (Nasdaq: RRGB  ) beat earnings expectations. Yes, shares bounced as high as 15% today on the news. And yes, that made me money in the positions I own in my Rising Star portfolio and my personal holdings. So why am I grouchy about the results?

For the quarter, revenue rose 5.4%, to $189.3 million, while earnings climbed more than 37%, to $2.2 million. But for the year, earnings fell a substantial 59%, despite higher sales.

For the quarter, same-store sales increased a modest 0.8%, thanks to a 1.1% traffic bump. Traffic is one of the key metrics that I need to see improve in Red Robin's turnaround, as I mentioned earlier this week. The company is attempting to improve repeat customers with Red Royalty, a loyalty program that offers guests free food and drink -- and gets the company more customer information to help it better target its promotions. Currently, the system's capturing one out of every three guest checks.

Like peers McDonald's (NYSE: MCD  ) and Wendy's/Arby's (NYSE: WEN  ) , inflation in beef, cheese, and other food prices is giving Red Robin indigestion. But the company plans a 1.5% price increase in April – its first in three years -- to help mitigate those riding costs.

I'm more intrigued by the company's increasing focus on selling alcoholic drinks. A decade ago, the company derived about 11% of its mix from alcohol. Today, that's just 6%. BJ's Restaurants (Nasdaq: BJRI  ) hits 20%, the best in its class, according to Red Robin CEO Stephen Carley. Each 1% increase in alcohol sales mix leads to an additional $6 million in profit, according to Carley. Alcohol is also a key driver for the consistently profitable Buffalo Wild Wings (Nasdaq: BWLD  ) , and I like Red Robin's move to reclaim the space.

The company's also concentrating on cutting costs. In January, Red Robin handed pink slips to about 17% of its workforce, leading to roughly $3 million in annual savings. But the company expects that the near-term savings could be eaten up by legal and corporate governance advisors. More significantly, the company aims to cut $16 million to $18 million in restaurant-level costs over the next 12-24 months. Carley provided several examples that yielded several million in savings, but when pressed by an analyst on the conference call, he was unable or unwilling to divulge other specific cost-cuts. That gives me pause, as does the company's unwillingness to provide any guidance for 2011.

The company plans capex at $39 million to $41 million this year, and will open 10 company-owned locations in 2011. Each restaurant costs about $1.8 million to open, which adds up to a planned $18 million in new stores for 2011. I'm less than thrilled with the company's continued expansion, as long as same-store sales remain so iffy. And the company plans five more locations for 2012. I'd rather that Red Robin focus on generating free cash flow, especially since the company is trying to renegotiate its credit agreement in the next few months.

On the positive side, the company stated that it would buy as much as $25 million in shares over the next six months, following the advice of activist investors. That would amount to about 7% of shares outstanding. More of this would be nice.

Foolish bottom line
With an industry veteran at the helm, I'm hopeful about Red Robin's turnaround, especially its increased focus on marketing and operational cuts. But I'd prefer a more rigorous focus on capital investment. Still, with activist investors hanging around, I'm expecting some big things, given the low expectations built into this stock.

Buffalo Wild Wings is a Motley Fool Hidden Gems selection. Motley Fool Options has recommended writing a covered strangle on Red Robin. The Fool owns shares of Red Robin. Try any of our Foolish newsletter services free for 30 days.

Jim Royal, Ph.D., owns shares in Red Robin and McDonald's. 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.


Read/Post Comments (9) | Recommend This Article (8)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 18, 2011, at 4:55 PM, laura328 wrote:

    I actually work at Red Robin & all I wanted to mention is that Wendy's & McDonald's are NOT our peers. We are not fast food, we don't serve "meals" or different sized drinks, we have servers & bartenders & our food quality is exponentially better. If you must compare us to something, I think Fudd Rucker's would be more accurate, even though they don't have servers either. I just wanted to add this because everyone at work, myself included, is sick of people coming in ordering as if they're at McDonald's. Finding out which burger they want when they come in asking for a "hamburger meal" feels like pulling teeth. We have nearly 20 different kinds of burgers. Can McDonald's say that?

  • Report this Comment On February 19, 2011, at 12:18 PM, penchy1 wrote:

    Good info to keep in mind. thanks

  • Report this Comment On February 19, 2011, at 1:41 PM, vinceds wrote:

    as much as I hate to say that, when I see "operational cuts" I think "more people laid off, more unemployment" and therefore an economy slowly sinking.

    Yet that's what us, investors, like to see.

    Still, in the long term, it's like sawing the branch we sit on.

  • Report this Comment On February 19, 2011, at 7:05 PM, matthew2219 wrote:

    When I was working a bunch of us workers would go to the local Red Robin for lunch. The food was "okay" but not so good as to justify its extra fancy prices. We stopped going.

    Based only on my own perceptions Red Robin is a long term loser as its client base realizes it is paying more for a hamburger, no matter how fancy they dress it up.. And liquor sales are irrelevant for most luncheon customers since drinking is a big "No-no" for most employees who have to return to work.

    Overall, I am not impressed.

  • Report this Comment On February 20, 2011, at 3:14 AM, ET69 wrote:

    Laying off 17% of its employees can't be a confidence booster in its stock. That said, I agree that they are not in the same category as Mcdonalds or Jack in the Box. There food is light years better. I don't mind a casual dinner at Red Robbins but I don't want to eat dinner at a McDonalds.

  • Report this Comment On February 20, 2011, at 12:37 PM, MoCattleman wrote:

    My local Westland, Mi ,RR has very poor service and is way over priced for the quality of the food. I quit going there. It is not worth it for the money. I used to go ther at least once a week

  • Report this Comment On February 22, 2011, at 12:25 PM, ivkovmg wrote:

    Check out blog post on the Wendy's/ Arby's Unmerger http://mattivkovich.com/blogs/food-service-industry/the-wend...

  • Report this Comment On March 02, 2011, at 4:25 AM, MiGaozaifoshan wrote:

    We've got rising costs because the Fed is printing money. Why would anyone want to invest in a company that wants to increase capital spending in a very inflationary environment, not to mention increasing trends of companies trying to counter these rising costs with cutting payroll. Now is not the time to be investing in restaurants or any industry that relies on the health of the American consumer, as the Fed is trying its hardest to choke the American consumer by splurging on its real interests, by giving the big banks freshly printed money through quantitative easing.

  • Report this Comment On April 03, 2011, at 7:33 PM, FoolTheRest wrote:

    Laura,

    I am sure Jim is not trying to insult RRGB, nor is he stating that it is the same type of company as MCD. He refers to them as peers in that they are both massively influenced by identical commodity prices.

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