Over the last few years, I've postulated that a restaurant industry bubble -- driven by better-burger upstarts in particular -- was brewing. I never would have guessed a pandemic was what would stem the tide of restaurant real estate expansion at ever-lower profit margins.
Heading into 2020, Red Robin Gourmet Burgers (RRGB 0.15%) was already struggling under the weight of heightened competition. Having lost 88% of its value over the last trailing five-year stretch, this burger stock could be a recovery candidate. But at this juncture, it looks like more of a gamble than compelling long-term value.
COVID-19 is only part of the equation
It would only be fair to point out that Red Robin was already hurting before the pandemic sent the world reeling early this year. Over the last decade, the casual diner has run operating profit margins in the mid-single-digit percentages, but that already slim bottom line started to deteriorate a few years ago -- as did revenue.
It's not all Red Robin's fault. During the economic expansion of the 2010s, restaurants were opening up at a torrid pace. However, rather than being opened to meet demand, many of them were cannibalizing sales from existing locations. Lower foot traffic doesn't just erode sales, it also takes a bite out of a piece of real estate's profitability (as there is less revenue to cover the high costs of operating a restaurant like rent and wages).
Now compounding the problem is the event I'll simply call "2020." Through the first half of the year, Red Robin's sales have tumbled 35% to $467 million, and adjusted EBITDA (earnings before interest, tax, depreciation, and amortization) have swung to negative $26.0 million (compared to positive $59.9 million the first half of 2019). The company has been able to make a pivot to off-premises sales (to-go and delivery) that made up about 40% of the total mix in mid-August. But with company-owned comparable store sales still down 33% year over year the week ended Aug. 9, this hamburger joint still has a long way to go to full recovery.
Slim liquid assets on the menu
Granted, Red Robin should be able to claw back more business as more dining rooms reopen and restrictions on how many guests can be seated ease. However, Red Robin's own report showing 40% to-go and delivery sales demonstrate that a more real estate-light and mobile-ready type of business may be the future for the restaurant industry. Other outfits like fast-casual burger peer Shake Shack (SHAK -3.52%) have also indicated as much. Red Robin has its own take on a path forward, like integrating Donatos Pizza into some of its locations to help boost productivity of its stores. But as many restaurant industry veterans can attest, offering a larger menu can present more operational challenges than it's worth.
In this new digital age where the fate of many restaurant dining rooms is in question, I feel like Red Robin has the deck stacked against it. It managed to raise $30 million in cash via a new stock offering in mid-June, but by the end of its second quarter on July 12, Red Robin reported having only $26.1 million in cash on its balance sheet. Paired with debt totaling $207 million, it's hard to say how viable a chain this will be going forward.
Thus, as the restaurant industry attempts to hit the reset button, I think there are better places to invest for the decade ahead.