What happened

Shares of Red Robin Gourmet Burgers (RRGB -4.52%) are plunging today, down by 17.8% as of 11:52 a.m. EDT, after the company delivered disappointing earnings results for the fiscal second quarter. While year-over-year revenue growth of 71.9% shows Red Robin's business is recovering well, it wasn't enough to boost investor confidence in the near-term outlook, as the pandemic just won't go away.

The broader markets were trading down in early trading as concerns shifted to economic growth and the spread of the coronavirus delta variant. The latter throws into question the near-term recovery of brick-and-mortar businesses, which is not good news for Red Robin.

The sell-off brings Red Robin's year-to-date performance below that of other restaurant stocks.

RRGB Chart

RRGB data by YCharts.

So what

CEO Paul J.B. Murphy III stated that "overall performance in the second quarter was below our expectation." Murphy cited ongoing pandemic restrictions in certain parts of the country, as well as labor shortages that resulted in reduced operating hours. This offset the strong sales and profitability at restaurants where staffing levels were higher.

The improvement in sales over the year-ago quarter narrowed the company's net loss to $5 million. Adjusted EBITDA, a measure of operating profit before taxes and other items, improved to a gain of $19 million from a loss of $15.3 million in the prior-year period.

On the bright side, the company spent the last year improving the business for when sales return to pre-pandemic volumes. Management reduced costs and expects to deliver a gain of more than 1 percentage point in enterprise-level margin. 

The company also launched last-mile delivery. Off-premise sales made up a third of total sales in the quarter, which is more than double pre-pandemic levels. 

Two people sitting at an outdoor table and eating burgers.

Image source: Getty Images.

Now what

It wasn't all bad news, as Murphy offered a note of encouragement. "While we continue to monitor developments regarding the COVID-19 variants, at this time we remain confident that we can capture heightened demand with full capacity, and restored staffing and operating hours, providing substantial opportunity for additional sales," Murphy said. 

Looking ahead, Red Robin's partnership with Donatos pizza is looking very promising as a long-term growth catalyst. In the second quarter, restaurants that offered Donatos outperformed the rest of the store fleet. Donatos is expected to drive over $60 million of annual pizza sales and over $25 million of profit by 2023. For perspective, Red Robin's total revenue was $868 million in fiscal 2020. 

However, given uncertainty over the length of the pandemic, investors should keep their expectations in check with restaurant stocks. The gains for many stocks in the industry over the past year have already priced in a strong recovery, which may leave limited upside from current price levels. Investors will have to select restaurant stocks with care to continue making good returns in this space.