Red Robin Gourmet Burgers (RRGB 4.87%) missed analyst expectations on revenue by $0.98 million, but came up aces on EPS beating expectations of $0.66 and earning $0.77 when it reported in August. However, the company also guided for third quarter earnings to be flat, again raining on investors' parades.
Not that sunny
Three years straight of same store sales growth and comps up 4.3% in the quarter weren't as sunny upon closer inspection. Most of that comp increase was due to 5% higher ticket totals, because traffic was actually down 0.7%. That said, average check totals have risen 10% over the last two years at Red Robin. According to Wells Fargo analyst Jeffrey Farmer, this is one of the largest increases in the casual dining industry.
The traffic problem is serious, as the company is painfully aware. CEO Stephen Carley said on the call," ...we see that we once again outperformed our peers, but continue to chase our goal of positive guest traffic. We're well aware that regardless of everything else, without delivering positive traffic, we can't achieve positive performance on a long-term sustained basis."
Restaurant level operating margin rose 220 basis points to 23.3%. Most of that was attributable to lower ground beef cost and sales of higher margin items like appetizers.
The company is hoping its Oktoberfest menu available now will bring up revenues and bring in customers this quarter. Beer-batter brats, beer milkshake, an Oktoberfest pretzelburger, and a pumpkin shake are specialties the company is counting on to bring in customers. Pumpkin, beer, burger, and pretzel are the trendiest flavors out there in the fast casual and fast food world right now.
The basic burger business
Of their 480 restaurants in the US, 341 are company operated. Generally, restaurant investors prefer a much higher ratio of franchisees as franchisees bring in rent and royalties to the company as well as doing the heavy lifting of day-to day operation.
The 5,000 square-foot casual dining restaurants are still their mainstay, but five of their newest concept Red Robin Burger Works are up and running. These are similar in size to a food court restaurant but with most of the signature Red Robin menu and alcohol. These should prosper as they open at airports, stadiums, malls, college campuses, etc. nationwide. Burger Works' prices are only slightly higher than McDonald's largest burgers at $5-6.00 price points.
The company refreshed 21 restaurants this year and plans to open 20 more company owned restaurants and several more Burger Works locations. The company tested 9 full remodels, finding a full refresh generated an average sales lift of 6% to give a cash payback in 5 years.
These openings and refreshes are expected to weigh on Red Robin's third quarter earnings, according to CFO Stuart Brown, but fourth quarter earnings are expected to show higher growth.
Beef vs chicken
Red Robin has many privately held gourmet burger competitors, but no burger-to-burger publicly held rivals. Comparable for the experience, however, is Buffalo Wild Wings (NASDAQ: BWLD) which also offers a sit down family friendly experience with full bar offerings and wall to wall TVs for sports viewing.
Buffalo Wild Wings' prospects seem sunnier than Red Robin. Buffalo Wild Wings beat expectations in the second quarter on both the top and bottom lines, and reaffirmed that it should meet its goal of 17% net earnings growth for 2013.
Chicken wing prices, which are a frequent overhang on the stock, have been declining but that could change drastically. McDonald's is premiering a Mighty Wings offering this week that could raise prices back up to $2.00 a pound by January, according to Stephens analyst Farha Aslam.
Wunderlich Securities analyst Robert Derrington wrote in a note that he didn't think the stock would take a hit from the Mighty Wings promotion, but agreed that wing prices could be volatile. He added that the new wing pricing by portion strategy protects Buffalo Wild Wings from wild wing price swings.
Buffalo Wild Wings has been expanding its menu to burgers and brats (look out Red Robin!) to offset the volatility of chicken wing prices. Lucky for them, wing prices have come down significantly since last year's $1.97 a pound and the company's average price was $1.61 per pound in the second quarter. In addition, the company has hedged out chicken wings through March 2015.
With football season under way, even if the price of chicken wings rises, the stock should continue to rise in the back half of the year, traditionally the strongest quarters for Buffalo Wild Wings. On the call CEO Sally Smith expected incremental sales growth from their fantasy football draft party promotions.
Buffalo Wild Wings trades with a high trailing earnings multiple similar to Red Robin, 32.96 and 31.18 respectively. You get what you pay for in Buffalo Wild Wings with a faster growing chain and international expansion, in the Philippines most recently. Mexico and Middle East openings are expected by year end.
It has twice the number of restaurants with 932 and has increased that footprint by 23% in the last year, compared to the less than 5% increase at Red Robin. It also has a higher proportion of franchisees to company owned locations at 525 to 407.
Buffalo Wild Wings' PEG ratio is lower at 1.60 than Red Robin's 2.44 because it is just plain growing faster, and expects to open its 1,000th restaurant by early 2014.
The Foolish takeaway
Buffalo Wild Wings, coming into its strongest time of year and with chicken prices temporarily stable, could still go higher. As a longer term investment, its growth and higher proportion of franchisees are valuable to any casual dining investor.
Red Robin doesn't have that international exposure. Its traffic problem, lower growth rate, and higher company owned restaurant ratio makes it one to bypass in favor of Buffalo Wild Wings.
