Diluted earnings per share in 2004 increased 44.2% to $1.47 on $409.1 million in revenue. Much of the increase stemmed from the opening of 22 new company-owned stores and a 5.7% mixed menu price increase that resulted in a same-store sales increase of 7.5% in company-owned stores for the year.
The company continues to forecast 20% year-over-year growth in revenues and profits for fiscal 2005. Revenues are expected to be between $490 and $495 million, with a net income of $1.75 to $1.77 per diluted share. I agree with the analysts that company estimates are fairly conservative. The success of its increased menu prices showed management that the company has retained a price-value relationship that continues to please customers.
Many franchisees that currently carry higher menu prices than the company-owned stores are still showing significant same-store sales increases. So it appears that the company-owned stores still have plenty of flexibility to compensate for higher commodity prices, should they need to. As a result, Red Robin is well positioned to keep profit margins high enough to sustain its forecast 20% growth. But with another 26 to 28 company-owned stores and 15 to 17 new franchised stores planned for this year, management doesn't expect that it will need to resort to using such leverage.
But although the restaurants are running smoothly, some changes in accounting practices make the earnings outlook a bit more foggy. First, the Securities and Exchange Commission issued a letter on Feb. 7 clarifying generally accepted accounting principles for lease accounting. Red Robin management didn't sound concerned, but it did warn that the clarification could cause a one-time charge in the fourth quarter or even a restatement of earnings for all of last year.
Second, compliance with the Sarbanes-Oxley Act cost the company $822,000 in 2004, with future compliance expenses uncertain. And finally, management isn't sure how it will comply with the expensing of stock options when it becomes mandatory starting in Red Robin's third quarter. Management has so far taken a wait-and-see attitude and has said it will probably do what everyone else does.
But if you're looking long-term -- as most Fools do -- the company has given no reason for investors to believe that any of these issues will have a lasting impact on performance.
If you're looking to buy, you'll pay a premium for the five-year estimated growth rate of 20%, since shares trade at a forward price-to-earnings ratio of 27. It's not out of line, given that fellow food providers Panera Bread
What has caught my eye is that the company is now trading at 33 times capital-expenditures-adjusted owner earnings, significantly lower than it was trading just a few months ago. My investing dollars still need to see a big price drop, but with dilution now under control and an experienced management team with significant ownership interest in place, the stock isn't too far from being just as appetizing as one of the restaurant's juicy gourmet burgers.
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