Explaining Red Robin's Gourmet Beatdown

Aug.15.14 | About: Red Robin (RRGB)

Summary

Shares of Red Robin plummeted over 20% in mid-day trading on Aug. 14 after the company reported revenue and earnings that fell far short of expectations.

Given its results and Mr. Market's reaction, it looks like some correction was warranted but given its long-term performance, the business makes for an interesting prospect.

The only downside, it seems, is that Red Robin is still a bit pricey at this point, but not necessarily a bad play.

After news broke that Red Robin Gourmet Burgers (NASDAQ:RRGB) had reported revenue and earnings that fell far short of expectations for the second quarter of its 2014 fiscal year on Aug. 14, shares of the restaurant chain took a beating, falling more than 20% at one point. While the fact that shares hit a new 52-week low on the way down might entice investors, it's important to understand why Mr. Market behaved so violently to the company and its shareholders.

Red Robin missed… big time

For the quarter, Red Robin reported revenue of $256.13 million. This represents a more than 7% gain over the $238.30 million management reported the same quarter last year, but came in noticeably lower than the $263.37 million analysts hoped to see. According to the company's press release, this rise in revenue was driven largely by an almost 8% jump in company-owned locations from 4,051 to 4,360.

Earnings Overview
  Last Year's Forecasted Actual
Revenue (millions) $238.30 $256.13 $263.37
Earnings per Share $0.77 $0.90 $0.65
Click to enlarge

Another driver, however, was the business's 1.2% increase in comparable store sales. This consisted of a 3.7% jump in average check size, which indicates that customers are willing to spend more but, unfortunately, much of this was mitigated by a 2.5% decline in guest count. As prices rise, it's only natural for fewer guests to walk in the door, but if a decline is met by a larger increase in check price (like in the case of Red Robin) this isn't a bad thing in the short run.

Comparable Store Sales
Guest Traffic Check Size Total Comparable Store Sales
-2.5% +3.7% +1.2%
Click to enlarge

From a profit perspective, the situation was even worse. For the quarter, Red Robin reported earnings per share of $0.65. Not only did this fall short of the $0.77 seen in last year's quarter; it also missed the $0.90 Mr. Market expected. Despite the fact that sales at the restaurant chain rose, business was negatively impacted by rising costs across the board. Perhaps the biggest contributor to lower profits year-over-year was Red Robin's spending costs, which shot up from 2.7% of sales to 3.9% as the company invested more in media efforts and incurred more gift card costs.

Takeaway

Currently, the situation doesn't look great for Red Robin but it doesn't appear disastrous either. While it is true that profits came in lower than forecasted and revenue didn't grow as quickly as some may have hoped, the business is still, in fact, growing.

When you add to this that the company has had a pretty nice run over the past five years, increasing revenue by 21% and its net income by 83%, it's hard to imagine that the company will see its shares fall in perpetuity. If anything, with a P/E (using 2013's earnings) of 24, the company has just come back down to Earth a bit. This suggests that while investing in its shares now is unlikely to make you rich, buying the company's stock could provide a decent amount of upside if growth reverts to the mean.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.