Red Robin Gourmet Burgers: The Early Bird Catches the Worm

| About: Red Robin (RRGB)

Back in the 1940s, so the story goes, the owner of a certain Sam’s Tavern in Seattle was fond of singing while he worked, particularly the hit tune about “The red, red robin goes bob, bob, bobbin’ along.” Eventually the bar and grill became known as Sam’s Red Robin Tavern and evolved into Red Robin Gourmet Burgers, Inc. (Nasdaq: RRGB).

Now headquartered in Greenwood Village, Colo., a Denver suburb, Red Robin has 370-some owned and franchised restaurants in 40 states – and it has more and more analysts singing its song. Four analysts have upgraded their ratings on Red Robin in the past three months, bringing the tally to two strong buys, five buys, and seven holds (no sells). Also, JP Morgan initiated coverage at neutral.

The restaurant market is growing more differentiated as analysts cast a wary eye on the consumer economy. Starbucks Corp. (Nasdaq: SBUX) is on the outs, while McDonald’s Corp. (NYSE: MCD) is in. Red Robin, which offers 20-plus gourmet burgers on its menu – all-beef as well as chicken, salmon and others (“anything between two buns”) – is bobbin’ on the threshold of being in.

For one thing, a cloud hanging over the company since ex-CEO Michael Snyder was booted out in 2005 for running up $1.2 million in unauthorized expenses, mostly in personal trips on a charter jet, has recently been dispelled. Snyder, still a major shareholder in Red Robin, agreed earlier this month to a $250,000 fine and a ban from corporate office. The SEC said it has dropped its investigation of the company, and Red Robin settled a class action shareholder suit over the matter for $1.5 million.

Red Robin reported strong sales growth in the most recent quarter. Revenue in the 16 weeks ended April 22, 2007, rose 24.5% to $212.3 million, boosted by the acquisition of 13 former franchise restaurants. Net income was flat at $7.5 million versus $7.4 million, or $0.45 a share in both periods. Company management, under Snyder’s successor Dennis Mullen, feels that one of the main drags on earnings is the long period – up to three years – it takes to get new restaurants to the same level of revenue and profitability as existing units.

This had been deemed unacceptable and the company is taking steps. First of all, it’s reducing the level of new restaurant openings of its owned units to 24-27 this year from 32 last year. Second, to help reduce costs, it’s shaving off 5% of the expense of building these new restaurants by introducing a smaller model unit – 5,600 square feet instead of 6,300 square feet, with the same amount of seating. To help get the new restaurants up to speed more quickly, it’s boosted its employee training, including managers, drawing on best practices of its most successful units. Finally, in April, Red Robin launched its first national media advertising campaign, budgeted at $11 million, on cable television and the Internet to foster greater brand awareness. While these measures also put pressure on profit, they should help bring the new restaurants up to normal revenue more quickly, the company reckons.

Again, the message seems to be getting across. Eleven analysts have raised their earnings estimate for the current year in the past 30 days. The average estimate is now $1.84 per share, compared with $1.72 in the previous year; the high estimate is $1.92 and the low is $1.75. The mean target for the share price is $46.71, and the median target 49.00, compared with $40 recently and a 52-week range of $32.42-$50.85. Market cap is about $670 million.

Red Robin – with its array of burgers made from fresh ingredients, its “bottomless fries,” unlimited refills and full bar as well as imaginative offerings such as a Whiskey River BBQ Burger and freckled lemonade – likes to think of itself as somewhat apart from the crowded burger field. A notch above the fast-food crowd, it still sets the time standards for 37 minutes for lunch and 42 minutes for dinner. Customers run an average tab of $10.84.

Red Robin feels it pairs well with specialty retail shops. Its appeal to teens, tweens and high-income women keeps it in demand with developers. Compared with other casualty dining chains, the company has room to expand. Its 370 units trail the 1,870 for Applebee’s International Inc. (Nasdaq: APPB) and 1,085 for Chili’s Grill & Bar, to name two prominent competitors. The company says it can envision 1,000 Red Robins around the country. About 60% of the units are owned and operated by the company, and the rest by franchisees. The company acquired 13 franchise restaurants last year and earlier this year announced it would acquire a further 17. It’s not signing on any new franchisees, though current franchise owners will be adding 15 to 17 units annually in the next couple of years.

The new CEO, Mullen, at 63, has some 30 years’ experience in the restaurant business, but has come under some criticism of his own. It seems flying is a chronic weakness of these Red Robin CEOs, and Mullen was taken to task recently by a local columnist for commuting with his family via charter jet from his home in Phoenix to his job at Red Robin (though Mullen’s jet time, unlike Snyder’s, is fully authorized).

He has also gotten some flack for moonlighting as the independent chairman of Janus Funds in Denver – a time-consuming job that is rewarded with a compensation approaching $500,000. Mullen’s staff tells critics that he is a hard worker. He is certainly in demand.

Some commentators want to see another quarter or two of earnings growth before jumping in, so cautious investors might want to hold off. Others are more bullish. A parting thought on Red Robin might be: It’s the early bird that catches the worm.

RRGB 1-yr chart


Disclosure: none