Red Robin - 3 Initiatives, 'Bottomless' Opportunities

| About: Red Robin (RRGB)

Summary

Focus on revenue, costs, and capital deployment could double EBITDA by 2020.

Opening approximately 25 stores in 2016.

Stock is at low levels with growth potential.

Background:

Red Robin (NASDAQ:RRGB) is associated with quality burgers at affordable prices and is accompanied by their well-known bottomless steak fries. The company offers burgers from the following proteins such as beef, chicken, and fish. The company's most well-known burgers include the Tavern Burger's, Red Robin's Finest, along with a wide selection of Gourmet burgers that can satisfy the appetite of nearly any hunger stomach.

Initiatives:

Red Robin in their fourth quarter 2015 conference call stated their plan to double EBITDA by 2020. This plan is based on three initiatives that will drive the growth that include: revenue growth, expense management, and efficient capital deployment. I will touch on each of these three initiatives and what the company is going to do to address each. I believe it is a very interesting time for the company as technology is used to increase efficiencies and customer experience.

In terms of revenue, increased efficiency of guest ticket times and average seating efficiency will drive revenue. Currently, the guest ticket time is too high at an average of 55 minutes and management has stated the goal is to bring the guest ticket times down to 45 minutes. Currently, the average seating efficiency is at 70 percent and management has stated a goal of having the number at 80 percent. Essentially, the number of guests needed to properly match the size of the table. These two initiatives will be accomplished with the Kitchen Display System (KDS) and the dynamic table management software, the front-end of the restaurant and the kitchen can be better linked. This results in approximately a $50 million uptick in revenue on an annual basis. Additionally, as the KDS system is rolled out, the timing of orders will be better synced and allow for orders to come out at once and improve the quality of the food (think of all the food being warm). Revenue will be also aided by a push to increase the to-go side of the business. Currently, Red Robin is lagging the industry by 800 basis points and could add $36 million to EBITDA incrementally from 2017-2020 by closing the industry gap. Red Robin is also focusing on improving the alcohol and beverage mix that is lagging the industry by 600 basis points. Per the company, an increase of 1 percent adds $6 million in incremental revenue.

In terms of expenses, the company currently is using a manual system that is completed by the general managers of the store and is time intensive and costly. The company will be implementing a new supply chain management system. The result of the new system will be freeing up $80,000 per year for each restaurant general manager, lower waste, and lower inventory. The new system will add approximately 30 basis points in margin starting in 2017. In terms of the use of technology, the data that will be generated by the inventory management system could allow the company to gain new insights into the supply needs of each store.

In terms of capital deployment, in 2016 the company-owned stores should complete the restaurant brand transformation remodeling and the franchise-owned stores completing theirs shortly after. Capital will also be deployed to support the opening of the 25-30 new Red Robins and Burger Works.

Risks:

Positioning: As with any retail company, risks associated with proper market research before opening a new location is a risk since the store can underperform and have to be relocated. In 2016, Red Robin plans to close two locations and relocate four. There is some risk from this but no details were stated behind the closing and relocations.

Commodities:

The major input for the company is beef and in the last year the company has been receiving the benefit of dropping live cattle prices as seen in the chart below. If beef prices rise or there is a disease or weather related incident that affects the supply of cattle then prices could rise and the company's margins could be affected.

Source: NASDAQ

Red Robin has expanded their locations to Canada and currently the stores are not performing as well due to low oil prices. Management stated that 5 of the 18 Canadian locations are in Edmonton, Alberta, which currently is feeling a lot of pain with layoffs and a general unfavorable economic environment due to the reliance on oil. For more information on the oil (NYSEARCA:USO) market see here and here.

Stock Performance/Thesis:

It is evident to see the stock of Red Robin has been crushed over the past year. Each investor should do their due diligence to determine if it is the correct time to enter the position. If the company can successfully complete the above stated initiatives, then the company will double their EBITDA by 2020. In that scenario, the stock should perform nicely and could possibly provide high single-digit to low double-digit returns per year.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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