Red Robin Gourmet Burgers, Inc. RRGB will likely benefit from its off-premise business model, menu innovation and Donatos expansion. Also, focus on technological enhancements bodes well. However, pandemic-induced supply chain disruptions and inflationary pressures are a concern.
Let’s discuss the factors highlighting why investors should retain the stock for the time being.
Catalysts Driving Growth
Red Robin continues to benefit from its robust off-premise sales. During the first quarter of fiscal 2022, the company delivered the eighth consecutive quarter of off-premises sales dollars at more than double pre-pandemic levels. As a percentage of total off-premise sales, the company reported solid contributions from third-party delivery (55%) to-go (36.7%), catering (4.3%) and Red Robin Delivery (4%). Going forward, the company intends to maintain the momentum by focusing on modifications with respect to its processes, staffing, floor plans and technology. Moreover, it is initiating an expanded floor plan space to support its off-premises and catering orders without impacting the dine-in business. Notably, the initiatives pave a path for effective and accurate executions.
Red Robin’s efforts to improve sales and regain market share via efficient menu innovation, focus on increasing service speed and effective marketing strategy bode well. Despite of scaling down its menu (from pre-pandemic levels), it reported solid performance of Cheesy Bacon Fondue Burger and Scorpion Gourmet Burger. Also, it has been witnessing positive customer feedback related to its limited time offer (LTO) menu items. During the fiscal first quarter, the company reported solid performance with respect to its LTO’s comprising of cheese levers (featuring Cheesy Bacon Fondue Burger and Mozzarella Cheese Sticks) and the Whiskey River Backyard barbecue menu lineup (including Smokehouse Brisket Burger and Tequila Sunset Cocktail). The company intends to focus on creative recipes to drive higher checks and margins.
Red Robin still considers Donatos as a key growth driver. During the first quarter of fiscal 2022, the company initiated Donatos at approximately 200 restaurants. During the quarter, Donatos generated sales worth $7 million. The company stated that for restaurants with Donatos, comparable restaurant revenue increased by more than 5% over restaurants that did not yet have Donatos. Also, guest checks that included Donatos Pizza were more than $10 (on average) compared with those that did not include pizza. The company anticipates rolling out Donatos to approximately 50 restaurants in 2022 and 150 restaurants in 2023. Red Robin is optimistic about the success of this partnership. It anticipates annual pizza sales to be more than $60 million and profitability to be above $25 million by 2024.
The company continues to focus on its digital platform to drive growth. During the first quarter of fiscal 2022, the company emphasized on enhancements regarding integration and a seamless digital ecosystem. To this end, the company launched a new website experience with user-friendly enhancements to presentation, navigation and online ordering. It reported increased order conversion on account of the same. Backed by solid customer engagement, the company remains optimistic regarding its digital ecosystem and anticipates it to drive incremental frequency, traffic and guest checks. The company stated that enhancements related to geofencing (which will inform restaurants when the guest is near for pickup) and additional payment options (such as Apple Pay and Google Pay) are in the pipeline to support the same.
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Shares of Red Robin have plunged 52.6% in the past three months compared with the industry’s 1.8% fall. The dismal performance was primarily caused by the coronavirus crisis. Notably, pandemic-induced staffing challenges and supply chain disruptions had taken an enormous toll on the company. Although most dining services are open, traffic is still low compared with pre-pandemic levels. Going forward, the company intends to monitor the situation regularly to gauge the impacts of COVID-19.
The company has been persistently shouldering increased expenses, which are denting margins. During the fiscal first quarter, the company cited concerns about restaurant labor cost inflation. During the quarter, labor costs as a percentage of restaurant revenue increased 130 basis points year over year to 36.3%. The increase was primarily driven by higher labor inflation and staffing costs, partially offset by sales leverage. In 2022, the company anticipates commodity and restaurant labor cost inflation to be in the mid-to-high single digit.
Zacks Rank & Key Picks
Red Robin currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
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The Zacks Consensus Estimate for Dollar Tree’s 2022 sales and earnings per share (EPS) suggests growth of 6.7% and 40.5%, respectively, from the year-ago period’s levels.
BBQ Holdings carries a Zacks Rank #2 (Buy). BBQ Holdings has a long-term earnings growth of 14%. Shares of the company have decreased 14.8% in the past year.
The Zacks Consensus Estimate for BBQ Holdings’ 2022 sales and EPS suggests growth of 46.1% and 67.6%, respectively, from the year-ago period’s levels.
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The Zacks Consensus Estimate for Arcos Dorados’ 2022 sales and EPS suggests growth of 16.6% and 83.3%, respectively, from the year-ago period’s levels.
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