Red Robin is setting up to beat consensus on the top and bottom line in our model.
Red Robin appointed a new Chief Executive Officer in Steve Carley in late 2010 and, since his arrival, we have become incrementally move constructive on the name. Management recently unveiled a new strategy, called Project RED, which focuses on Revenue Growth, Expense Management and Deployment of Capital. While revenue growth is a constant goal of all restaurant teams and a sound bite in every earnings call, the extent of the expense cuts management is proposing is impressive. Below I discuss the revenue and expenses outlook in more detail.
Same-restaurant sales are trending more positively over the last few quarters and, we believe, the company’s Project RED will enable it to take share going forward. Our estimate for same-restaurant sales is 2% for the second quarter. This implies an acceleration in two-year average trends of 60 basis points from the first quarter.
The company’s growth profile is also attractive from an investment standpoint. New unit growth is accelerating by 25% to 10 new openings in 2011 and average weekly sales for the non-comparable store base continually exceeds those of the comparable store base. The company opened only two stores in the first half of 2011.
During the last earnings call, management highlighted the new loyalty program, Red Loyalty, as a key component of the top-line strategy going forward. The loyalty card program not only allows the company to retain customers but also enables management to learn more about the customer base and target future sales strategies more effectively.
The company took a 1.5% price increase in April which will help margins as beef costs remain elevated.
Management is targeting 200 different cost savings through the end of 2012 which, it is hoped, will yield $16-18 million in annualized cost savings. We find the meticulous manner in which management is pursuing savings, big and small, to be encouraging given our preference for expense-cutting (EAT) turnarounds rather than spending to turn around a company (PFCB). Everything from lowering food waste to renegotiating trash contracts is being focused on.
Commodity costs remain a concern for the company given its exposure to beef. In May management said, “Ground beef could be higher by as much as 20% year-over-year, which has a meaningful negative impact to our margins”. Looking at the price of beef since that earnings call on May 19th, it is up 4% but prices have been volatile as weather impacts, changing global consumption patterns and slower economic growth impact commodity prices. Commodity guidance given in May was for 5-6% inflation over the remainder of the year and we believe that it’s unlikely any downside revision will be made to that range.
In terms of expectations going forward, management is guiding to 80-100 basis points of margin expansion due to labor efficiencies.
As the quadrant chart below illustrates, RRGB’s operating performance has improved markedly over the past couple of quarters and, given easy compares for the next few quarters and the company’s focus on costs savings, we expect the next quarter to be strong.
Sentiment has improved in this name and estimates have risen but we still think that the 2Q11 consensus EPS number of $0.36 is $0.05 or $0.06 too low. Given that 17% of ratings on the stock are “Sell”, there could be still additional sentiment shifts to the positive side coming soon.
Short interest, at 15.7%, is a bullish data point in that any upside surprise in EPS could prompt short covering and a nice pop in the stock price. With the Knapp Track casual dining sales index having trended positively through the quarter and the company doing all it can to target controllable costs, we see a strong quarter from RRGB as a distinct possibility.