Red Robin Gourmet Burger (RRGB) is on the Hedgeye Restaurants Best Ideas list as a LONG.
HEDGEYE OPINION
Last we heard from the RRGB management team, they were presenting at the ICR conference in early January, and the Company had released preliminary sales results for 4Q16. The company estimated that total revenues would be ~$290.8 million versus consensus estimates of $299.6 million at the time (now consensus sits at $290.8 million); comparable restaurant sales are expected to fall by -4.5% versus consensus expectations of -2.7% (consensus now sits at -4.5%); and comparable guest count is expected to decrease by -2.9% versus consensus expectations of -1.8% (consensus stands at -2.9%). It’s no secret that the current casual dining landscape continues to falter and this is taking a toll on the gourmet burger chain. However, RRGB took heed, as they announced full scale changes to the business on their 3Q16 earnings call, with the hopes of reenergizing consumer sentiment. Changes included reducing unit growth from 30 units in both 2017 and 2018, to only 16 in 2017 and even less than that in 2018. Such a change would allow management to focus on current operations, which includes improving efficiency, significantly reducing ticket times, off-premise operations (carry-out, deliver, and catering), and optimizing four-wall profitability before proceeding with any aggressive unit growth initiatives.
With same store sales coming in at -4.3% (vs preliminary -4.5%), EBITDA of $30.2M vs FactSet $28.4M, and revenue of $291.5M vs prior guidance $290.8M, RRGB has fared better than its peers in the casual dining space. Initiatives are still in the early stages, but the Company is making good on its promise to bring service to where the customer wants it. Despite it being too soon to do a deep dive into their off-premise services, management disclosed that they have expanded on their relationship with DoorDash, and that the size of the orders they are seeing are larger than those seen in the restaurants. Additionally, the Company has a limited partnership with Amazon Prime, bringing their total off-premise locations to 83 or 84 unique restaurants, and still actively growing. Couple this with limited unit growth, continued investments in technology implementations, and their focus on high level execution within the four walls, and it is clear that RRGB is doing all the right things. With that being said, we are still comfortably LONG RRGB.
NOTABLE COMPANY THOUGHTS
“The changes we made to streamline the team and focus on value, speed and service in the back half of last year have strengthened our business and resulted in significantly improved guest service scores… We began this year piloting several off-premise growth initiatives. We will roll out the most promising programs as quickly as possible to support year-over-year earnings growth in the back half of 2017, heavily weighted to the fourth quarter as these programs come together” (Denny Marie Post, CEO).
HEDGEYE – Top of mind for management on their 3Q16 and ICR presentations were improving the customer experience first and foremost, and it appears they have done just that; next will be to see if traffic trends show signs of improvement going forward.
“Restaurant labor costs are projected to increase 25 basis points to 75 basis points driven by ongoing minimum wage increases and more highly penetrated markets, higher benefit costs and restaurant manager bonuses planned at target levels, this will be offset somewhat by the effective pricing and improvements in labor productivity,” (Guy J. Constant, CFO).
HEDGEYE – According to management, they expect to see 5-6% wage inflation for FY17. Their implementation of KDS will be tasked with continuing to help the brand offset such wage inflation by optimizing labor scheduling and assisting in cost saving costs in that regard.
“Cost of sales improved 90 basis points to 22.8%, driven primarily by deflation in ground beef costs…as of the end of 2016, approximately 60% of our 2017 food cost spend was contracted,” (Guy J. Constant, CFO)
HEDGEYE – Beef remains deflationary, and with the majority of their food commodity basket already contracted for FY17, RRGB has somewhat hedged its bets, which will work in their favor going forward.
“And we we've talked about how our company-franchise mix is probably skewed a little more to a company than an average of the spaces. So, we think that presents an opportunity. And of course just overall improving our returns, which really encompasses all of those things, we just talked about representing represents the opportunities opportunity as well.”
HEDGEYE – Currently, RRGB functions as a ~84% company-owned model. Management is hinting that they may consider moving to a franchised-heavy model as a way to improve their overall returns. Such a model would allow for less volatility from the Company’s point-of-view, and would increase free cash flow down the road.
4Q16 COMPS:
- SSS: -4.3% vs preliminary -4.5% and CM -4.5% (driven by a -2.9% decrease in guest counts and a -1.4 decrease in average guest check)
- EPS $0.35 vs FactSet $0.29 (and compared to $0.84 in the same period a year-ago)
- Total Revenue: $291.5M vs prior guidance $290.8 ( and FactSet $290.8M)
- Adjusted EBITDA $30.2M vs FactSet $26.4M
- The Company repurchased $14.6M of its common stock.
FY16 Highlights:
- Comparable restaurant revenue decreased by -3.3% vs CM -3.4%
- EPS: $2.78 vs CM $2.72 (compared to $3.32 in FY15)
- The Company repurchased $46.1M of its common stock
FY Guidance (Dec 2017):
- EPS $2.70 - $3.00 vs FactSet $2.88
- The Company expects total revenues to grow between 6% and 8%, comprising SSS growth of +0.5% to +1.5% and increased operating weeks associated with locations opened in 2016 and 2017, as well as the 53rd week in 2017
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
