THE HEDGEYE EDGE
“I'm here to tell you casual dining peaked and it’s not coming back.”
–CEO & President Denny Marie Post, Red Robin Gourmet Burgers, Inc.
This was a bold statement coming from a CEO of a Casual Dining restaurant company. Good or bad I (Howard Penney) have never been one to mince words in my research process and I appreciate those who do the same in their respective jobs. Going into the RRGB analyst day, I had enormous respect for the bold moves the CEO of RRGB had taken so far. In a very short period of time she has transformed a sleepy, small-cap restaurant company into a vibrant, forward-thinking restaurant company; and the analyst day seemed to take the transformation one step further.
As we see it, with those words she has effectively laid down the gauntlet to her larger Casual Dining competitors. She used a Marcel Proust quote from the late 1800's to point out how RRGB has a competitive advantage over the larger Casual Dining companies with a system of 1,800 stores: "My destination is no longer a place; it's rather a new way of seeing." We love this play on words!
The spin on the forward-thinking mentality turned into “the optionality” of the RRGB business model as she said, “What’s under consideration for a new way of seeing just within the existing 4-walls. Again, so at this point, I'm very glad we have 550 of them in total as a system and not 1,800.”
With the Casual Dining segment seeing the most disruptive transformation in history via delivery and carry-out (off-premise), anything less than “forward thinking” will render many stores unprofitable. With the Applebee’s system having ~2,000 stores and Chili’s at 1,600, what is the future of all that capacity? What does this mean for Outback U.S. which currently has 742 stores? Does BLMN have a competitive advantage over others in the space? (Not likely!) Where does that put Olive Garden which currently has 843 units? (Good thing pasta travels well in a car!)
With the future of Casual Dining in limbo, who is best prepared to handle the disruption? The RRGB management team asked some very important questions during their presentation:
- Can you have a flexible service model and customize the guest experience?
- What roles will technology play in that service model?
- Can it be frictionless?
- What is the future role of full-service?
- What is the future of aggregators?
- How big is off-premise?
So many unanswered questions, but our bearish bias toward most casual dining companies is still warranted. That being said, can RRGB truly become the first Omni-Casual restaurant company? What is the real optionality of the RRGB business model? That is yet to be determined, but the fact that management is talking about it openly and not hiding is comforting as a LONG.
While we wait for the transformation to an Omni-Casual company, in the short run, we still like the LONG set up for RRGB. With each presentation yesterday, I was reminded at how poorly run RRGB was under the previous management team. Yesterday’s news is today’s opportunity!
If it were not for the long tenure of the many key regional and local store managers, this brand would be in far worse shape. As we see it, the key tenants of a LONG thesis are very much in place:
- The development strategy, under Chief Development Officer Les L. Lehner, is now very rational and focused on growing strategically and improving ROIIC.
- Operationally, there is significant low hanging fruit, and Carin Stutz is the right COO to instill the right operational mentality.
- Putting it all together, CFO, Guy Constant, laid out in his presentation the 5-year growth model, which seems very manageable.
I will leave it to others to report on the news of the 124-page slide deck, but we have included some of the important pages below. In summary, we are seeing the transformation of a company in the early stages of fixing operations with tremendous upside potential!
(Source: Company Analyst & Investor Day Presentation, 5-23-2017)
(Source: Company Analyst & Investor Day Presentation, 5-23-2017)
(Source: Company Analyst & Investor Day Presentation, 5-23-2017)
ONE-YEAR TRAILING CHART
