RRGB is up 20% since reporting 4Q09 results, which to remind, the company missed EPS expectations, reporting $0.10 versus the street’s $0.15 estimate. Same-store sales came in at -10.5%, better than the street’s -11.1% estimate, but -10.5% is not anything to get excited about and implied a continued sequential decline in 2-year average trends.
Yes, the entire FSR group has traded higher and RRGB’s short interest is high at 18.2% relative to the FSR group’s average of 14.4%.
Investors seem to be pricing in the fact that the new advertising will definitely work…assuming the company will achieve positive comps in 2010 (guidance of +2.4% to 3.4%) and will get the necessary return on the significant increase in investment behind advertising (doubling total marketing spending in 2010 to $31M from $15.2M in 2009 and increasing television spending to $16M-$17M from $2.3M).
Or are investors just really happy with the governance changes brought on by the Clinton Group? RRGB announced that it signed a standstill agreement with Clinton Group and Spotlight Advisors on March 4th.
The fact that RRGB is trading at 5.9x NTM EV/EBITDA relative to the FSR group’s average 7.5x multiple signals that investor confidence is not as high as recent stock performance implies. More tales of the tape…
Notes from the presentation:
Broad consumer appeal and an exceptional experience
Menu has not changed dramatically since the restaurant was first started
Unique brand positioning
- Attract teens
- High income women
- Between casual and fast casual
- Equal distribution between lunch and dinner (49% lunch)
- 37 min lunch, 42 min dinner
Menu is heavily influenced by children
Strong brand loyalty
- 55% at 75k and above category, high income
California, Arizona concentration
Working on brand awareness in new markets such as East coast and Mid West
Developing 11-13 new company restaurants
- Proceeds from operating cash flow
- Using FCF to pay down debt
Using TV advertising
- Brand awareness scores improved significantly
Did not use TV in 2009, used coupons, digital, and direct marketing
Guest count in 2009 declined
- Did market research and found that brand awareness was lacking
- Needed to get back on TV
- Need to offer value
- Stress variety in menu, not just about burgers
2010 marketing
- Brand awareness
- Value
- Variety
4Q09 campaign was tested in 10 markets
- SSS was lifted 900 bps during three week period in those markets
Spring, summer, and fall campaigns
- Spring
- Burger and Salad at discounted prices
4Q LTO mix was 10%
- 90% still offering off the menu
- 300 bps price mix hit from promotional items
- Other items still remain on the menu
Bounce back coupon to bring guests back
Increasing gift card program
New units:
NRO AUVs are 80% of comps…not dropping further than existing restaurants
- 500 bps improvement in margin from 2007 class to 2009 class
- Maturity curve is faster for new units
Reduction in construction cost
- 2006 = 2.5m
- 2010 = <2m
Financial Review:
Sales mix:
80% food, 20% beverage.
14% non alcohol. Non alcohol is just as profitable
60% of sales are from burgers
Commodity costs:
Not contracted for beef or cheese
Commodity basket is expected to deflate 2.5% pre promotional item impact
Despite top-line pressure
- Operating cash flow only down 1%
- Using it to pay down debt
FY10 Guidance
- Positive SSS of 2.4% to 3.4%
- Breakeven of media +50-100 bps of profit
- $2.30 of revenue lift for each dollar of spend
- 887 to 895m in revenue
- 11-13 units
- One is open, four being constructed, rest in the back end of the year
- Franchise partners building 4/5 units, 1 under development
- G&A flat year over year excl bonus expense
- Incremental marketing spend of 14-15m dollars in 2010 (TV)
- 16-17m in total
- Tax rate 19%
- Capex of 35-40m
- 22-26 from new unit development (2m per build)
- 3m in corporate infrastructure
- Remainder in maintenance
- Leverage max ratio is 2.5x, at 2.13x 2009
- Expecting to maintain safe margin
Howard Penney
Managing Director
