Earnings Scorecard: Red Robin (RRGB)

Red Robin Gourmet Burgers Inc. (RRGB), a casual dining restaurant chain, posted lower-than-expected second quarter 2010 results on August 12, 2010. The disappointing results were due to the sales decline experienced in the company’s key market. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock are covered in depth below.

Earnings Report Review

During the second quarter, Red Robin reported earnings of 28 cents per share, missing the Zacks Consensus Estimate of 37 cents and the year-ago quarter’s earnings of 41 cents.

The reported quarter results were hurt as 25.0% of Red Robin restaurants are located in California and Arizona, which are facing the brunt of the economic slowdown. These markets have a high unemployment rate; thus traffic has sagged as budget-constrained consumers are trading down to lower-priced dining options.

Total revenue in the quarter rose slightly 0.1% year over year to $201.0 million, but was below the Zacks Consensus Estimate of $207.0 million. Red Robin’s total revenue comprises restaurant sales (flat from the year ago quarter to $198.0 million), franchise royalties and fees (up 1.4% to $3.1 million) and other revenues (up more than 100.0% to $0.2 million).

Comparable restaurant sales dropped 1.2% for company-owned restaurants in the quarter due to a 2.1% decline in the average guest check, partially offset by a 0.9% increase in guest counts. Comparable sales for franchise restaurants in the U.S. fell 2.0% year over year, while the same for Canada inched up 0.8% year over year.

Red Robin reduced its revenue forecast for fiscal 2010 in the range of $866 million to $873 million from its previous expectation of $872 million to $880 million. The company also cut its 2010 earnings estimates to the range of 90 cents to $1.10 per share from its prior view of $1.10 to $1.30 per share. The company expects comparable restaurant sales in a range of down 0.5% to up 0.5% in fiscal 2010

(Read our full coverage on this earnings report: Red Robin Misses, Trims Outlook)

Earnings Estimate Revisions: Overview

Following the second quarter earnings release, the Zacks Consensus Estimate for the company has decreased; with the analysts covering the stock having a negative view on the stock. The company has also reduced its fiscal 2010 outlook for the second consecutive quarter. The earnings estimate details are discussed below.

Agreement of Estimate Revisions

From the table below, a negative inclination can be witnessed among the analysts. In the absence of any near-term fundamental catalyst, the analysts remained cautious on Red Robin, with no positive changes. In the last seven days, out of 6 analysts, 4 have reduced their estimates for fiscal 2010 and for fiscal 2011, 4 out of 11 analysts covering the stock have decreased their estimates.

Negative revisions by the analysts are based on disappointing second quarter results and weaker sales outlook, given the conservative comparable restaurant sales assumption. The analysts also expect restaurant-level margin to decline based on a higher food cost, particularly of cheese, and rising labor cost.

Magnitude of Estimate Revisions

The table below indicates that earnings estimates have decreased by 10 cents to 96 cents for fiscal year 2010 and by 3 cents to $1.18 for fiscal 2011, over the last 7 days. The magnitude of estimate revisions indicates that the analysts were disappointed by management’s outlook and expect earnings to remain under pressure as the company’s advertising campaign is not able to drive traffic as per expectations.

Our Recommendation

Red Robin continues to emphasize more on brand awareness through a national advertising campaign and focus on cost control initiatives in fiscal 2010. Moreover, to enhance the perception of value and drive traffic, Red Robin is remodeling its restaurants and plans to open 11 restaurants in fiscal year 2010. We are also excited about the appointment of a new CEO Stephen Carley, as he will be able to bring fresh ideas and new dimension to the company based on its rich experience.

However, we remain skeptical about the company’s near-term prospects due to an unfavorable consumer spending pattern and increased competition from other casual dining operators. In addition, nearly 50.0% of total restaurants are located in areas that have been hard hit by the recent downturn.

Accordingly, we keep our conservative view on Red Robin shares and have a Zacks Rank of #4 (short-term Sell recommendation) on the shares. Our long-term recommendation for the stock remains in the middle of the road at Neutral.

Apart from Red Robin, another stock that promises long-term growth opportunities is Buffalo Wild Wings Inc. (BWLD), in which we currently retains a Zacks #1 Rank; which translates into a short-term Strong Buy recommendation, as Buffalo Wild Wings’ second quarter earnings of 50 cents topped the Zacks Consensus Estimate of 42 cents. Boasting a long track record of success, a viable business strategy and a debt-free balance sheet, Buffalo Wild Wings offers investors one of the strongest growth stories in the industry.

BUFFALO WLD WNG (BWLD): Free Stock Analysis Report

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