2023-11-05 12:07:18 ET
Summary
- Red Robins Gourmet Burgers beats EPS and revenue expectations for the third consecutive quarter.
- The stock has lost 88.04% in value over the past ten years and financials are weaker than in FY2017.
- Despite investing in business improvements and cutting costs, significant financial recovery remains elusive.
The Red Robins Gourmet Burgers, Inc. (RRGB) released its latest Q3 2023, beating EPS and revenue expectations for the third consecutive quarter. Although there's been a notable improvement in EPS compared to a year ago, the company, unfortunately, still grapples with persistent financial challenges and is yet to exhibit clear drivers for growth or recovery. Over the past decade, the stock has proven unrewarding for investors, witnessing a significant loss of 88.04% in value.
Ten year stock trend ( SeekingAlpha.com )
Although we've seen an improvement in the company's revenue, the gross profit margin has taken a hit to increase demand. The firm is contending with high debt interest due to variable rate agreements and a decline in levered free cash flow. While management is actively cutting costs and reducing debt, a notable recovery is yet to be observed. As such, I suggest adopting a 'wait and see' approach until we witness an improvement in the company's overall performance.
Company overview
The Red Robins Gourmet Burgers is renowned for its chain of restaurants and franchises spread across North America. Although once a beloved brand, it has faced prolonged financial challenges. Since 2019, under the leadership of new CEO Gerard Hart , the company has initiated a turnaround strategy . This approach involves substantial investments in its food, service, and marketing while diligently trimming costs. Their focus lies in enhancing the quality of offerings and ensuring an exceptional dining experience. Presently, the company operates 417 restaurants and boasts 91 franchised full-service restaurants.
Annual revenue and restaurant count (Investor presentation 2023)
So far this year, the company has allocated $16 million towards enhancing its food quality and staff capabilities, with a future plan to invest around $8 million per quarter, primarily directed towards labour. A key cost-saving measure has been the shift to using fresh chicken, which is expected to yield approximately $12 million in savings this year. To entice customers, the company introduced a discounted $10 meal deal, which notably boosted footfall but had an adverse effect on profits. Primarily, the company derives its revenue from its restaurants, mainly from food and beverage sales.
Revenue by type of good or services for Q3 2023 versus Q3 2022 ( SeekingAlpha.com )
The business encounters seasonal fluctuations, typically experiencing higher sales in most restaurants during the summer and winter holiday seasons, with a decline during the fall season. Consequently, our quarterly operating results may exhibit significant variations.
Customer reveiws ( Doordash.com )
The brand is well-perceived, according to reviews on Doordash.com . Furthermore, the company anticipates enhancing its year-on-year top-line revenue and EPS. The projected outlook for Fiscal 2023 indicates an Adjusted EBITDA of $72.5 to $77.5 million and a minimum Total Revenue of $1.3 billion. Nevertheless, evident challenges persist for the company, particularly concerning high costs and debt.
Financial highlights
In Q3 2023, The Red Robins Gourmet Burgers disclosed a Non-GAAP EPS of -$0.79, surpassing by $0.06. The reported revenue stood at $277.6 million, demonstrating a -3.2% year-on-year change, although surpassing expectations by $1.95 million. An examination of the company's financials across the years reveals that both total revenue and gross profit have dipped since FY2017. However, over the last three years, there has been an upward trend in revenue and gross profit, indicating promising results from the turnaround strategy.
Annual revenue and gross profit ( SeekingAlpha.com )
Upon reviewing the annual EPS, it's evident that the company has posted negative results over the last three financial years. While there's an anticipation of better results in FY2023, it's concerning to note that EPS has declined in the last two financial years.
Annual EPS results ( SeekingAlpha.com )
We've observed a decline in net income over the past five years, even though there's a slight improvement when examining the TTM net income with a negative $51.1 million. Nevertheless, it's evident that the company is still not in a financially robust position.
Annual net income ( SeekingAlpha.com )
The TTM Levered Free Cash Flow appears positive; yet, over the last three years, there's been a cash burn due to business investments as part of the turnaround plan and paying off debts. Unless the company resolves its cost challenges, it may encounter cash flow issues, posing difficulties in rewarding investors, settling debts, and reinvesting in the business.
Annual levered free cash flow ( SeekingAlpha.com )
A significant concern for the company revolves around its debt accumulation and the subsequent rise in interest expenses. From 2022, the company established a new credit agreement, involving $4.8 million in deferred financing charges and $6.1 million in original issuance discounts. The five-year credit agreement of $225.0 million comprises a $25.0 million revolving line of credit and a $200.0 million term loan, maturing on March 4, 2027.
Borrowings ( Sec.gov )
Valuation
The Red Robins Gourmet Burgers' current stock price is lower than the average price target of $15.50 set by Wall Street analysts, marking it as a 3.66 Buy rating. However, it's important to note that this stock isn't widely covered by analysts. While it hasn't performed as well as the S&P index over the past three quarters, it did give investors a 42.92% return in the last year. Despite this positive return, it has yet to produce a positive earnings report, receiving a B- valuation grade from Seeking Alpha's Quant rating. Additionally, there hasn't been significant growth in the company observed over the last three years. The gross profit margin of the company remains low, standing at 14.92%.
Quant rating ( SeekingAlpha.com )
When we stack The Red Robins Gourmet Burgers against its comparable restaurant peers such as Fat Brands ( FAT ), Noodles & Company ( NDLS ), and Nathan's Famous ( NATH ), a concerning trend emerges. The company has exhibited the lowest year-over-year revenue growth at 2.01% and a negative five-year CAGR in revenue at -1.36%. What's more, it maintains the least favourable gross profit margin, resting at 14.92%. These figures raise concerns, particularly within the competitive restaurant industry, where any further margin cuts could pose risks for the company.
Growth versus peers ( SeekingAlpha.com ) Profitability versus peers ( SeekingAlpha.com )
Risks
Although the company has shown a willingness to adapt to changing circumstances, it has yet to make significant financial progress. While there has been a slight improvement in revenue over the past year, reduced gross profit, ongoing losses, and declining cash flow present risks if sales do not increase. Last year's decision to offer discounted $10 meals helped to increase foot traffic but had a negative impact on profit margins, which is reflected in this year's results. This short-term decline in profits may discourage potential investors despite the potential long-term benefits of the strategy. Additionally, the company needs to address the decline in off-premise sales, particularly in catering services, which is a pressing area for improvement.
Final thoughts
Since 2019, Red Robins Gourmet Burgers has dedicated itself to a financial and culinary overhaul, spotlighting improved ingredients designed to boost quality while trimming costs. Yet, hurdles persist. The company's financial landscape faces ongoing challenges, especially with discounted meal strategies that improved foot traffic but have dented gross profits. Coupled with persistent high-interest expenses and debts, potential investors are advised to take a measured approach. With a disheartening 88.04% loss in value over ten years, a cautious stance is prudent, seeking further evidence of a robust turnaround strategy.
For further details see:
Red Robin Gourmet Burgers: Serving Up Financial Health Challenges