Casual dining chain Red Robin (click ticker for report: ) reported strong second quarter results last week. Revenue jumped 6.5% year-over-year to $238 million, just a touch shy of consensus estimates. Conversely, earnings per share surged 48% year-over-year to $0.77, easily exceeding consensus expectations.
Image Source: RRGB 2Q FY2013 Slides
The most positive news from Red Robin, in our view, was the robust same-store sales growth rate of 4.3%. While the firm was lapping just a 0.8% increase in the year prior period, the increase was a nice jump sequentially, underscoring the effectiveness of the company’s brand transformation. Traffic declined 0.7% year-over-year, but that was far better than the 3.1% decline experienced by the average industry competitor. The combination of a fresh advertising campaign and lower average checks than peers has helped boost overall sales, in our view.
Red Robin is seeing fantastic growth in profitability as restaurant level operating margins surged 220 basis points year-over-year to 23.3%. The firm benefitted from input costs falling modestly (down 70 basis points year-over-year), strong fixed cost leveraging (down 100 basis points) and lower labor costs (down 50 basis points). We think the firm is well-positioned for incremental margin expansion going forward, especially if we see accelerating macroeconomic conditions in the US and a continued mix shift towards higher-margin items.
Interestingly, Red Robin’s strong results run counter to the trends we’ve seen in the quick-serve restaurant (QSR) space. Same-store sales at industry goliath McDonald’s (click ticker for report: ) were just 1% higher than a year ago in the United States. Same-store sales at Wendy’s (click ticker for report: ) were an anemic 0.4% higher than the year prior period, and Burger King’s (BKW) same-store sales declined 0.5% year-over-year in North America during its second quarter. We think the poor results in the QSR space suggest Red Robin is stealing some traffic from the lower end. Instead of general contractionary action, consumers are simply allocating dollars in different ways.
Image Source: RRGB 2Q FY2013 Slides
Looking ahead, management maintained most of its guidance, but did slightly raise its G&A cost outlook as the firm continues to open additional restaurants. Same-store sales growth expectations of 3% for 2013 could prove to be conservative, as the firm guided to an increase of only 2.5%-3% during the second quarter (and beat those expectations meaningfully).
Valuentum’s Take
Red Robin is doing a wonderful job capturing consumer dollars in a still-modest macro environment. We believe continued growth in confidence and improving economic fundamentals will likely provide some upside to management’s restaurant level operating margin target. Though recent performance has been strong, we won’t be chasing shares in our Best Ideas Newsletter portfolio at current levels.
Related Companies: Arcos Dorados (ARCO), Jack in the Box (JACK), Sonic (SONC)