Red Robin Gourmet Burgers, Inc. (NASDAQ:RRGB) stock surged on Tuesday, rising as much as 15% in early trading after demolishing earnings expectations. RRGB stock, following today’s report, is now on a five-year, 220% tear.
And who can blame investors for bidding shares higher? RRGB earnings were expected to come in at 88 cents per share, but instead topped those estimates by a full 25%, coming in at $1.10 instead. Net income rose 39% year-over-year.
As if that weren’t enough, revenue also rose 16% from the same quarter a year ago, coming in at $394.9 million against expectations of $394.1 million. At the time this article was written, RRGB stock was being traded heavily, with volume more than six times its average daily trading volume.
But the deeper one digs, the more it seems like Red Robin’s blowout quarter was actually an anomaly — not something that can be repeated with regularity.
Casual Restaurants Continue Their Run
As gas prices took a tumble over the last year, consumers found themselves with more dollars lining their wallets. That extra cash has been generally positive news for the restaurant industry, and while RRGB is today’s star, there have been far bigger winners in the past year.
Shares of Darden Restaurants, Inc. (NYSE:DRI), whose brands include Olive Garden and LongHorn Steakhouse, are up 33% in the last year. Cracker Barrel Old Country Store, Inc. (NASDAQ:CBRL) stock has posted 42% one-year gains, while Denny’s Corporation (NASDAQ:DENN) stock rallied 60% over the same period.
While Red Robin stock has certainly been a beneficiary of this rotation into restaurant stocks, the company has put itself in a position to continue posting double-digit revenue growth. RRGB expects total revenue growth between 12% and 12.5% in fiscal 2015.
Two Main Drivers Going Forward
Two main factors will largely determine which direction the RRGB stock price goes in the coming year: a massive, company-wide store remodeling project and an increased focus on alcohol sales.
RRGB remodeled 18 of its stores in the first quarter, bringing the total number of store remodels to 122 (among 517 company-owned and franchised Red Robin restaurants). The company expects to remodel about 150 stores by the end of 2015 — up from 125 previously — and aims to have the whole system remodeled by the end of 2016.
Remodeling is important for two reasons. Firstly, it gives off a fresher, more modern look, which drives traffic. On its conference call, management noted that remodeled stores saw higher same-store sales than its non-remodeled base in 2012, 2013 and 2014. The lift was visible not only in the first year but also the second year after the remodel.
Remodeling also allows the company to tweak its branding, with signage reading “Red Robin Gourmet Burgers and Brews” instead of just “Red Robin Gourmet Burgers.” Which brings me to the second catalyst for RRGB stock: alcohol.
A more favorable alcoholic beverage mix helped contribute to Red Robin’s strong quarter, and with “brews” being steadily rolled out as a part of the company’s brand, I expect that mix to continue to improve.
Don’t Expect Performance to Continue Indefinitely
With all that being said, I’m not sure Red Robin’s quarter deserves the euphoric reception it got in the stock market today, as there are quite a few headwinds going forward.
Workers compensation expenses were 38% lower in the first quarter of 2015 vs. the same quarter in 2014, which management expects will “normalize” in coming quarters. The abnormal decrease was largely responsible for the RRGB earnings beat today, and investors simply cannot assume this unexpected boon to continue.
Moreover, an increase in California’s minimum wage will further pressure margins, and reduced non-comparable restaurant revenue growth is also expected as a number of new store openings have been delayed until the fourth quarter of 2015 and parts of its Canada operations suffer from an economy hit by weaker oil prices.
I expect these factors to drive RRGB margins down in subsequent quarters, and with expectations set high after today’s stellar results, the company is left with little room for error. I’d think twice before gobbling up Red Robin shares today.
As of this writing John Divine held no positions in any of the stocks mentioned. You can follow him on Twitter at @divinebizkid or email him at editor@investorplace.com.
