Is Red Robin Gourmet Burgers About To Fly?

Red Robin Gourmet Burgers Hatches Plan For Growth 

Red Robin Gourmet Burgers NASDAQ: RRGB is working on a plan for growth. The company is investing heavily in its staff, a key component for operations, setting it up to outperform in future quarters. With the holiday season upon us, COVID in an apparent retreat, and global travel restrictions lifting we think that outperformance could happen as soon as the current quarter. The catch is that staffing issues and investment in their resolution cut into the previous quarter’s results and that is weighing on share prices now. What this means for investors, with share prices trading above and near a strong support level, is a chance to start nibbling on this tasty investment. 

Red Robin Gourmet Burgers Returns To Growth 

Red Robin Gourmet Burgers turned in a decent Q3 earnings report despite the headwinds and impacts of tight labor conditions. The company reported $275.4 million in net revenue which is good for a gain of 37.4% over last year but missed the consensus estimate by 90 basis points. The company says strength is driven by internal growth initiatives and a return to better staffing levels that have comps up 34.4% YOY and up 0.6% versus 2019. 

The improvement in comps is underpinned by a 22.5% increase in ticket count and an 11.8% tailwind from price and mix. In our view, both ticket counts and check averages can be attributed to higher staffing levels and training. Off-premise continues to be an area of strength as well. Off-premise sales are up 29.5% for the quarter and mark the third consecutive year of YOY gains. 

Moving down to the margin and earrings the news is equally mixed. The company reported a 400 basis point decline in YOY restaurant-level margin that left the margin down almost 300 basis points from 2019. The decline is attributed in large part to staffing issues, hiring efforts, and training that we see diminishing in future quarters. The company reports $3.1 million in transitory labor costs alone, things like hiring temp staff and paying overtime, which is worth 115 basis points of restaurant-level margin alone. 

“We believe there is more opportunity for upside through the remainder of the year and beyond by ensuring that each restaurant is effectively managed, optimally staffed, and our Team Members are well trained, enabling us to capture the full benefits of our proven strategic growth initiatives,” says Paul J.B. Murphy III, president and CEO. 

The Technical Outlook: A Short-Covering Rally Is In The Works 

The short-interest in Red Robin Gourmet Burgers is a high 15% and it has been growing in recent months. This is enough to push the shares down to support but we think the move lower is played. Support at the $20 level appears to be strong and confirms a reversal in price action that occurred last year. The daily chart is telling with both the stochastic and MACD showing divergences consistent with support at this level. Assuming price action maintains the upper-side of $20 we see the start of short-covering and a reversal in price action. A move above $22.50 would be bullish and could take the price up to the $25 level fairly quickly. If price action can not maintain support at the $21 level there is a chance it could fall to $15 or even $10 but we don’t see that in the cards.