- Red Robin Gourmet has surged off of its March lows, up over 400% in less than 9 months.
- While the recent flood of vaccines news should help with improving capacity and demand at restaurants, earnings estimates continue to point to years of net losses per share ahead.
- Besides, Red Robin was already one of the weakest dine-in names from a growth standpoint ahead of COVID-19, explaining what looks to be a discounted valuation relative to peers.
- I continue to see Red Robin as an Avoid despite the recent vaccine news, and I would view any rallies above $23.00 as selling opportunities.
It’s been a rough year thus far for the restaurant sector, but recent vaccine news from Pfizer (PFE), AstraZeneca (AZN), and Moderna (MRNA) has put a relentless bid under the formerly untouchable restaurant space. This enthusiasm has pushed ailing Red Robin (RRGB) up over 400% from its March lows, and now within a stone’s throw of where it entered the month of March. However, while revenues have recovered quite a bit from Q2 levels, the company continues to suffer from a double-digit drop in year-over-year comps and is expected to post net losses per share out to FY2022. Therefore, while potential bankruptcy concerns are off the table, profitability is a mile away. Despite what looks to be a cheap valuation relative to peers, I continue to see Red Robin as an Avoid.
Red Robin released its Q3 results earlier this month and reported quarterly revenue of $200.5 million, down 32% year over year. While this was a 1200-basis point sequential improvement from the 48% sales decline in Q2, this was still a rough quarter for the dine-in restaurant chain. However, the stock has responded by soaring nearly 60% since the news, possibly reflecting the optimism as comparable-store sales have continued to improve as the company exited the month of October. The issue is that while sales are increasing, profitability on an annual earnings per share [EPS] basis is still miles away. Let’s take a closer look at the quarter below:
(Source: Author’s Chart)
As shown in the chart above, it’s been a very rough couple of quarters for the restaurant industry, with calendar year Q2 sales declines shown in red and calendar year Q3 sales declines shown in blue. If we look above, we can see that Red Robin Gourmet is in the middle of the pack among its dine-in peers when it comes to year-over-year sales declines, though ahead of some peers who are still suffering from 40% declines year-over-year like Ruth’s Hospitality (RUTH) and Kura Sushi (KRUS). This weakness is due to Red Robin’s significant presence in California, where the state had new restrictions issued on July 1st for indoor restaurants, and this has been a large headwind for Red Robin. Fortunately, the company has been able to re-open 370 dining rooms as of November 1st as restrictions have relaxed a little, representing 89% of the company’s store count.
