On Thursday, Red Robin Gourmet Burgers (NASDAQ:RRGB) saw its price target adjusted by a Craig-Hallum analyst, who cited challenges including disappointing margins in the company's third-quarter performance. The new price target is set at $8.50, reduced from the previous $11.50, while the Buy rating on the stock remains unchanged.
The analyst noted that despite Red Robin achieving solid same-store sales (SSS) and total sales in Q3, the company faced higher than expected labor costs and general and administrative (G&A) expenses, leading to weaker margins. Traffic trends showed improvement from the second quarter and are comparable or slightly better than the casual dining average, helped by mid-week promotions that emphasized value to customers.
Red Robin's management has maintained its sales guidance for fiscal year 2025 but has revised its adjusted EBITDA guidance downward, anticipating continued margin pressures in the fourth quarter. Approximately 70 locations, which represent about 15% of the total, are only profitable on an EBITDAR basis, contributing to the margin issues. Management plans to improve operations at these specific locations, but the analyst suggested that activist investors might push for more significant changes to enhance company-wide restaurant-level margins by over 200 basis points.
Additionally, Red Robin has amended its credit agreement, increasing its revolving credit facility, extending the maturity, and providing some covenant relief. The analyst expressed optimism about Red Robin's increased sales levels but also frustration over the company's inability to improve margins. The involvement of activist investors is seen as a potential catalyst for urgent change and is expected to support the stock price. Despite the lowered price target, the firm's analyst reiterated the Buy rating on Red Robin shares.
In other recent news, Red Robin Gourmet Burgers reported mixed second-quarter financial results, with revenue reaching $300 million, slightly surpassing expectations, but recording an adjusted loss per share of $0.47, missing analyst estimates. The company has also revised its forecast for fiscal year 2024, now expecting adjusted EBITDA to be between $40 million and $45 million, and total revenue of approximately $1.25 billion. In addition, Red Robin's Chief Technology Officer, Jyoti Lynch, has resigned from her position to explore new opportunities.
Analysts at Craig-Hallum and Benchmark have maintained a Buy rating on the stock, albeit with lowered price targets due to increasing food costs, labor expenses, and broader industry pressures. Despite these challenges, Red Robin has reported improvements in guest satisfaction and loyalty program membership, which could potentially enhance future same-store sales.
The company has also amended its credit agreement to revise financial covenants and expand revolver capacity, providing additional flexibility for its ongoing turnaround strategy.
InvestingPro Insights
Red Robin Gourmet Burgers' recent financial performance aligns with the challenges highlighted in the analyst report. According to InvestingPro data, the company's revenue growth has been negative, with a -0.88% decline in the last twelve months as of Q3 2024. This slowdown is reflected in the company's market capitalization, which currently stands at a modest $86.49 million.
InvestingPro Tips reveal that Red Robin is "quickly burning through cash" and "operates with a significant debt burden," which could explain the need for the amended credit agreement mentioned in the article. The company's financial health is further strained by the fact that "short term obligations exceed liquid assets," potentially adding pressure to its operational flexibility.
The analyst's concerns about margin pressures are supported by InvestingPro data showing a gross profit margin of just 12.97% in the last twelve months as of Q3 2024. This aligns with the InvestingPro Tip that Red Robin "suffers from weak gross profit margins."
For investors considering Red Robin's stock, it's worth noting that InvestingPro Tips indicate the stock "generally trades with high price volatility" and has shown a "strong return over the last month," with a 27.77% price total return in the past month. However, the company is "not profitable over the last twelve months," and "analysts do not anticipate the company will be profitable this year."
These insights from InvestingPro provide additional context to the analyst's report and may help investors better understand Red Robin's current financial situation. InvestingPro offers 12 additional tips for Red Robin, which could provide further valuable insights for those interested in a deeper analysis of the company's prospects.
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