Over the past six months, Red Robin’s shares have plummeted to $5.93, resulting in a disheartening 9.3% loss—a stark contrast to the S&P 500’s 7.3% growth during the same period. This decline appears to be driven by weaker quarterly results and has left many investors wondering about their next move: should they consider adding Red Robin to their portfolio, or is it wiser to avoid it?
This article delves into our comprehensive research report, which provides insights from our analyst team’s opinion—a free resource for all investors. According to our analysis, we’ve decided not to recommend holding RRGB at this juncture. Here are three key reasons why you should be cautious with Red Robin (RRGB) and a stock we’d rather own instead.
Why Do We Think Red Robin Will Underperform?
Red Robin (NASDAQ:RRGB), a well-known chain of casual restaurants specializing in burgers and American cuisine, has been performing under expectations. Here are the primary reasons why we believe it may continue to underperform:
1. Flat Same-Store Sales Reflect Weak Demand
Same-store sales refer to the revenue generated from restaurants that have been operational for at least a year. This metric is crucial because it measures organic growth—the ability of a company to grow its business without expanding locations.
Over the past two years, Red Robin has experienced flat same-store sales despite efforts to boost demand. The steady absence of consistent growth in existing dining establishments highlights underlying challenges such as weak consumer sentiment and reduced interest in casual dining experiences.
2. Earnings Per Share (EPS) Declining
Earnings per share (EPS) is a critical metric that indicates the portion of a company’s profit allocated to each outstanding share of common stock. A downward trend in EPS, coupled with flat revenue growth, suggests that Red Robin has struggled to maintain profitability.
Over the past five years, Red Robin’s trailing 12-month EPS (non-GAAP) has declined by 33.2%. This decline underscores the company’s difficulty in adapting to fluctuating demand while maintaining profitability. Its reliance on fixed costs has exacerbated this challenge during periods of reduced consumer spending.
3. High Debt Levels Increase Risk
Red Robin’s $585.5 million in debt represents a significant financial burden that could impact its ability to meet obligations. While leverage can amplify returns, it also increases the risk of default when profitability fluctuates or economic conditions turn adverse.
Given Red Robin’s high debt levels, any further decline in profitability will strain its ability to service debt comfortably. This risk makes us cautious about holding onto the stock during uncertain market conditions.
A Cautionary Note on Red Robin
While we acknowledge that Red Robin has a loyal customer base and operates in a vibrant industry, the factors outlined above paint a concerning picture of the company’s financial health. With flat same-store sales, declining profitability metrics, and significant debt levels, it appears unlikely that Red Robin will soon turn things around.
Given these challenges, we advise investors to exercise caution before adding Red Robin to their portfolios. A prudent approach would be to avoid holding onto RRGB at this time while remaining vigilant about its performance.
A Better Alternative
While we are not recommending Red Robin as a buy at this juncture, we do have an alternative that we believe holds greater potential for growth and profitability in the coming months and years. This stock is well-positioned to capitalize on the same trends affecting Red Robin but is currently undervalued relative to its peers.
This stock operates in an industry characterized by steady growth and a loyal customer base. Its financial metrics, particularly its ability to maintain revenue growth while delivering expanding earnings per share (EPS), suggest strong fundamentals that we believe will continue to drive long-term success.
Given the combination of robust financials, undervaluation relative to its peers, and strong market position, this stock represents an attractive opportunity for investors seeking consistent returns. We encourage you to explore our full research report to learn more about why this stock emerges as a compelling alternative to Red Robin (RRGB).
Conclusion
In conclusion, while Red Robin has a long history of success in the casual dining industry, its current performance raises significant concerns regarding its ability to maintain profitability and grow its same-store sales. The combination of flat same-store sales, declining EPS, and high debt levels makes us cautious about holding onto RRGB during this challenging period.
Instead of investing in Red Robin (RRGB), we recommend considering our alternative stock as a more prudent investment choice at this time. We believe that while Red Robin may not yet be ready to purchase, its industry position and growth potential make it an attractive option for the long term.
We wish you success on your investment journey and encourage you to stay informed about key developments in your investments.
