Since September 2024, Red Robin has been in a holding pattern, posting a small loss of 3% while floating around $4.25.
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We're swiping left on Red Robin for now. Here are three reasons why RRGB doesn't excite us and a stock we'd rather own.
Why Do We Think Red Robin Will Underperform?
Known for its bottomless steak fries, Red Robin (NASDAQ:RRGB) is a chain of casual restaurants specializing in burgers and general American fare.
1. Flat Same-Store Sales Indicate Weak Demand
Same-store sales is an industry measure of whether revenue is growing at existing restaurants, and it is driven by customer visits (often called traffic) and the average spending per customer (ticket).
Red Robin’s demand within its existing dining locations has barely increased over the last two years as its same-store sales were flat.
2. EPS Trending Down
Analyzing the long-term change in earnings per share (EPS) shows whether a company's incremental sales were profitable – for example, revenue could be inflated through excessive spending on advertising and promotions.
Sadly for Red Robin, its EPS declined by 49.3% annually over the last five years, more than its revenue. This tells us the company struggled because its fixed cost base made it difficult to adjust to shrinking demand.
3. High Debt Levels Increase Risk
As long-term investors, the risk we care about most is the permanent loss of capital, which can happen when a company goes bankrupt or raises money from a disadvantaged position. This is separate from short-term stock price volatility, something we are much less bothered by.
Red Robin’s $577.4 million of debt exceeds the $30.65 million of cash on its balance sheet. Furthermore, its 14× net-debt-to-EBITDA ratio (based on its EBITDA of $38.75 million over the last 12 months) shows the company is overleveraged.
At this level of debt, incremental borrowing becomes increasingly expensive and credit agencies could downgrade the company’s rating if profitability falls. Red Robin could also be backed into a corner if the market turns unexpectedly – a situation we seek to avoid as investors in high-quality companies.
We hope Red Robin can improve its balance sheet and remain cautious until it increases its profitability or pays down its debt.
Final Judgment
Red Robin falls short of our quality standards. That said, the stock currently trades at 1.4× forward EV-to-EBITDA (or $4.25 per share). While this valuation is optically cheap, the potential downside is huge given its shaky fundamentals. There are superior stocks to buy right now. Let us point you toward the most dominant software business in the world.
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