Red Robin Could Have Its Wings Clipped
By Eric Jackson
Last November, I took a long position in Red Robin Gourmet Burgers (RRGB -commentary - Trade Now) before it announced third-quarter earnings. The stock sold off after disappointing the Street, and I increased my position. I argued on these pages then that the risk/reward profile was very attractive on the stock. Since then, the stock is up more than 43% to $23, while the Dow is up 1.3%. Now some activists are agitating for management and governance changes, thinking there's more upside ahead in the stock. My advice is to get off the RRGB train now that the easy money's been made -- which is exactly what I've done.
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Here's a review of why I liked RRGB back in November:
- Valuation -- its forward P/E at the time was just 11 times.
- Cash flow had remained strong, partly because the company hadn't discounted its menu. This meant the company hadn't trained customers to expect heavy discounts moving forward.
- Marketing had been cut to the bone. Any improvement here would make a major difference.
- Debt load was high ($200 million) relative to most restaurant chains.
- Restricted marketing had led to a drop-off in traffic.
- Management offered confusing explanations on the sources of problems within the company or, more importantly, how the company was going to tackle them.
- It wasn't clear the executive team had a hand on managing commodity costs as well as other chains.
Despite these negatives, I argued the case for going long the stock was compelling at $16 (and then it fell to $14 after the selloff). The stock was due for a rebound even if management did nothing in the months ahead. It turns out that's exactly what they've done, and yet the stock's gone up enormously.
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