KeyBanc Downgrades Red Robin Gourmet Burgers (RRGB) to Hold; Disappointing Q3 Results and Outlook

November 6, 2009 7:38 AM EST

KeyBanc downgrades Red Robin Gourmet Burgers (Nasdaq: RRGB) from Buy to Hold.

KeyBanc analyst says, "Following disappointing results from Red Robin Gourmet Burgers in 3Q09 and a significantly reduced outlook from management, we are reducing our rating for shares of RRGB to HOLD. We are concerned that management's resumption of increased marketing expenses along with the negative mix impact of the discounted price points on which these promotions will focus will lead to significant margin declines in the coming quarters. We feel that a balanced promotional strategy that focuses on both the discounted limited time offers (LTOs) and other signature items would be more successful than a focus solely on lower priced items to drive traffic. While we continue to view RRGB as a strong brand, we have become more cautious in relation to the near-term outlook as we are concerned that the current marketing strategy runs the risk of straying too far from the Company's traditional premium positioning. Given these risks, we feel that shares are fairly valued as they are already trading at a discount to the peer group with a P/E of 14.5x our revised 2010 EPS estimate $1.22 (from $1.92) and a 2010E EV/EBITDA multiple of 5.1x vs. the peer group averages of 16.3x and 6.0x, respectively...To reflect both our reduced expectations for lower SSS and an additional $1.0 million of marketing expenses now planned for 4Q09, we have reduced our 2009 EPS projection to $1.38 from $1.68 and our 4Q09 projection to $0.13 from $0.39."

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