Skip to main content

Red Robin Gourmet Burgers (RRGB) - Get Red Robin Gourmet Burgers Inc. Report fizzled Tuesday after an analyst downgraded the casual-dining chain's stock.

The stock price dropped 6.5% to $32.15 after Bank of America Merrill Lynch cut the chain to underperform from neutral, according to published reports.

The firm affirmed its price target for the Greenwood Village, Colo., company at $30.

B of A Merrill Lynch cited concern that earnings growth next year will come up short of Wall Street expectations.

In particular, the report pointed to issues with Red Robin's "price aggressive strategy" and a resulting drop in traffic.

Scroll to Continue

TheStreet Recommends

That, in turn, could interfere with Red Robin's efforts "to find a sustainable answer for long-term traffic" needed for the "health of the brand."

A tight labor market has also helped depress Red Robin's profit margins below industrywide margins, the report noted.

In its second-quarter earnings, Red Robin reported a 110-basis-point narrowing in profit margins on the restaurant level, to 18.2%.

Driving costs up and profit down was a 90-basis-point hike in labor costs and a 50-basis-point jump in other restaurant expenses, the company said.

Red Robin also saw traffic decline 6.4% during the second quarter, which drove down comparable restaurant revenue 1.5% compared with the year-earlier period, Zacks Investment Research noted.

Save 57% With Our Labor Day Sale. Join Jim Cramer's Action Alerts PLUS investment club to become a smarter investor! Click here to sign up!