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May 17, 2017

S3 BLACKLIGHT: Red Robin Gourmet Burger Shorts Burned on 23% Price Move

Red Robin Gourmet Burgers Inc. (RRGB US) is up over $13.40 today, over 23%, as they reported 1st quarter results that handily beat analyst estimates with earnings coming in at $0.89/share versus the estimate of $0.57/share. In addition to strong quarterly results RRGB is projecting full year earnings per share to be between $2.80 and $3.10 which crushed analyst expectations of $2.76/share. Unlike RRGB, most of their Restaurant sector competitors followed the overall market and had down days.

RRGB short interest increased $94 million, or 44%, to $307 million, in the 2nd quarter and is up $208 million, or 211%, for the year. RRGB short sellers had an average position of only $78 million in 2016, but made $8.2 million of profits for a net return of 10.5%. This year average short interest more than doubled to $166 million, but shorts have not fared as well on their increased bets. They were down $21 million for a net return of -12.5% as of yesterday. With today’s over 23% price move, shorts have lost an additional $58 million in mark to market P/L, bringing their year-to-date loss to $78.4 million, a 47.3% negative return.

Shorting the Restaurant sector has not been a good investment in 2017 with very few profitable names offset by large losing positions. The top ten most profitable shorts made $231 million in mark to market profits while the top ten least profitable shorts lost $1.6 billion.

Short interest in the total Restaurant sector is $12.9 billion and although short interest has increased $583 million over the last month, we are seeing a recent trend of traders trimming some of their positions. Short interest has declined by $248 million over the last week, but with no one stock with over $10 million of short covering this reduction has been a broad decline over the entire sector. The UCSF Restaurant Leaders ETF (MENU US) is up 8.4% year-to date and up 10.6% since its inception in November 2016, both returns beating the S&P 500 by over 225 bps. This relative over performance may be a precursor to a weakening overall short conviction in the Restaurant sector.

Restaurants have had operational headwinds in 2017 with rising labor, commodity, real estate and healthcare costs eating away at their margins. Customers’ spending habits have been negatively impacted by rising healthcare costs and job insecurity. Through the use of in-store technology, mobile dining apps, franchise streamlining and supply optimization restaurants have been able to stabilize their valuations and outperform the S&P 500. President Trump’s stance on the federal minimum wage and Obama-care coupled with continued technological innovations may help increase restaurant margins by year-end and short interest may decline even further in the Restaurant sector. Short sellers may begin to move on and find greener pastures elsewhere.

For more information on the above analysis, please contact:
Ihor Dusaniwsky, Head of Research, S3 Partners, LLC    
The information herein (some of which has been obtained from third party sources without verification) is believed by S3 Partners, LLC ('S3 Partners') to be reliable and accurate. Neither S3 Partners nor any of its affiliates makes any representation as to the accuracy or completeness of the information herein or accepts liability arising from its use. Prior to making any decisions based on the information herein, you should determine, without reliance upon S3 Partners, the economic risks and merits, as well as the legal, tax, accounting and investment consequences, of such decision.

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