Free Cash Flow Valuation

Using the WACC previously calculated in post 7, and other assumptions and input that will be further discussed, RRGB's stock price was forecasted using the McKinsey free cash flow model. Currently, at the time of writing this post, RRGB's stock price is valued at $10.07, and my FCF valuation projected the stock to be ($10.99). This negative valuation is a result of Red Robin producing negative operating income over the past five years. Historically, in Red Robins past five years operating expenses and cost of goods sold have exceeded revenues. Ultimately, this valaution method is not applicable to RRGB due to consisten negative operating income.

The four key rate calculations include growth percentage of revenues, the percentage of revenues that were taken out of net income by cost of goods sold, the percentage of revenues taken out of net income by selling, general, and administrative expenses, the percentage change in NOA, depreciation percentage, and other operating expenses percentage. All of these rates have their own assumptions. Starting with revenue growth, FactSet forecasts 1.69% revenue growth in the upcoming year, and 2.10% in the following year, and in my own forecast I suggest a 1.5% long term growth rate given the company's history and sector outlook. Moving on to cost of goods sold, I used my vertical analysis and took the five year average COGS to forecast future COGS%. For selling, general, and administrative expenses, I took the average of 2021-2022 SG&A expenses, which came out to be 10.67% of sales. For change in NOA I took the average of NOA from 2021-2022 from both free cash flow models, coming out to 6.13%. To forecast the depreciation is took the five year average, equating to 7.48% of sales. Lastly, other operating expenses, I took the five year average as well, equating to 0.29% of sales. Nevertheless, these assumptions and key rate calculations produced a negative valuation, highlighting not only the company's failure to produce operating income, but also the evident high expenses that exist within Red Robin's operations.