We are maintaining our long-term Neutral recommendation for Brinker International Inc. (EAT), a leading casual dining restaurant company in the world.
The Dallas, Texas-based company reported fourth quarter earnings ahead of the Zacks Consensus Estimate, benefiting from same-store sales growth, lower food cost and a lower share count. Brinker’s fourth quarter 2011 adjusted earnings per share of 48 cents surpassed the Zacks Consensus Estimate by a penny.
Total revenue dropped 3.4% year over year to $717.5 million due to a 7.5% decrease in capacity given an extra operating week in the fourth quarter of fiscal 2011. However, same-restaurant sales at company-owned restaurants increased 2.6% on the back of growth rates of 2.1% and 5.7% at Chili's and Maggiano's, respectively.
The company is repositioning its Chili’s brand and is undertaking several initiatives to offset its declining sales momentum and register more sustainable and stable growth. Chili's revamped its menu in an attempt to regain customers and build loyalty through new items and reintroduced and improved classics.
At the beginning of January 2011, Chili's launched a new value-oriented lunch combo, with price points from $6 to $8, in the core menu to position itself more favorably against fast-casual restaurants. The Lunch traffic turned positive after the roll out of the combo and continues to remain in the mid single-digit range.
In a bid to boost bar sales during the fourth quarter of 2011, Chili’s also rolled out a new Happy Hour program, which includes specially priced drinks and menu items. The company is also focusing on key platforms like Triple Dipper and two-course meals for $20 to drive dinner traffic. Additionally to drive the top line, the company remains connected to its guests through social media programs and email database.
The company also reiterated its goal to deliver 400 basis points (bps) of net operating margin growth at Chili’s and double its EPS by 2015. To achieve the target, Brinker is undertaking major cost-saving initiatives at Chili’s, including disciplined cost management, successful implementation of team service and labor cost savings initiatives.
The margins at Chili have also started to benefit from the implementation of the phase one of the kitchen equipment retrofit program relating to new kitchen processes. Through this, Brinker expects to optimize kitchen labor component and improve cost of sale by reducing food waste. Moreover, after testing at 15 units in fiscal 2011, the company plans to aggressively roll out the second phase of the program i.e. new cooking equipment initiative to 500 units in 2012.
New equipment benefits include labor productivity gains, improved and more consistent food quality, and quicker preparation times. The company also expects to roll out the new point of sale and back office enhancements to nearly the entire Chili’s system in 2012. The new POS system is expected to enhance inventory control and expand margins.
Furthermore, the company plans to remodel its restaurants; the first remodeled unit was opened at Oklahoma, where the guest response was positive. Brinker now wants to extend the re-image program to about 250 restaurants.
Brinker is emphasizing on global expansion in both new and existing markets through development agreements with new and existing franchisees as well as joint venture partners. The company’s growing percentage of franchise operations in domestic and international markets will help improve margins as royalty payments impact the bottom line.
In the fourth quarter of 2010, the company had signed a joint venture partnership in Brazil to expand its footprint. As part of this venture, Brinker plans to make the first opening in the first quarter of 2012. Brinker is also expanding its footprint in the BRIC market, by opening its first restaurant in Russia in the third quarter of 2011 and an additional restaurant in India in the fourth quarter of 2011, bringing the total to 4 restaurants in India.
The company also had several openings in the Middle East market in 2012, but due to the turmoil in the Middle East, the casual dining chain has reduced the number of planned openings. Hence, the company now plans to become the global leader in casual dining with 420 Chili's internationally by fiscal 2015 rather than 2014.
Brinker’s other brand Maggiano’s also continues to perform well and hence the company expects to open a Maggiano’s unit in 2013. Global expansion allows further diversification from a saturated domestic market, thereby enabling the company to build its position in a variety of markets and economic conditions.
However, we remain cautious on the stock based on the ongoing stiff competition and cost inflation, which are expected to temper first quarter 2012 results, with 10% of the commodities currently contracted through the end of 2012.
The company expects cost of sales to jump 100 bps as a percentage of sales in 2012 due to rising commodity costs. Additionally, we believe the sluggish traffic growth and consumer spending will likely restrict Brinker’s revenue growth in the near term.
BRINKER INTL (EAT): Free Stock Analysis Report
Get all Zacks Research Reports and be alerted to fast-breaking buy and sell opportunities every trading day.
Be the first to comment