Brinker International, Inc. (EAT) posted strong fiscal second-quarter 2015 results with both earnings and revenues beating the respective Zacks Consensus Estimate. However, the company’s share price dipped 2% in the trading session, as higher operating costs possibly dented investors’ confidence in the stock.
Adjusted earnings of 71 cents per share beat the Zacks Consensus Estimate of 68 cents. Further, the quarterly figure increased 20.3% year over year, backed by improved revenues.
Revenue Discussion
Quarterly revenues rose 5.4% year over year to $742.9 million and beat the Zacks Consensus Estimate of $733 million by 1.4%. The upside reflects 4.9% increase in company sales and 18.1% rise in Franchise and Other revenues, as a result of higher comps.
Brinker International primarily engages in the ownership, operation, development and franchising of various restaurant brands under the names of Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s).
Company-owned comps were up 3.7%, better than 0.8% growth in the year-ago quarter and 2.4% in the first quarter, driven by improved comps at both Maggiano's and Chili’s.
Behind the Headline Numbers
Chili's reported revenues of $602 million, up 4.4% year over year, driven by increases in comparable restaurant sales and restaurant capacity.
Domestic comps at Chili's rose 4.2%, better than the prior-quarter increase of 2.3% as well as the year-ago quarter improvement of 0.3%, on the back of menu innovation. Aided by 2.1% rise in traffic, Chili's’ company-owned comps increased 4%, attributable to a positive pricing impact.
Comps at Chili’s’ franchised restaurants went up 3.2%, comparing favorably with stable comps in the year-ago quarter and 1% growth in the prior quarter. Domestic comps growth of 4.9%, as against 1.7% in the prior quarter, made up for the international franchised comps decline of 0.5%, same as the last quarter. Domestic comps had declined 0.7% while international comps grew 1.4% in the year-ago quarter.
Maggiano's’ sales increased 7.5% to $115.8 million. Comps at Maggiano's went up 2.3%, comparing favorably with comps growth of 0.9% in the year-ago quarter and 0.6% in the previous quarter. Comps at Maggiano's reflect the impact of favorable menu pricing and traffic.
Expenses and Margins
Cost of sales ratio decreased 10 basis points (bps) to 27% driven by 50 bps of menu price improvement, coupled with 30 bps of favorable mix primarily associated with lower oil usage related to new fryers and menu changes. These improvements were slightly offset by unfavorable commodity costs stemming from greater-than-expected increase in prices of burger meat, cheese and avocados.
In fact, total costs and expenses rose 5.6% to $677.4 million, mainly due to incremental prices of meat, seafood and other ingredients, and costs associated with the installation of Ziosk tabletop tablets at Chili's.
Restaurant labor ratio decreased 40 bps to 31.7%, primarily due to leverage from higher sales and an adjustment to lower employee health insurance expense associated with recent claims. These benefits were partly offset by increase in restaurant manager compensation and the impact of the minimum wage increases.
Restaurant operating margin improved approximately 60 bps to 16.4% due to margin improvement at both Chili’s and Maggiano’s.
Guidance
Brinker International reaffirmed the fiscal 2015 guidance. The company expects earnings in the range of $3.00 to $3.15 per share, up 11% to 16% year over year. By 2017, the restaurateur expects to achieve earnings per share of $4.00, doubling from the 2012 level.
The company expects total revenue to increase 4% year over year in fiscal 2015. This reflects 1% to 2% comps growth and about 15% increase in franchise and other revenues. Restaurant operating margin is expected to improve 25 to 50 bps year over year.
Our Take
We note that sales-building initiatives undertaken by Brinker like menu innovation, extensive reimaging, better food presentation, kitchen system optimization and introduction of a better service platform are aiding comps. Nevertheless, we cannot ignore the rising commodity costs that continue to be a concern for this Zacks Rank #2 (Buy) company.
Other Stocks to Consider
Better-ranked stocks in the same industry include BJ's Restaurants, Inc. (BJRI), Red Robin Gourmet Burgers Inc. (RRGB) and Kona Grill Inc. (KONA). All these stocks sport a Zacks Rank #2 (Buy).
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