Brinker International, Inc. EAT recently reported fiscal fourth-quarter and 2015 results. The company posted sluggish fiscal fourth-quarter 2015 results with both earnings and revenues missing the Zacks Consensus Estimate. Moreover, the comps were sluggish which caught investors’ attention. Share price of Texas-based casual; dining restaurant fell 4.8% on Aug 6 in response.
Adjusted earnings of 94 cents per share missed the Zacks Consensus Estimate of 95 cents by 1.1%. However, earnings increased 10.6% year over year backed by improved revenues and margins.
Revenue Discussion
Quarterly revenues rose 0.6% year over year to $764.1 million due to a 0.5% increase in company sales and 3.5% rise in Franchise and Other revenues. However, revenues missed the Zacks Consensus Estimate of $785 million by 0.9%.
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 down 0.7%, lower than 2.3% growth in the year-ago quarter and 1.7% improvement in the prior quarter. A decline in comps at both Maggiano's and Chili’s hurt Brinker’s comps.
Behind the Headline Numbers
Chili's reported revenues to $638.2 million, down 0.3% year over year, primarily due to decline in comparable restaurant sales, partially offset by increase in restaurant capacity.
Domestic comps at Chili's rose 0.1%, comparing unfavorably with the year-ago quarter growth of 2.1%. Chili's’ company-owned comps declined 0.8%,due to 0.5% decline in traffic and 1.8% unfavorable impact from the mix shift.
Comps at Chili’s’ franchised restaurants went up 1.9%, better than 1.2% growth in the year-ago quarter backed by domestic comps growth of 2.1% and international franchised comps growth 1.2%. Domestic comps grew 1.4%, while international comps improved 0.8% in the year-ago quarter.
Maggiano's’ sales increased 5.3% to $100.2 million. Comps at Maggiano's went down 0.1%, comparing unfavorably with comps growth of 0.9% in the prior quarter and in fourth-quarter fiscal 2014. Comps at Maggiano's reflected traffic decline and a negative impact of the menu shift, partly offset by the impact of favorable menu pricing.
Expenses and Margins
Cost of sales ratio increased 70 basis points (bps) to 26.1% driven by favorable menu pricing and commodity pricing, with mix remaining flat.
In fact, total costs and expenses declined 5.9% to $676 million. Restaurant labor as a percentage of revenues remained stable at 31.7%, with the benefits of lower employee health insurance expense offsetting an increase in wage rates.
Restaurant operating margin improved approximately 80 bps to 18.5% due to margin improvement at both Chili’s and Maggiano’s.
2015 Results
In fiscal 2015, Brinker’s earnings increased 14% year over year to $3.09, within the guidance range of $3.00 to $3.15 per share.
Revenues were $3.0 billion, up 3.2% year over year, slightly lower than the company’s expected revenue growth of 4% year over year.
Guidance
Brinker International expects earnings in the range of $3.55 to $3.65 per share in 2016, up 16% to 19% year over year.
The company expects total revenue to increase 12–14% year over year in fiscal 2016. This reflects 1.5% to 2% comps growth and about 15% improvement in franchise and other revenues.
Restaurant operating margin is expected to be flat to down 25 bps year over year. Excluding the impact of the recently acquired Chili's restaurants, restaurant operating margin is likely to increase 25 bps 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 revenues, despite a decline in comps. Nevertheless, we cannot ignore the rising expenses due to technological investments, and increasing food costs that continue to be a concern for this Zacks Rank #2 (Buy) company.
Other Stocks to Consider
Some other stocks in the same industry that can be considered are BJ's Restaurants, Inc. BJRI, Carrols Restaurant Group, Inc. TAST and Ruby Tuesday, Inc. RT. All these stocks sport a Zacks Rank #1 (Strong Buy).
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