Brinker Lags EPS, Lowers 2Q Outlook

Zacks

Dallas, Texas-based Brinker International Inc. (EAT), recently reported first-quarter 2013 adjusted earnings of 37 cents per share, lagging the Zacks Consensus Estimate by a penny, but up 23.3% from the year-ago quarter earnings of 30 cents per share.

Total revenue nudged up 2.0% year over year to $683.5 million due to a 2.7% hike in system-wide comparable restaurants sales.

Quarter Performance

Chili's Grill & Bar restaurant reported revenues of $581.3 million, up 2.7% year over year, while Maggiano's sales crept up 0.9% to $82.4 million in the quarter. However, Royalty and franchise revenue slid 3.9% to $19.8 million, due to a dip in gift card breakage income, partially offset by rise in royalty revenues.

Comparable restaurant sales at Chili's Grill & Bar restaurant climbed up 2.8% for the sixth consecutive quarter, benefiting from a 0.4% rise in traffic, 1.4% spike in menu price and 1% favorable mix-shift. Same-restaurant sales at Maggiano's inched up 0.9% for the 11th time in a row driven by menu price (up 2.6%) and mix-shift (up 0.8%), partially offset by lower traffic of 2.5%.

Comparable restaurant sales at franchised restaurants ascended 2.9%, aided by growth of 3.7% and 1.31% in franchised domestic and international, respectively.

Restaurant operating margin enhanced 150 basis points (bps) year over year to 14.6%, aided by the initiatives that have streamlined staffing, and upgraded kitchen and point of sale systems. Restaurant margins at Chili’s Grill & Bar expanded on lower restaurant labor and restaurant expenses as well as flat cost of sales. Restaurant margin at Maggiano's improved mainly on better cost of sales, lower credit card fees and benefits from sales leverage on fixed costs related to higher revenue.

Liquidity Position

At the end of 2012, the company had current assets of $190.6 million and shareholders’ equity of $268.1 million.

Share Repurchase

During the quarter, the company repurchased 2.5 million shares for approximately $86.3 million and currently has $579 million remaining under the share repurchase authorization.  

Unit Update

During the quarter, the company opened nine international franchise restaurants and closed five franchise-owned Chili's restaurant.

At the end of the quarter, Brinker operated 1,585 restaurants, of which 1,274 were Chili’s, 44 were Maggiano's and 267 franchised restaurants in the international market. The international franchise restaurants operate 266 Chili’s restaurants and one Maggiano’s restaurant in 32 countries and two territories.

Outlook

For 2013, Brinker expects adjusted earnings to be in the range of $2.30 to $2.45, up 17% to 25%. The company anticipates comparable restaurant sales for full-year to increase 2–3% year over year and operating margin to expand by 100 bps.

As a result of unfavorable employment environment leading to lower consumer spending and slowing restaurant industry sales, the company, for the second quarter of 2013, anticipates comps growth at or even below the 2%–3% guidance and earnings in the range of 48 cents to 50 cents, down from the provided range of 17% to 25% for 2013.

Our Take

Brinker remains optimistic about improving its margin by 400 basis points and to double its EPS by 2015, supported by top-line growth and improving operational efficiencies. However, the outlook for the next quarter remains weak, owing to feeble growth in employment and frail industry sales. Hence, we expect estimates to go down for the second quarter of 2013. The Zacks Consensus Estimates for the next quarter is pegged at 55 cents.

Brinker currently retains a Zacks #3 Rank, which translates into a short-term ‘Hold’ rating. We are also maintaining our long-term ‘Outperform’ recommendation on the stock.

Chipotle Mexican Grill Inc. (CMG), one of Brinker’s peers, reported third-quarter 2012 earnings of $2.27 per share, which fell shy of the Zacks Consensus Estimate of $2.30. However, the result was ahead of the year-ago earnings of $1.90 per share. Double-digit top-line growth and margin expansion led to the year-over-year growth in earnings.
 

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