EAT Brinker International Inc

We are maintaining our long-term Neutral recommendation on Brinker International Inc. (EAT), which owns, develops, operates and franchises the Chili's Grill & Bar (Chili's) and Maggiano's Little Italy (Maggiano's) restaurant brands primarily in the United States.

The Dallas, Texas-based company reported adjusted earnings of 30 cents in the first quarter of fiscal 2012, surpassing the Zacks Consensus Estimate by 3 cents, benefiting from same-store sales growth, higher restaurant margin as well as lower share count.

Total revenue jumped 2.1% year over year to $668.4 million due to a 2.0% increase in system-wide comparable restaurants sales. Restaurant operating margin enhanced 80 basis points (bps) year over year to 15.8%.

The casual dining restaurant company also reaffirmed its adjusted earnings guidance range of $1.80 to $1.95 for fiscal 2012. The company continues to expect full-year revenues and comparable-restaurant sales to increase 2%–3% year over year.

Brinker’s effort to reposition its Chili’s brand and several sales initiatives, particularly value-oriented lunch combo, Happy Hour program and two-course meals for $20 to drive traffic and improve comps seem to be paying off as during the first quarter comparable restaurant sales at Chili's restaurant escalated 1.7%. In a bid to attract customers, Brinker is making efforts to innovate two-course meals for $20  and lunch offering.

Moreover, Brinker continues to concentrate on more product-based promotions like day parts initiatives, rather than discounting, in order to attract the attention of casual diners.

Additionally, to drive top-line growth, the company remains connected to its guests through social media programs and email database.

Furthermore, to increase customer visitation, the company plans to remodel its restaurants; the first remodeled unit was opened at Oklahoma city, where the guest response was positive.

Brinker has currently renovated 70 units and expects to extend the re-image program to about 200 restaurants by the end of 2012. The investment cost for remodeling is $250,000 with an estimated sales lift of 3%-4%.

The company also remains on track to double its EPS and achieve margin expansion of 400 bps by 2015. To attain its target, the major cost-saving initiatives still in the pipeline are the second phase of kitchen equipment retrofit program and the new point of sale (POS) system.

In the first quarter of 2012, the second phase of the kitchen retrofit program has been deployed in 66 company-owned restaurants and four franchise restaurants.

The company plans to aggressively roll out the second phase of the program– the new cooking equipment initiative– at 500 units in 2012. Brinker expects to complete the deployment of new line equipment to kitchens in all company-owned restaurants by the end of second quarter of 2013. New equipment benefits include labor productivity gains, improved and more consistent food quality, and quicker preparation times. The company estimates a benefit of 100 bps from the second phase of kitchen retrofit program and a gain of 50-70 bps from the first phase of the program. The new POS system has been implemented in 86 restaurants so far and the company expects to install an additional 56 units in second quarter of 2012 and expects the complete roll out by early 2013.

The company’s strategy to shift to franchised operation, focus on international expansion in order to move away from the over-supplied domestic market and enhancement of shareholder value looks promising for its business.

However, we remain cautious on the stock based on the ongoing stiff competition with respect to price, service, location and concept in order to drive traffic and these may adversely affect Brinker’s top and bottom-line growth and cost inflation, which is expected to remain in the range of 3.5%-4.5% in 2012.

Currently, Brinker is 79% contracted through the remainder of 2011 and 51% through the end of fiscal 2012. In 2012, Brinker forecasts cost of sales to remain in the range of 27–27.5% of revenues. Additionally, we believe that lower consumer spending due to economic uncertainty will likely restrict Brinker’s revenue growth in the near term.

 
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