EAT Brinker International Inc

Brinker International Inc. (EAT), the owner and operator of Chili’s Grill & Bar and Maggiano's Little Italy restaurants, reported adjusted earnings per share of 47 cents in the second quarter of 2012, beating the Zacks Consensus Estimate by a couple of cents. Reported earnings were also ahead of the year-ago level of 38 cents per share.

On a GAAP basis, the company reported second quarter earnings of 44 cents per share versus 41 cents per share in the year-ago quarter. However, GAAP net income fell 5% to $35.7 million due to costs associated with the closure of some underperforming restaurants.

Total revenue at the Dallas, Texas-based company crept up 1.5% year over year to $681.9 million due to a 2.0% increase in system-wide comparable restaurants sales. However, reported revenue lagged the Zacks Consensus Estimate of $686 million.

Quarter Performance

Chili's Grill & Bar restaurant reported revenue of $554.8 million, up 1.2% year over year while Maggiano's sales perked up 2.9% to $110.9 million in the quarter. Royalty and franchise revenue increased 2.5% to $16.2 million, driven by a year-over-year unit growth of 22 additional international restaurants.

Comparable restaurant sales at Chili's Grill & Bar restaurant were up 1.4% for the third consecutive quarter benefiting from a 1.1% rise in traffic and 1.1% hike in menu price. Same-restaurant sales at Maggiano's climbed 2.8% for the eighth time in a row driven by higher traffic (up 0.6%), menu price (up 1.8%) and mix-shift (up 0.4%).

Comparable restaurant sales at franchised domestic restaurants and franchised international restaurants grew 1.7% and 4.8%, respectively.

Restaurant operating margin expanded 50 basis points (bps) year over year to 17.9%. Despite the food cost inflation, margins at Chili’s expanded on labor savings initiatives. Restaurant margin at Maggiano's improved mainly on lower workers' compensation insurance expense, credit card fees and benefit from sales leverage on fixed costs related to higher revenue.

The restaurant company reported adjusted tax rate of 29.7% during the quarter compared with 27.3% in the second quarter of 2011. Interest expense decreased $0.5 million year over year due to lower interest rate.

Financial Position

At quarter end, the company had current assets of $252.7 million and shareholders’ equity of $368.7 million. During the second quarter, the company repurchased 2.0 million shares for approximately $47.8 million.

Outlook

Brinker 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.

Unit Update

During the quarter, the company closed 5 Chili’s restaurants and opened one international franchise restaurant. 

At the end of the quarter, Brinker operated 1,574 restaurants, of which 1,288 were Chili’s, 44 were Maggiano's and 242 franchised restaurants in the international market. International franchise restaurants operate 241 Chili’s restaurants and one Maggiano’s restaurant.

In 2012, Brinker plans to open 40 to 45 restaurants of which 37 to 42 units will be opened by international franchise and 3 Chili’s store by domestic franchise.

Our Take

Brinker remains on track to double its EPS by 2015, driven by margin expansion through disciplined cost management and fourth consecutive quarter of positive comps and traffic growth. To attract customers, the company continues to focus on its value offerings like lunch combo, Happy Hour program and two-course meals for $20 at Chili’s and classic pasta Marco’s Meal for Two at Maggiano's.

Additionally, the company is boosting shareholder value through share repurchases as well as dividend payment. However, stiff competition and food cost inflation are expected to remain headwinds for the company. The Zacks Consensus Estimates for 2012 and 2013 are pegged at $1.86 and $2.16, respectively.

Brinker currently retains a Zacks #2 Rank, which translates into a short-term Buy rating. We are also maintaining our long-term Neutral recommendation on the stock.

One of the peers of Brinker, McDonald’s Corporation (MCD), the leading fast-food chain operator, posted fourth quarter 2011 earnings of $1.33 per share, surpassing the Zacks Consensus Estimate of $1.30.

 
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