Brinker International Inc (EAT), the world’s leading casual dining restaurant company, reported second quarter 2011 adjusted earnings per share (EPS) of 38 cents, surpassing the Zacks Consensus Estimate of 32 cents. It was also well ahead of 25 cents reported in the prior-year quarter. The upside in earnings was driven by continued margin expansion at Chili’s and top-line growth at Maggiano’s.
On a GAAP basis, the owner of Chili’s Grill & Bar and Maggiano’s Little Italy, reported second quarter earnings of 41 cents per share, more than double of 18 cents posted in the year-ago quarter.
Quarter Performance
Total revenue dropped 4.8% year over year to $671.9 million and missed the Zacks Consensus Estimate of $673.0 million. The year-over-year decline in revenues was due to sluggish same-restaurant sales. The system wide comparable-restaurant sales fell 3.7%.
Chili’s Grill & Bar restaurant reported total revenue of $548.3 million, down 7.4% year over year, as the restaurant continues to face challenges in improving comparable-restaurant sales. Moreover, 21 restaurants were sold to a franchisee in 2009 and 10 were closed during the quarter. Maggiano’s sales spiked up 4.7% to $107.8 million, driven by a rise in traffic. The royalty and franchise revenues inched down 4.3% to $15.8 million.
Comparable-restaurant sales at company-owned restaurants declined 3.5% year over year during the quarter. By restaurant concepts, comparable-restaurant sales fell 4.9% at Chili’s Grill & Bar, but rose 4.7% at Maggiano’s. Chili’s Grill & Bar restaurant experienced a 7.1% drop in traffic, whereas Maggiano’s restaurant traffic rose by 5.7%.
Comparable-restaurant sales at franchised restaurants decreased 4.1% from the prior- year quarter, as same-restaurant sales at franchised domestic restaurants plunged 6.5%, partially offset by 2.9% upside at international franchised restaurants.
Restaurant operating margin improved 210 basis points (bps) year over year to 17.4%, driven by contraction in restaurant labor and expenses.
The Dallas-based restaurant pointed out that its tax rate was 17.5% during the quarter as compared with 16.8% in the second quarter of 2010.
During the recently reported quarter, four international franchised restaurants and two franchised restaurants were opened under the Chili’s brand. However, Brinker closed two company-owned restaurants under the Chili’s brand.
Financial Position
As of December 29, 2010, the company reported current assets of $325.6 million and shareholder equity of $527.6 million. During the second quarter, the company repurchased 8.3 million shares for approximately $157.2 million and reduced its long-term debt by $5.5 million sequentially to $513.5 million.
The company paid a dividend of 14 cents per share in the second quarter, up 27.3% year over year.
Outlook
Brinker reaffirmed its adjusted earnings guidance range of $1.30 to $1.42 for fiscal 2011. The Zacks Consensus Estimate for fiscal 2011 is $1.39. The company continues to expect full-year revenues to decrease between 2% and 4% from the last year’s revenues of $2.86 billion. The company projects comparable-restaurant sales to be in a range of flat to negative 2%.
The company plans to open 45 to 53 franchise restaurants, including 10 to 13 franchise restaurants under the Chili’s brand and 35 to 40 internationally.
Our Take
Brinker’s earnings increased, but revenues declined. The company continues to expect comparable-restaurants sales to be disappointing in 2011. However, Brinker is repositioning its Chili’s brand to offset its declining sales momentum and record more sustainable and stable growth. Additionally, company is making efforts to expand its margins through disciplined cost management and is also expected to benefit from capacity contraction and the consequent lower unit capital expenditure.
One of Brinker’s competitors, McDonald’s Corporation (MCD) has reported fourth quarter 2010 earnings of $1.16 per share, in line with the Zacks Consensus Estimate. The earnings growth was driven by value offerings and premium products along with a rise in comparable-store sales across all regions. The company also benefited from its renovation strategy and new menu offerings, which drove higher traffic in the reported quarter.
We have a Zacks #3 Rank (short-term Hold recommendation) on the shares. We also reiterate our long-term Neutral rating.
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