Brinker International Shares Up Despite Q4 Earnings Miss

Brinker International, Inc. EAT posted mixed fiscal fourth quarter results with earnings missing the Zacks Consensus Estimate while revenues beat the same. Despite the earnings miss, the share price of the restaurateur was up 2.5% due to the positive outlook for 2017.

Adjusted earnings of 85 cents per share missed the Zacks Consensus Estimate of 86 cents by a penny. However, the quarterly figure increased 10.4% year over year, owing to improved revenues and a decline in interest expense.

 

 

Revenue Discussion

Quarterly revenues edged up 4% year over year to $758.7 million and beat the Zacks Consensus Estimate of $750.0 million by 1.2%. The upside reflects a 3.7% increase in company sales and a 13.4% increase in Franchise and Other revenues owing to an improvement in comps.

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 up 2.3%, better than the prior-year quarter decline of 0.5% and third quarter comps growth of 0.7%, driven by improved comps at Maggiano's as well as Chilli's.

Behind the Headline Numbers

Chili's reported revenues of $639.8 million, up 4% year over year, driven by the company's acquisition of 11 units in Canada, increases in domestic restaurant capacity, and an increase in comps. Domestic comps at Chili's increased 2.1%, better than the prior quarter increase of 0.5% as well as the year-ago quarter decline of 0.3%, on the back of its menu innovation initiatives.

Despite a 0.6% drop in traffic, Chili's company-owned comps increased 2.5%, attributable to a positive pricing impact. Comps at Chili's franchised restaurants were up 1.2%, comparing favorably with comps growth of 1% in the year ago quarter and 0.2% in the prior quarter. Domestic comps growth of 1.4% compared to 0.5% in the prior quarter made up for the relatively softer international franchised comps growth of 0.8% compared to 2.3% in the year ago quarter.

Maggiano's sales increased 1.9% to $95.2 million in the quarter. Comps at Maggiano's went up 0.9%, better than comps growth of 0.2% both in the third quarter of fiscal 2014 as well as fiscal fourth quarter 2013. Comps at Maggiano's reflect favorable menu pricing impact and traffic.

Expenses and Margins

Cost of sales ratio declined 10 basis points (bps) to 26.8% driven by menu price, favorable mix associated with menu changes, better waste control and lower oil usage related to the new fryers. These improvements were partially offset by higher cheese, avocados, lime and seafood costs.

Restaurant labor ratio was flat year over year owing to higher sales offset by slightly higher hourly overtime training and manager salaries. Restaurant expense ratio was up 30 basis points owing to an increase in advertising expenditure, higher pre-opening costs from new restaurants, and Ziosk rental fees.

Restaurant operating margin improved approximately 80 basis points to 18.7% due to improved Chili's as well as Maggiano's margin.

Fiscal 2014 Highlights

Adjusted earnings of $2.71 per share increased 15.8% year over year and were within management's guidance range of $2.65 to $2.75. Revenues of $2.91 billion increased 2.1% year over year. Comps growth of 0.6% was better than the year-ago comps growth of 0.5% and was within management's guidance range of (1%) to 1%.

Guidance

Brinker Interanational expects earnings in the range of $3.00 to $3.15 per share for fiscal 2015, up 11% to 16% year over year. By 2017, the company expects to achieve earnings per share of $4.00, doubling from 2012.

The company expects total revenue to increase 4% year over year in fiscal 2015. This reflects comps increase in the range of 1% to 2% and franchise and other revenue increase of about 15%. Restaurant operating margin is expected to improve 25 to 50 basis points year-over-year.

Our Take

We note that sales-building initiatives of the company like menu innovation, extensive re-imaging, better food presentation, kitchen system optimization and introduction of a better service platform are aiding comps. Having said that, we cannot ignore rising commodity costs that continue to be a concern for this Zacks Rank #3 (Hold) company.

Other Stocks to Consider

Better-ranked stocks in the same industry include BJ's Restaurants, Inc. BJRI, Chipotle Mexican Grill, Inc. CMG and Jamba, Inc. JMBA. All these stocks sport a Zacks Rank #1 (Strong Buy).
 

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