Brinker's 3Q Top-Line Acceleration Supports Improving Consumer Environment; Shares Under Review

Brinker International's EAT strong third-quarter results lent credence to a gradually improving consumer spending environment in the United States, as well as the company's ability to pass along menu price increases. Systemwide comparable-store sales grew 4.2% for the quarter, doubling the consensus estimate of 2.1%, with company-owned Chili's and Maggiano's locations contributing 4.6% and 3.9%, respectively. Diving deeper into the comparable-store sales gains, we see that the sharp increase from the second quarter (2% systemwide comps, 1.4% at Chili's, 2.8% at Maggiano's) was the result of menu price increases at both brands as well as an acceleration in traffic. Though Chili's and Maggiano's comps saw 50 and 100 basis points of comp benefit because of favorable weather, we generally believe the underlying traffic trends are sustainable over the short run. This suggests full-year comparable-store sales growth closer to the high-end of the standing 2%-3% guidance, consistent with management's commentary on Monday's call. More important, the top-line gains are generating excellent profitability, partly the result of increased labor expense leverage following a series of recent capital investments (including a new point-of-sale system and upgraded kitchen equipment). Excluding the impact of credit card breakage adjustments, Chili's and Maggiano's restaurant-level margins improved 90 and 100 basis points respectively, while consolidated operating margins increased 60 basis points to 9.2%.