Company Reports

Led by Chili's, Brinker chalked up 5% comparable sales growth in the fourth quarter, driven by 4.2% and 1% lifts in price and traffic, respectively. More productive stores helped expand unit-level margins by 20 basis points to 18%, despite elevated food costs and investments in labor and marketing.

Brinker is well-positioned to steal market share in full-service dining, even amid a tumultuous consumer backdrop. Investments in labor, advertising, store infrastructure, menu innovation, and technology—paired with simplified operations—have forged a leaner operator better equipped to press its scale edge against smaller peers. Moreover, the turnaround unlocked enhanced service and capacity levels, just as savvy marketing and a value convergence with fast food lured diners through the door. This has been evidenced by 13% average annual comparable sales growth over the last three years, besting the full-service industry’s 6% rate, per Euromonitor. Now, Brinker aims to keep new and returning diners engaged by ramping up its investments, with capital expenditures expected to reach 5.4% of sales on average over the next five years, by our estimates, above the 4.1% in the prior period. This should translate into continued outperformance, with our 4.2% company-owned sales forecast outpacing dine-in’s 3% estimate.

After years of underinvestment, Brinker has begun spending behind labor, stores, marketing, and the menu to bring diners back into Chili's. The banner's polished unit-level execution and low-cost traffic drivers resulted in 16% annual comparable sales growth over two years.

We are transitioning our coverage for Brinker International and plan to publish an updated report shortly. Our report on Brinker will now utilize our quantitative ratings in conjunction with an analysis on the firm's business strategy and competitive advantage from our analyst team. The quantitative ratings are philosophically analogous to Morningstar's proprietary, analyst-driven equity ratings. However, they are derived using advanced techniques that compare the firms to those with similar attributes from our universe of analyst-driven ratings.

Brinker reported solid fourth-quarter and fiscal 2013 results as the firm was able to overcome a difficult operating environment. The firm continued to capitalize on solid cost management, allowing restaurants to employ new strategies such as sampling to gain exposure for new products. Still, we maintain our belief that Brinker does not possess any competitive advantages in the dining space.

Solid cost containment and previous menu price increases enabled Brinker EAT to grow its bottom line in the third quarter despite weakening trends on the top line. The results do not move the needle on our projections or long-term outlook. As such, we will maintain our fair value estimate of $33 per share and our no-moat rating.

Brinker EAT reported modest second-quarter earnings, though its stock is trading lower despite meeting Street expectations on the bottom line. A slight miss on top-line projections may be the culprit, but we do not view the results unfavorably. The miss may be the result of more aggressive promotional activity within the industry, particularly from Darden DRI, but we have captured this in our own projections. All told, we will be maintaining our fair value estimate of $33 per share.

After shedding its On the Border concept in 2010, Brinker International, a casual dining restaurant operator, has since focused on growing its Chili's and Maggiano's Little Italy businesses. The firm, which operates nearly 1,600 restaurants and holds a minor stake in Romano's Macaroni Grill, has been keen on growing its franchise business in the past few years, particularly abroad, as it aims to keep operating costs low in a challenging environment for casual diners. While the Chili's brand remains relevant and innovative, we believe low switching costs and minimal barriers to entry in the industry hamper the firm's ability to gain a competitive advantage.

Brinker EAT reported first-quarter earnings Wednesday that slightly missed Street expectations on the bottom line and have the stock reeling in early trading. The firm posted decent same-store sales growth at its two main concepts, although comparables weakened in the latter part of summer. At this time, our fair value estimate remains under review as we transition our coverage of Brinker to a new analyst.

In contrast to a number of other casual dining participants, Brinker International EAT posted solid fourth-quarter results, including same-store sales trends that are coming in ahead of industry averages for both core brands, while also driving impressive expense leverage. While we harbor concerns that the restaurant industry will become an increasingly challenging space in which to operate in the months to come, including the threat of uneven global consumer spending patterns, increased competition due to a higher number of new restaurant openings, and the looming specter of higher commodity costs, we believe Brinker has laid out sensible plans to maintain current same-store transaction growth and preserve profitability in fiscal 2013. Nevertheless, we remain concerned that the aforementioned headwinds could spark a correction among valuations across much of the restaurant category, including Brinker, especially as slowing industry traffic and food costs are factored into forward valuation assumptions. Our fair value estimate remains under review, as we weigh the near-term industry headwinds with management's long-term goals.

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%.

Brinker International EAT posted solid financial results in its second fiscal quarter, reflecting continued strong comparable-store sales and operating margin expansion. Total sales were up 1.5% year over year to $682 million, primarily because of higher pricing as input costs rose. The firm gave no update to fiscal 2012 guidance. In the forecast issued last quarter, and consistent with our assumptions, the firm expected fiscal 2012 revenue to be up 2%-3% and operating margins to expand 50 basis points to 8.3%, leading to earnings per share of $1.80-$1.95. We believe the shares are currently modestly overvalued, and we remain concerned that a correction among restaurant stocks may occur as macroeconomic pressures and menu price increases from earlier in the year weigh on traffic industrywide.

Brinker International EAT again posted solid financial results in its first fiscal quarter, reflecting continued strong comparable-store sales and operating margin expansion. Total sales were up 2.1% year over year to $668 million, primarily due to increased traffic at the firm's two concepts, Chili's and Maggiano's. Consistent with our assumptions, the firm expects fiscal 2012 revenue to be up 2%-3% and operating margins to expand 50 basis points, leading to earnings per share of $1.80-$1.95. We believe the shares are currently modestly overvalued, and we remain concerned that a correction among restaurant stocks may occur as macroeconomic pressures and menu price increases from earlier in the year weigh on traffic industrywide.

After a decade of rapid expansion and portfolio diversification, Brinker EAT has spent the last few years paring its store base by selling off chains such as On the Border, Macaroni Grill, and Corner Bakery. We believe this is a strategic move because the firm can now focus on its core flagship chain Chili's Grill & Bar and Italian restaurant concept Maggiano's. While competition remains tough in the crowded domestic casual dining space, we believe Brinker has ample opportunities for growth in international markets.

Brinker International EAT presented solid fourth-quarter results reflecting continued strong comparable-store sales and solid operating margins. The margin expansion exceeded our already optimistic assumptions, and we plan to raise our fair value estimate modestly to account for this, along with management's robust outlook for the coming year. For fiscal 2012, the firm expects revenue to be up 2%-3% and operating margins to expand 50 basis points, leading to earnings per share of $1.80-$1.95. With operating margin expansion and the reduction in shares from share-repurchase activity, we believe this EPS target is attainable and will adjust our model accordingly. We believe the shares are currently fairly valued.

Brinker International EAT presented solid third-quarter results and is on track to meet our full-year estimates. For fiscal 2011, we project a low-single-digit revenue decline, despite a 5.4% decrease year to date, as the firm cycles out of heavier promotional activities in the year-ago period in the back half of the year. Additionally, we estimate that the operating margin will expand to around 7.0%-plus in fiscal 2011, up from 6.4% in the prior year, as Brinker benefits from operational efficiencies and menu price increases, partially offset by higher beef prices in the back half of the year. This is in line with management's 70- to 100-basis-point margin improvement forecast. Results were in line with our expectations, and we are maintaining our fair value estimate of $19 per share.

After a decade of rapid expansion and portfolio diversification, Brinker has spent the last few years paring back its store base by selling off chains like On the Border, Macaroni Grill, and Corner Bakery. We believe this is a strategic move because the firm can now focus on its core flagship chain Chili's Grill & Bar and Italian restaurant concept Maggiano's. While competition remains tough in the crowded domestic casual dining space, we believe Brinker has ample opportunities for growth in international markets.

Brinker International's EAT second-quarter results affirm our thesis that it will be difficult to wean consumers off previously introduced promotional combos, as they have become accustomed to discounting. However, the operating margin improved significantly as the firm benefited from efficiency gains related to technology updates and the transformation of kitchen processes. Results were in line with our expectations, and we are maintaining our fair value estimate.

Brinker International's EAT first-quarter results affirm our thesis that it will be difficult to wean consumers off previously introduced promotional combos, as they have become accustomed to discounting. However, the operating margin improved significantly as the firm benefited from efficiency gains from technology updates and the transformation of kitchen processes. Results were in line with our expectations, and we are maintaining our fair value estimate.

Brinker International's EAT fourth-quarter results reflected a continually challenging environment in the casual dining space but showed sequential improvement from the previous quarter. Additionally, management provided a fiscal 2011 full-year outlook that was above our expectations, driven by higher operating margin assumptions, as the firm expects to benefit from efficiency gains from technology updates and the transformation of kitchen processes. As a result, we plan to increase our near term projections, but our fair value estimate remains unchanged.