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Brinker put up a strong number that didn’t blow the doors out from a comp perspective but certainly impressed on the margin line.

Brinker’s 2QFY11 results were strong, as I wrote this morning, and the earnings conference call suggested that the upside I am forecasting in comps is within reach.  Some interesting takeaways from the conference call:

  • Chili's guest feedback scores continue to improve with attentive service being a key component of the increase.  Management’s internal metrics are validated by what we see in external research when we compare ourselves to the competition.
  • The strong comp performance was largely due to the year-over-year compare not having very much 3 for $20 during the month.  Management stated that this was a sort of a preview of the effect they anticipate from the lapping of 3 for $20 after 10 week during this current quarter.
  • The kitchen retrofits have been yielding positive results and management stressed that the kitchen process has been simplified. Furthermore, the restaurant level margin improvement seen in 2QFY11 does not include the food prep benefit to labor costs because the changes were not fully rolled out until this month. 
  • Another labor initiative, team service, is working well for Chili’s.  Margins have been enhanced by this initiative and it has coincided with higher earnings for staff along with higher guest satisfaction stores. 
  • The outlook for continued comp acceleration is strong; the new lunch menu has tested strongly in three test markets with no advertising aside from some use of the company’s database.  While it is tricky to extrapolate the results of test markets to the broader system, I am confident that a broader rollout, complemented by a more robust advertising allocation, will perform strongly and bolster a traditionally-soft day part for Chili’s.
  • During a period of slowing top line trends for the casual dining category, EAT saw sequential improvement.  The Gap-to-Knapp, adjusting for the 53rd week, improved by 120 basis points from 1QFY11 through 2QFY11.

My conviction in this stock remains high and I believe further sequential improvement is to come on the top line as well as further margin enhancement.  Below is a chart showing Chili’s comparable restaurant sales and projections for the next two quarters.

EAT: STRONG QUARTER WITH MORE TO COME - eat sss

Howard Penney

Managing Director