POST MORTUM on the SBUX QUARTER
Laxman faced his first real test since being appointed as the new CEO. This quarter just reported heralded an unexpected shift in the company's financial outlook, particularly in revenue projections. This recalibration has introduced a heightened strain on growth as two of the company's pivotal markets, the United States and China, show signs of stress (the US is 49% of the store base, and China is 34%). This development begs the question: will the unchanged EPS back-half weighted guidance evolve into a persistent issue of concern? What happens to the "long-term" growth algorithm? Will confidence in the CEO wane if both need to be lowered later this year?
- Can new beverage platforms boost US Comps? What happens to long-term growth if they don't?
- Q1 results were disappointing, with revenue, comps, and EPS missing. Guidance was also lowered for full-year revenue growth and comps but not EPS. Why?
- A significant concern remains weak performance in China due to the challenging macro environment and intense competition. The visibility of recovery in China is still limited, and the competition will not stop discounting.
- US comps were better than feared but fluctuated intra-quarter, and 2Q is starting off soft (up against a 6% traffic compares in 2Q24) The success of new beverage launches is critical for improving US trends. Will the new beverage lines complicate operations?
- Margin performance and EPS were better than expected, and management kept the EPS growth target despite lowering revenue guidance. Did they pull forward with cost-cutting, and do they have more to come if sales remain soft?
Given the likelihood of weak Q2 comps, a fragile start to January, diverging customer segments, and no signs of improvement yet in China, we remain cautious about the outlook.
Brinker CEO Is Cooking Up Winning Formula
We like Brinker as a LONG and DIN as a SHORT. Chili's is significantly outperforming Applebee's. In 3Q23, Applebee's SSS declined (-2.4%) and is likely to see slightly better performance in 4Q23 as traffic improved QoQ from (-6%) to (-1.0%).
Brinker International, Inc. has reported its latest quarterly figures, marking a notable upswing from the previous year and underscoring the efficacy of its strategic maneuvers over the past 18 months. At the helm, CEO Kevin Hochman and CFO Joe Taylor are steering the company with a clear vision, prioritizing an enriched experience for guests and staff alongside dynamic new marketing approaches. Notably, in the quarter, Chili's and Maggiano's have eclipsed industry benchmarks, with Chili's surpassing industry sales by a notable 4% and traffic figures by 2%. The company's concerted efforts in diminishing guest-reported issues and bolstering managerial retention are evident. Financially, Brinker International stands stronger than before, reflecting the fruits of its strategic initiatives and its agile response to evolving market challenges. This commitment to refining customer and employee experiences, coupled with astute marketing strategies, lays a robust foundation for sustained growth.
Key Financial Highlights:
- Revenues: Total revenues reached 1.074 billion, a 5.4% increase from the previous year.
- Operating Margin: The restaurant's operating margin improved to 13.1%.
- Earnings: Adjusted diluted earnings per share increased by 30% to 0.99.
- Comp Store Sales: Chili's and Maggiano's reported comp store sales gains of 5% and 6.7%, respectively.
Detailed Analysis:
- Guest Experience: Significant improvements were noted, with reduced guest-reported problems and higher intent-to-return scores. The simplification efforts and labor model changes were highlighted as drivers.
- Team Member Experience: Managerial turnover improved, with a 2-point decrease to 22%. The company attributes this to more engaged management, effortless job execution, and higher compensation.
- Advertising and Marketing: The focus on the "3 for Me" value platform has effectively driven traffic and increased Chili's unaided awareness by 9% over the past year. New advertising strategies are being tested.
- Menu Strategy: Adjustments are being made to address issues with menu merchandising that led to a lower mix. The company is de-emphasizing certain items like wings and quesadillas and introducing new menu items to encourage trade-up.
- Maggiano's Performance: Maggiano's showed a strong performance with a 6.7% sales growth and a 300-basis point margin improvement. The new leadership under Dominique Bertolone aims to elevate the brand further.
Projected Outlook:
- Revenue Guidance: Annual total revenues are expected to be between 4.3 billion to 4.35 billion.
- Earnings Guidance: Adjusted earnings per share are projected to be between 3.45 to 3.70.
- Weather Impact: January results were significantly impacted by adverse weather, estimated to have a negative impact of 10 million to 12 million.
Emerging Themes and Concerns:
- Consumer Behavior: A more conservative consumer is indicated in lower add-ons and alcohol purchases.
- Operational Challenges: The company is addressing issues related to menu merchandising and its impact on the sales mix.
- Weather Impact: The adverse weather in January is a concern, though it is considered under guidance.
Guess Who's Back? Hamburglar Steals McDonald's Best Burgers Ever
Will the Best Burgers initiative boost traffic? For MCD, January will be down 8%, but significantly improving on 2-year trends.
McDonald's has launched a nationwide upgrade of its burgers, a move that's part of its "best burger initiative" announced in April. This initiative involves over 50 improvements, including softer buns, increased Big Mac sauce, and a revamped cooking process for better sear and cheese melt. McDonald's is reviving its iconic Hamburglar character to promote these enhanced burgers. The campaign, targeting McDonald's text messaging program participants, kicked off last weekend. It features a playful narrative where the Hamburglar is "on the loose" with McDonald's "best burgers ever." Participants received a text with a clue: a vehicle with the license plate "RBL RBL," the Hamburglar's catchphrase. The text encouraged users to reply with their city for updates on the Hamburglar's whereabouts and a chance to win prizes, including free burgers for a year.
The vehicle, a 1970 Plymouth Barracuda dubbed the "Burgercuda," is a critical element of this campaign. It's designed with the Hamburglar's black-and-white stripes, red accents, and burger-themed features like bun-shaped hubcaps and a cheeseburger-disguised spare tire. Fans who spot the Burgercuda and scan its code can win an Arch Card and Hamburglar-themed merchandise. For those who miss Burgercuda, McDonald's offers another opportunity to win free burgers for a year through SpotHamburglar.com. Tariq Hassan, McDonald's Chief Marketing and Customer Experience Officer, emphasized the company's commitment to improving its iconic burgers. The Hamburglar's involvement in this campaign adds a fun, interactive element for fans.
These burger enhancements aren't new globally; they've been tested in international markets and received positive feedback, as Jo Sempels, president of international developmental licensed markets, noted during the company's Investor Day in December. McDonald's last updated its burgers in 2018, introducing fresh beef for its Quarter Pounder with Cheese and removing artificial ingredients from its burger lineup. These changes align with the company's broader strategy, "Accelerating the Arches 2.0," focusing on core menu items. CEO Chris Kempczinski highlighted the importance of improving these staple products during the Q4 2023 earnings call, citing the success of items like the McCrispy Chicken Sandwich as evidence of this strategy's effectiveness.
