The perception of the earnings call was negative and rightly so. Management’s tone was cautious but we believe that the magnitude of the selloff has resulted in an attractive entry level on the long side. This afternoon, Keith added Brinker, on the long side, to our Real Time Positions. A chart illustrating his levels is below. In short, we do not believe that Brinker is going to miss FY13 EPS guidance. We are confident that Chili’s remains an outperformer and we expect margins to continue to expand through the year. We see 20-25% upside from these levels.
Brinker’s shares are trading at $30 or 10% below last night’s closing price. Management’s commentary on the earnings call has been the most significant factor driving down the stock; the print raised no concerns for FY13 earnings meeting our expectations. The headline 1QFY13 EPS number was a disappointment but the shortfall was driven largely by increased G&A expenses. The table below highlights the major components of the company’s income statement versus consensus.
Points of note:
- Revenues came in slightly ahead of expectations as Chili’s comps continue to outperform Knapp by over 200bps
- Chili’s comps actually strengthened into September while the industry slowed sequentially and, for the quarter, accelerated on a two-year basis
- Restaurant level margins expanded year-over-year, at a greater rate than consensus was expecting as cost-saving initiatives are being rolled out
Management mentioned two factors worth discussing:
"Employment growth continues to be sluggish, resulting in a persistently cautious consumer and industry sales are softening."
HEDGEYE: We hold a negative view of casual dining and have long highlighted the anemic level of job growth as a primary contributing factor to our thesis. Chili’s is still producing best-in-class same-restaurant sales growth and, given the continuing rollout of new products, we expect its outperformance versus the industry to remain in the 2-2.5% range.
“We expect continued hours overtime associated with the accelerated rollout of new kitchen equipment and point of sale system at least through part of the second quarter…these factors will affect our second quarter EPS growth causing it to fall below the FY13 guided range of 17-25% to $0.48-0.50.”
HEDGEYE: We believe that management is being especially cautious on the second quarter, given the uncertain macroeconomic environment and one-time incremental costs negatively impacting the P&L. Even with EPS coming in at $0.49, we expect FY13 earnings per share of at least $2.45-$2.50. The company remains confident of hitting its FY13 implied range of $2.39-2.45 and we believe that this “comp scare” as happened in January on 2QFY12 earnings. At that time, skepticism was rife that the company’s 2-3% comp guidance would be met. We believe that today’s sell off has been overdone, as it was in January.
Conclusion & Levels
Chili’s continues to perform well versus the industry as margin-enhancing initiatives continue to gain traction and drive strong earnings growth for Brinker. While management’s forthright commentary is well-placed, we believe that the market is currently mispricing this stock. We would not pay the same multiple for RUTH as we would for EAT; both stocks are valued at roughly 7x EV/EBITDA. BLMN is a stock we would focus more attention on, as a short idea, at 8x.
Below are Keith’s quantitative levels for Brinker. The stock has held long-term TAIL support at $29.11 and Keith’s model is highlighting immediate-term TRADE resistance at $32.89.