EAT – LESS IS MORE

 

Now we know why EAT's CFO Chuck Sonsteby was so bullish about margins!  EAT preannounced its 3Q09 earnings and even with same-store sales slowing from 2Q09 to -5.6% from -4.5%, management expects EPS of $0.44-$0.45 versus consensus at $0.29.  Based on this guidance, operating margins will likely improve by 180-200 basis points year-over-year following five quarters of year-over-year margin declines.  Management attributed these better than expected margins to cost of sales favorability, lower preopening expenses and better control of labor and G&A expenses.   And, as I said last week (please refer to my April 3 post titled "EAT - Is There A Paradigm Shift in Casual Dining?"), there appears to be more fat still left to cut, largely related to the company's recently announced organizational changes and decision to have Todd Diener, serve as the president of both the Chili's and On the Border brands.  This will lead to more management cuts across the two concepts.  That being said, EAT's press release stated that management expects its current margin momentum to continue into fiscal 2010. 

 

Some of EAT's margin favorability was offset by weaker than expected same-store sales growth in 3Q09.  Despite the sequential slowdown in same-store sales on a year-over-year basis, EAT's blended 2-year average trends improved slightly in 3Q09 to -2.3% (from -3.3% in 2Q09).  Chili's same-store sales growth declined 5.2% in the quarter but on a 2-year average basis, decreased 1.8% (from -3.3% in 2Q09).  Traffic trends at Chili's worsened in the third quarter, declining 9.6% versus -5.5% and -5.8% in 1Q09 and 2Q09, respectively. 

 

EAT's recent same-store sales and traffic trends reaffirm my view that it is unlikely we will see a significant improvement in casual dining sales trends in calendar 2Q09 from the -3% to -5% levels.  The issue facing all operators will be the impact on the P&L from discounting in an effort to drive customer counts.  As of yesterday, Chili's started its "10 meals for under $7" deal (not reflected in the 3Q09 numbers).  In 3Q09, Chili's price and mix increased sequentially on both a 1-year and 2-year basis while traffic declined.  Going forward, Chili's could see a tick up in traffic as it promotes its $7 menu options at the expense of price and mix.   In today's environment, I think this is the way casual dining is headed - less is more.  And EAT has and continues to proactively adjust its margin structure and business model to outperform in this environment.

 

EAT – LESS IS MORE - Chili s 3Q09 Price Mix Traffic


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