Brinker’s shares represent the best way to play casual dining on the long side, in our view, particularly if the jobs picture in the United States continues to stabilize. This morning, Brinker reported 2QFY13 of $0.50, in line with consensus, and sales of $690mm slightly missing $693mm consensus.
In a difficult industry environment, Chili’s produced earnings in line with expectations. While the top-line was weaker-than-expected, Chili’s still leads the industry. The headline company same-restaurant sales growth figure was 1% but a holiday shift negatively impacted 2QFY13 comps by 60 bps, implying a 1.6% normalized comp versus 1.7% consensus. 3QFY13 should benefit 3QFY13.
Restaurant-level margin improved by 30 bps versus 2QFY12, to 15.7% of sales, but missed the consensus expectation of 16.1% due to lower-than-expected sales.
While not an impressive quarter, the 2QFY13 result demonstrated that Chili’s has invested in its brand to enable it to continue to take share. Over the short-term, it’s difficult to discern the impact that Darden’s “price war” will have on Brinker. Judging by management’s commentary today, the company does not see increased discounting as a threat to its progress toward achieving its guidance.
Guidance for FY13 was reiterated at $2.30-2.45, or +17-25% growth versus FY12. Same-restaurant sales growth for the year is still expected to be 2-3%. Long-term guidance is for margin to be expanded by 400 basis points, driven by unit growth of 1-2% and same-restaurant sales of 2-3%, culminating in 10-13% EPS growth.
Near-Term Points Worth Noting
- Comparisons are difficult for Chili’s over the next two months
- The rate of industry hiring is decelerating
- Food inflation is accelerating and pricing is challenging in the current environment
- Competitive dynamics point to increased margin pressure, especially given the impact of Darden’s stated plan to sacrifice margin to gain traffic
Howard Penney
Managing Director
Rory Green
Senior Analyst
