We remember, vividly, the Street writing Brinker’s obituary in October 2012.
Specifically, it was October 24th and Brinker had just reported its 1QFY13 earnings. The company reported a 23% increase in EPS on 2.8% Chili’s comp but that was not good enough. The industry was experiencing a sales slowdown in September 2012 and was continuing into October. Apparently, at the time, it was game over for Chili’s and the stock ended up down nearly 10% that day, closing at $30.00.
Fast forward to the just reported 3QFY13 earnings call the stock is now $37 and trading down on good volume all because Chili’s lost ground to the Knapp Track bench mark in the month of March. Is the Brinker story over again for the second time in 6 months?
We need to ask the same question today as in October 2012: Has anything changed on the margin that has cause the story to change for EAT?
- Have the competition responded to counter the Chili’s sales momentum?
- Have the critical financial metrics of the company slowed?
- Did management use weather as an excuse to justify the slowing performance?
- Has management’s tone changed toward the future goals?
- Did guidance change?
Some of these questions are more difficult to answer but the most important ones for the long-term TAIL thesis, 2, 4 and 5, can be answered with resounding "no"s. The March results were certainly weaker than we were looking for. Specific details on the quarter were positive, however, with the company reiterating its FY2010 promise to double EPS by the end of FY14 and emphasizing a recovery from initial operational difficulties around the roll-out of pizza in its Chili’s stores.
While many on the sell-side view Brinker with more than a little skepticism, perhaps because of disappointments in the pre-FY10 era, we believe the current management team has earned a heightened level of credibility (particularly versus some competing management teams). The company’s guidance of roughly $2.35 in FY13 EPS versus consensus $2.32 implies, to us, that the earnings power of the company has not deteriorated. We retain a positive bias on Brinker over the longer-term TAIL.