EAT: THE BLUEPRINT FOR SUCCESS

Takeaway: It's time for DRI to pay attention.

We often articulate our view that EAT is one of the best managed companies in the restaurant space.  This morning’s press release and subsequent call merely adds conviction to this belief.  It was nothing short of an awesome quarter, as the company managed to surprise the street by beating revenues, EPS, and comp sales expectations.  Mind you, this performance comes amid a less than favorable macro backdrop and a three-month period in which we suspect the majority of casual dining companies struggled. 


The company’s ability to weather an adverse environment speaks volumes to the sound management and solidity of the business model.  What makes Brinker unique in a sense (at least compared to DRI and BLMN), is that they focus on doing one thing right – running the Chili’s brand as efficiently as possible.  This mindset is precisely what inspired the company to dwindle its portfolio down to two brands several years ago.  The casual dining industry has changed and management quickly realized the best way to deal with this fact, whether they liked it or not, was to adapt.  Accordingly, the company, management, and shareholders have been rewarded for this decision – the stock has nearly quadrupled since the beginning of 2009.  In many ways, Brinker should be viewed as the blueprint for success in the new age of casual dining.

 

This proves that when you have the right team in place, with the proper focus, your business can succeed when others don’t.  To this extent, we believe EAT has created a very efficient operating model and has the drivers in place (reimages, new kitchen equipment, tabletop media, Fresh Mex platform, delivery) to drive incremental efficiencies and gains over the long-term.  In addition, the company continues to fulfill its duty to shareholders by returning cash when they cannot justify reinvestment in the business. 

 

To be frank, the only issue we had with the quarter was declining traffic (-1.9%) at Chili’s.  Weather may have played a slight role in this, but we cannot ignore the fact that this comes on top of a -1.9% traffic decline in 2Q13.  This trend is obviously a red flag.  Management is aware of this issue and, when prompted, acknowledged that reversing this trend is a high priority.  We expect current initiatives to drive traffic over the long-term, but would certainly like to see this issue addressed sooner.  A more aggressive marketing strategy, implemented halfway through 2Q, could be a start.

 

What we liked in 2Q14 results:

  • Management maintained FY 2014 guidance.
  • Both revenues ($704.395mm) and adjusted EPS ($0.59) beat expectations by 84 bps and 134 bps, respectively.
  • Chili’s company-owned comp sales (+0.7%) beat expectations (-0.3%).
  • Maggiano’s comp sales (+0.9%) beat expectations (+0.6%), representing the 16th consecutive quarterly increase.
  • After tracking in line with the industry (Knapp Track) in 2HFY13, they began to take share in 1Q14 and accelerated that trend in 2Q14.
  • International portfolio, now at 291 restaurants after 7 openings in 2Q14, continues to grow.
  • Value scores are improving while, at the same time, operators are managing the business more efficiently.
  • Demonstrated the tremendous cost controls they have in place.
  • New kitchen equipment and server initiatives positively impacted labor costs.
  • Aggressively re-imaging restaurants, rolling out tabletop media, and building delivery which should, in our opinion, be able to drive incremental sales and traffic over the long-term.
  • The Fresh Mex platform has tested well and could drive traffic, stronger food scores and margin improvement due to the positive impact it will have on cost of sales.
  • YTD share repurchases of $93.1mm or 2.2mm shares, with $453mm still authorized.
  • $63mm of available cash on the balance sheet.

What we didn’t like in 2Q14 results:

  • Traffic at Chili’s was down -1.9% in 2Q14, after being down -1.9% in 2Q13.
  • Overall domestic franchise comp sales were down -0.7%.

 

EAT: THE BLUEPRINT FOR SUCCESS - chilis

 

EAT: THE BLUEPRINT FOR SUCCESS - maggianos

 

EAT: THE BLUEPRINT FOR SUCCESS - traffic

 

 

Howard Penney

Managing Director


Cartoon of the Day: 'Biggest Tax Cut Ever'

President Donald Trump's economic team unveiled what he called last week, "the biggest tax cut we’ve ever had.” Before you get too excited about that hang on a sec. "Trump Tax Reform ain’t gettin’ done anytime soon," Hedgeye CEO Keith McCullough wrote in today's Early Look.

read more

Neurofinance: The Psychology Behind When To Sell A Bull Market

"Most momentum investors stay invested too long, under-reacting and holding tight after truly bad news finally arrives to break the trend," writes MarketPsych's Richard Peterson.

read more

Energy Stocks: Time to Buy the Dip? | $XLE

What the heck is happening in the Energy sector (XLE)? Energy stocks have trailed the S&P 500 by a whopping 15% in 2017. Before you buy the dip, here's what you need to know.

read more

Cartoon of the Day: Hard-Headed Bears

How's this for "hard data"? So far, 107 of 497 S&P 500 companies have reported aggregate sales and earnings growth of 4.4% and 13.2% respectively.

read more

Premium insight

McCullough [Uncensored]: When People Say ‘Everyone is Bullish, That’s Bulls@#t’

“You wonder why the performance of the hedge fund indices is so horrendous,” says Hedgeye CEO Keith McCullough, “they’re all doing the same thing, after the market moves. You shouldn’t be paid for that.”

read more

SECTOR SPOTLIGHT Replay | Healthcare Analyst Tom Tobin Today at 2:30PM ET

Tune in to this edition of Sector Spotlight with Healthcare analyst Tom Tobin and Healthcare Policy analyst Emily Evans.

read more

Ouchy!! Wall Street Consensus Hit By Epic Short Squeeze

In the latest example of what not to do with your portfolio, we have Wall Street consensus positioning...

read more

Cartoon of the Day: Bulls Leading the People

Investors rejoiced as centrist Emmanuel Macron edged out far-right Marine Le Pen in France's election day voting. European equities were up as much as 4.7% on the news.

read more

McCullough: ‘This Crazy Stat Drives Stock Market Bears Nuts’

If you’re short the stock market today, and your boss asks why is the Nasdaq at an all-time high, here’s the only honest answer: So far, Nasdaq company earnings are up 46% year-over-year.

read more

Who's Right? The Stock Market or the Bond Market?

"As I see it, bonds look like they have further to fall, while stocks look tenuous at these levels," writes Peter Atwater, founder of Financial Insyghts.

read more

Poll of the Day: If You Could Have Lunch with One Fed Chair...

What do you think? Cast your vote. Let us know.

read more

Are Millennials Actually Lazy, Narcissists? An Interview with Neil Howe (Part 2)

An interview with Neil Howe on why Boomers and Xers get it all wrong.

read more