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%.
Howard Penney
Managing Director
