Brinker reported a great quarter this morning which exceeded consensus expectations. I think I have been one of, if not the most bullish analysts on this name yet Chili’s reported comps still beat my expectations also.
Brinker reported earnings this morning and reported diluted EPS of $0.46 came in slightly above consensus at $0.45. EPS from continuing items came in at $0.45 cents, 22% higher than 3QFY10. Chili’s company-owned same-store sales declined -0.7% during 1Q, on a calendar/53 week-adjusted basis. The reported comp was -0.3%. Consensus was anticipating a decline of -1.2%. At Maggiano’s, company-owned same-store sales grew +4.1% during 1Q, on a calendar/53 week-adjusted basis. The reported comp was +3.4%. Consensus was anticipating a print of +3.0%.
Guidance for 4QFY11 may have been somewhat of a disappointment, given that consensus is at the high end of the range, but looking past the fourth quarter, the direction of the business is positive.
The improvement of same-store sales, relative to competitors in the casual dining space, was a key crux to my bullish thesis for Brinker and this quarter obviously further solidifies my confidence in the sustainability of the story. As the chart above shows, the trend in comps at Chili's – particularly when one looks at the two-year trend – is clearly pointing higher. Management has emphasized the importance of value and a high-quality guest experience for the health of the company’s top-line and, it seems, the customer is responding well to initiatives ranging from “Team Service”, improved speed of service thanks to food preparation initiatives, and new lunch menu items at affordable price-points.
The company highlighted the substantial impact on comps from the new line of combos on the lunch menu. While traffic at lunch moved from negative mid-single digits to positive, there was also an expected impact on mix resulting from a lower check. Preference for these $6/$7/$8 items were higher than anticipated based on test results and management said that it will continue to work to balance top-line growth and profitability. In my view, as the company continues what is ultimately a reintroduction of the new Chili’s to the casual diner, traffic growth is paramount so as to raise awareness of a much improving restaurant chain. When asked about the prospect of raising prices during the Q&A, the company reiterated its prioritization of traffic which, I believe, is the correct strategy for Chili’s at this point in time.
Besides the trend, merely comparing the language and tone of Brinker’s earnings call versus the earnings calls of peer companies that have reported of late underscores the progress Brinker is making. As I wrote in my restaurants earnings preview on Monday, Brinker would not point to gas prices as an excuse and that alone sets it apart for the earnings season so far.
Restaurant operating margins grew 152 bps year-over-year. Cost of sales decreased 127 bps driven by a more profitable value offer in January and menu improvements. There was also a 50 basis point improvement due to a favorable impact from menu pricing and other items. Commodity costs were unfavorable in the quarter to the tune of 10 basis points. Labor improved 60 basis points in 1Q. Team service continues to perform well, contributing roughly 100 basis points in savings. 1Q included the first phase of the kitchen retrofit program which will optimize the labor component of food preparation. This should reduce labor costs and cost of sales through food waste reduction.
The company estimates that the reimaged restaurants are seeing a lift of approximately 100 basis points from a margin perspective. Changes in the kitchen were rolled out late last quarter and it is expected that the impact of that will gain additional traction over time. In terms of the margin enhancements that are projected to come from the kitchen retro-fits, it will take time – perhaps into FY13 – for the benefit to flow through the system. The Oklahoma City reimage test has been encouraging for management and has prompted a move to expand the reimaging program to additional markets.
Share Repurchases/Capital Expenditure
During the 3QFY11, the company completed an additional $107 million share repurchase (4.5 million shares). Year-to-date, the company has spend $357 million on share repurchases (18 million shares). Total fiscal 2011 capital expenditure is expected to by approximately $80 million. Capex in 2012 is projected to be $170 million.
- The company offered conservative EPS guidance of $0.43 to $0.47 but remains confident in doubling EPS in five years.
- From a commodity perspective, the company is currently 92% contracted through the end of the year. 4Q is expected to bring slightly unfavorable cost of sales. The company is 54% contracted through the end of calendar 2011 and anticipates roughly 100 basis points in commodity pressure for fiscal 2012.
- Beef remains the most significant inflationary pressure in EAT’s commodity basket. In August, the current contract expires and, if renewed at current prices, a new contract would likely involve a significant increase in inflation.
- The company is hoping to renew its chicken contract at a more favorable rate given deflationary pressures in the chicken market.
- Dairy costs are contracted and management believes that the company could expect favorability in fiscal 2012 if the contract was renewed.
Sentiment and Valuation
A conversation I had last year with Guy Constance comes to mind. “A badge of honor” is how he described the label of being the least favored casual dining company from a sentiment monitor I wrote in November (“EAT – A BADGE OF HONOR”, 11/14/11). Below, I am including a chart on sell side sentiment for Brinker. I expect this to change markedly in the coming quarters. From a valuation perspective, EAT remains attractive. At 6.7x EV/EBITDA NTM, I believe there is room for that multiple to expand.
In preparation for HST's Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HST’s Q4 earnings call.
- “Our transient revenue growth of 6.3% was driven by a nearly 5% increase in transient rate as transient room nights, which now exceed 2007 levels, increased slightly more than 1%. The improvement in ADR was driven by the premium and corporate segments where rate increased by almost 7%. When combined with the demand increase of 6%, these segments saw a revenue increase of more than 13%.”
- “While our full year transient demand matches 2007 levels, ADR is still more than 16% below the prior peak, indicating a meaningful opportunity for additional rate growth in 2011 and beyond.”
- “Our Group room nights were up more than 6% as increases in our corporate and other segments more than offset a slight decline in association business. Average rate was slightly better than the fourth quarter of last year resulting in an overall Group revenue increase of 6.2%.”
- “Demand increase of over 11% in our higher rated corporate group business and a rates increase of more than 3%.”
- “Recovery in the Luxury segment continues to gain momentum as our Luxury Group room nights were up more than 15%.”
- ‘Compared to 2007, our Group revenues are still down by 19%, and our corporate room nights are down by one-third.”
- “Looking at 2011, we would expect that revenue growth will be driven by a combination of both occupancy and rate increases. It is worth noting that despite the nearly four point increase in occupancy we experienced this year, we are still four points below our prior stabilized occupancy level of 74%, so we expect to see increases in occupancy in both our Group and Transient segments.”
- “Our booking activity in the fourth quarter was exceptionally strong, and we started the year in a far better position than 2010, as group bookings for the first three quarters of the year are up by more than 3.5% versus a decline of roughly 6% last year. More importantly, our average rate for existing group bookings exceeds 2010 in every quarter. We expect we will see booking pace improve as the year progresses and activity in the higher rated categories will increase.”
- “We’re going to continue to look to fund a significant portion of our acquisitions through the issuance of equity.”
- New acquisition EBITDA contribution: “Helmsley, you talked about $35 million of EBITDA, once it becomes a Westin. This year, it’s more like $5 million, and we have $5 million in our guidance. Hyatt, we’re talking about a number that’s around $30 million and then there’s some EBITDA from New Zealand… That’s roughly $18 million.”
- 2011 Guidance:
- “Comparable hotel RevPAR to increase 6% to 8%
- “We expect the RevPAR increase to be driven more by rate growth than occupancy.”
- “Adjusted margins increasing 100 to 140 basis points.”
- The additional rate growth should lead to strong rooms flowthrough, even with growth in wage and benefit cost above inflation. We expect some increase in group demand as well as higher quality groups, which should help to drive growth in banquet and audio-visual revenues and solid F&B flowthrough. We expect unallocated costs to increase more than inflation, particularly for utilities which we expect higher growth due to an increase in rates and volume and, as well, in sales and marketing costs. We also expect property taxes to rise in excess of inflation.”
- “Adjusted EBITDA of $1 billion to $1.035 billion”
- “FFO per share of $0.87 to $0.92”
- “In 2011, we expect to spend approximately $290 million to $310 million on ROI and repositioning investments."
- “In terms of maintenance capital expenditures, we spent $195 million in 2010 and expect to spend $260 million to $280 million in 2011. 2011 plan includes room renovations at the New York Marriott Marquis, the Philadelphia Marriott and the JW Desert Springs Marriott, as well as meeting space renovations at the Hyatt Washington, Sheraton Boston, New York Marquis and New Orleans Marriott.”
- “While we are actively reviewing our portfolio for likely sale candidates, we expect the volume of our asset sales to be light in 2011.”
- Dividends: “First-quarter common dividend to be $0.02 per share. As our operations continue to improve, we expect to modestly increase the common dividend through the year, with the expectation of a full-year common dividend of $0.10 to $0.15 per share.”
- “Due to the significance of the downturn, our taxable REIT subsidiary incurred a substantial book loss, primarily due to negative lease leakage, which resulted in our recording a $32 million tax benefit in 2010. The anticipated significant improvement in operating results should lead to a substantial improvement in lease leakage, and as a result, we are projecting a tax provision for 2011. This translates into roughly a $0.04 per share reduction in FFO for 2011.”
- “Finally, starting in 2011, we are modifying our definition of adjusted EBITDA to no longer deduct. For 2010, we incurred $10 million of successful acquisition costs that decreased our adjusted EBITDA to arrive at the $824 million.”
- Regional RevPAR guidance:
- Atlanta: “Underperform our portfolio in 2011 even with an overall improvement in group business and special corporate pricing as well as a positive mix shift.”
- San Diego: “Outperform the portfolio due to overall improvements in transient and group demand and ADR growth.”
- Chicago: “Outperform the portfolio in 2011 due to strong Group and Transient demand as well as a further positive shift in mix which will increase ADR.”
- San Fran: “Perform in line with our portfolio in 2011 through improvements in citywide and corporate group demand and ADR gains due to the related compression.”
- San Antonio: “Outperform the portfolio in 2011 because of improvements in overall demand.”
- Hawaii: “One of our top-performing markets in 2011 due to improvements in both group and transient demand, which should also drive some pricing power.”
- Boston: “Underperform the portfolio in 2011 due to less citywide demand.”
- Phoenix: “Turn the corner in 2011 and outperform our portfolio. Both group and transient demand are expected to increase significantly.”
- Philadelphia: “Citywide demand for 2011 is strong and improvement in ADR is expected, but the renovation will limit available capacity and, as a result, that hotel will underperform the portfolio.”
- Orlando World Center Marriott: “The hotel is expected to slightly underperform the portfolio in 2011.”
- “We expect the European joint venture portfolio will have RevPAR growth of 5% to 7% for 2011.”
- “Comparable hotel RevPAR to increase 6% to 8%
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Nothing surprised us in the Fed’s prepared statement. The Bernank remains Indefinitely Dovish.
- Inflation – he finally admitted it’s there
- Growth – he talked it down (because his US GDP forecast was wrong by a lot, again)
- US Dollar = DOWN
- Gold = UP
- Oil = UP
The Bernank perpetuates The Inflation but takes no responsibility for it. The ongoing risk of a US Currency Crash remains.
Keith R. McCullough
Chief Executive Officer
In preparation for PNK's Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from PNK’s Q4 earnings call.
- "We believe the corporate costs will continue to trend down in 2011."
- "You should expect us to continue to begin to draw down on that increasingly this year as we complete the Baton Rogue construction. That said our Baton Rouge project remains fully financed through existing cash on hand, our revolver and anticipated free cash flow from operations. We do have approximately $319 million of cash construction costs still to fund for the completion of Baton Rogue."
- "Up next are new brand campaigns for L’Auberge and the three Boomtown properties. MyChoice, our guest loyalty program, will be re-launched in April."
- "The fourth quarter corporate would be a better proxy than any of the preceding quarters in the year for that
very reason. We’re hoping for some marginal improvement to that as well."
- "We have sensed a stabilization of our top line experience roughly across our markets."
- [Reno] "We’re going to keep an appropriate level of maintenance at a property. We have a large tract of land that’s for sale there and if we were able to sell the land we would. But we’ve said before if there was an appropriate offer there we’d consider it. But we’re not out shopping it. It is what it is."
- [Discontinued operations] "Atlantic City is in disc ops in particular, probably the largest single component of that but that’s mostly a property tax expense at this point. That’s probably going to accrue up to something. In total you’re probably going to see in the kind of [low] double-digit millions for the year would be my guess."
- "We are right now working on making MyChoice a universal card, meaning it would be recognized and accepted at all Pinnacle properties. We expect the universal card functionality to be fully in place by the end of first quarter 2012, so that would obviously be aligned with Baton Rouge and their opening."
- [L'Auberge gaming mix change] "Now we have a plan that we expect to have completed by the end of the second quarter that will complete the change from a mix standpoint."
In preparation for HOT’s Q1 earnings release tomorrow, we’ve put together the pertinent forward looking commentary from HOT’s Q4 earnings call and subsequent conferences.
POST EARNINGS COMMENTARY
- "The fact of the matter is New York is weak right now.
- "It’s been a long, hard winter in New York."
- "New York came back earliest and – also from a group perspective, and my sense is that people were staying away from resorts from a group perspective because of the residual AIG effect that we were still living under. And I think that that’s changed and shifted some of the business from New York."
- "There’s been substantial incremental capacity into the New York market over a short period of time, which is a bit of an anomaly relative to the overall supply dynamic and demand dynamic."
- "China is 75 hotels for us at this moment. That makes it our second largest country. But what’s really remarkable I think is the fact that we have another 85 hotels that are under construction, meaning we’re building more hotels today in China than we have open. And just the hotels that we’re opening in China would be our second largest country therefore."
- "Our target is to be at least 80% fee-driven. Today, over 60% of our fees come from markets outside of the U.S."
- "We have three select serve brands between Four Points by Sheraton, Element and Aloft. And that’s I think where the biggest opportunity is for us in the sense that we’re still substantially below scale in that area, and see that as a growth opportunity on the one hand. And on the other hand, still is something that we continue to get after."
- "Yeah. Well, let me answer directly the asset sale timing issue first. Hotels today, simply put, are still trading at below replacement cost, and so this isn’t a great time to be selling a lot of hotels if you don’t need to. And the majority of our hotels still today are in North America and in Europe. In both of those markets, there’s not only been very little capacity added relative to trend line over the last ten years, but as would astound none of you in the room to know that there’s very little construction lending today. And therefore, the prospect of more capacity being added over the gestation period of developing a hotel, which is three to four years, is going to be small. And so we’re already seeing occupancies that feel more mid cycle than early cycle. Although judging from the unemployment numbers and being a student of business cycles, it still feels like we’re earlier rather than later, and probably early in a long cycle up, not early in a short cycle up, particularly given the trajectory. Therefore, I believe there’s still an opportunity either to find buyers who have that same belief that we’re going to go from substantially below trend line ADR to substantially above. And if we have buyers that share that perspective and are willing to provide us with that value, then we sell. If not, then I’ll wait for the market to improve. As you pointed out, we don’t need cash right now. So we sell from a position of strength."
- "So more on the pipeline. Our pipeline is 85,000 rooms at the end of the fourth quarter. On our existing base of rooms, that’s roughly 28% implied growth, assuming all of those hotels are built – larger than any of our peers. A key differentiator in our pipeline is, it’s more international than any of our competitors, roughly 80% international, 20% U.S. Whereas, you can see from the chart, Hyatt, Hilton and Marriott are much more skewed towards the U.S."
- "So we expect supply in 2011 to grow in North America at sub 0.5%, which is substantially below trend. And if you look at the decade from 2001 to 2010, supply grew closer to 1.5% per year. So we’re entering this up cycle with less excess capacity than the industry has ever seen before."
- "Developed markets business, most of our fees in the developed markets are driven off of the top line, roughly three-quarters. So as RevPAR accelerates and you have a continued imbalance between supply and demand, we expect to see favorable growth in our fees in these markets."
- "I think offsetting somewhat that reduction in earnings from timeshare is the fact that we cut out almost $100 million in SG&A in the ‘08, ‘09 time period. And we expect those cost cuts to be largely sustainable. So I think that does offset much of the reduced SVO earnings impact."
- [gas impact] "But I’d also point out gas prices were $3.50 most of the year for us in Connecticut. Now they’re closer to $4. I don’t hear the same type of hemming and hawing that I did in 2008 when gas hit those levels. So, again, people adjust their expectations somewhat. But certainly oil moving up beyond these levels is not a positive for the broader economic picture."
- "Our outlook reflects this normal recovery with global REVPAR growth of 7% to 9% at company operated hotels in local currency and 100 basis points higher as reported in dollars, 150 to 200 basis points of margin improvement at owned hotels, 10% to 12% fee growth, a small increase at SVO, giving us a 2011 EBITDA range of $975 million to $1 billion and an EPS range of $1.55 to $1.65. One point of REVPAR impacts EBITDA by approximately $15 million. One point of shift in ForEx rates globally relative to the dollar impacts EBITDA by $4 to $5 million. We expect to open 70 to 80 hotels globally in 2011 with more than half outside the U.S."
- "We are excited about the next major W opening in Europe, the W Leicester Square in London this February, which is also a leased hotel. Pre-opening costs associated with this opening will depress reported owned/lease hotel earnings in Q1. Q1 is a seasonally small quarter in Europe and the trends for the year will likely become more evident as we get into the second quarter. Like the U.S. with low supply growth and rate improvement, we expect 2011 to shape up as the second year of a normal cyclical recovery. As we have for the past few years we have hedged about 50% of our Euro exposure."
- "Several significant renovations will be undertaken in 2011 including the Grand in Florence which we are converting to a St. Regis, the Alfonso 13 in Sevilla, the Westin Gaslamp, the Sheraton Kauai and other smaller projects. Over an extended timeframe our maintenance capital spend at owned hotels has averaged 7% to 8% of gross operating revenue ranging from 5% when the cycle turns down to highs of 10% when the cycle turns up. We expect to be at the high end of the range for the next couple of years."
- "Our Monday to Thursday volumes are driving occupancies in the 90% range in most major metro markets. Our customers are telling us that they’ll continue to travel in 2011 in search of precious growth for their own businesses."
- "Group pace for 2011 also improved sequentially through 2010. So as a result, we’re beginning 2011 with pace up double digits, significantly ahead of last year’s starting point. As expected for some time, booking windows are now slowly starting to lengthen. Nonetheless, strong bookings and improving sales will translate into revenues that are quickly rebounding towards 2007 levels."
- "On group pace, at this point it’s driven, as you would expect because of the business that was booked in 2010, more by volume than rate. But as the new business is coming in, the mix is changing more to rate."
- "As you look at group pace in 2012, that’s also pacing positive relative to 2011."
- "The real story in 2011 will be about rising rates. Corporate rate negotiations are being finalized, and they’re still on track to increase in high single digits. The mix of room categories and clients should also support our ADR growth. Business travelers power 75% of our revenues, but leisure travel is also an important part of our business especially at resorts and tourist destinations. We’ve seen the leisure demand increase as consumer confidences has improved and we take heart from the fact that affluent travelers [inaudible] finances today are quite robust compared to a couple of years ago. As with business travel, this affords us the opportunity to improve mix by, for example, phasing out some cut-rate Internet channels such as opaque."
- [Argentina] "Our hotel rates which are typically in dollars are not going up as fast as our costs. As a result of this disconnect and despite significant efforts by our local teams to hold costs in line, our margins are under pressure. We expect this issue to persist as long as these currencies are not devalued relative to the dollar commensurate with the local inflation trend."
- "Our vacation ownership business is stable. Doors, close rates and pricing have tracked in line with expectations. Delinquency default rates continue to improve. We remain focused on cash generation in this business. With selective inventory adds we expect to generate over $150 million in cash flow in 2011 on top of the $500 million we generated in ‘09 and ‘10. There will also be some cash flow from closings that offset some of our capital spend on Bal Harbour this year. We have contracts on more than half the condo inventory and hope to be 65 to 70% sold by the time we start closings. 2012 will be the big year for revenue and income recognition and cash flow from Bal Harbour based on current plans."
- "Sometimes you have some fees that are on a cash basis and the fee is paid, but by and large the incentive fee growth in the fourth quarter was powered by Asia where you saw some significant REVPAR growth. It was good in the U.S. from a very low base, and what held it back to some degree was the Middle East. So I think we’ll see some of that in the next year."
- [North Africa fees] "$3 million to $4 million a quarter is reasonably close to what you should expect."
- "We went into some detail about what percentage of our properties both in the U.S. and international markets were paying incentive fees, and it hasn’t changed much since then, so probably low double digits for North America and international is 60% or 70%."
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