Going into the quarter, I stated that EAT needed to eliminate some questions around its long-term strategy changes at Chili’s. Management did outline some of its plans around introducing menu enhancements which will come in stages and will work to remove some menu items while improving its core items. Specifically, management said that the casual dining space has gotten crowded and the company needs to emerge from the “sea of sameness” by improving execution and providing better food, value and service.
Based on the fact that the stock is trading down significantly today despite EAT’s reporting better than expected 1Q earnings and sales, my key takeaway from the earnings call is that management did not do a good job laying out its plans for the Chili’s brand. Instead, most of management’s plans could be inserted into almost any casual dining company’s future plans, thereby only increasing the perception of industry “sameness.” The fact that the company did not provide updated full-year guidance (and implied that prior EPS guidance is no longer a good number) is definitely weighing on the stock today as well, but the strategy changes at Chili’s will be important on a go-forward basis.
Focusing on execution, value and the core menu is very important and lies within the boundaries of what I think the company should be doing, but Brinker did not provide enough brand-specific initiatives. It does not show them going for the jugular. I know Brinker needs to be vague for competitive reasons, but in today’s tough economic environment, investors need more answers.
We all know that the questions asked during a conference call often highlight investors’ primary concerns, and I was the sixth analyst to ask a question and the first to ask about Brinker’s specific plans for Chili’s. So I just may be wrong. People may not be too concerned with what management is saying about Chili’s because it will not matter until the changes yield actual results.
Sales and margin performance will always drive stock price performance and although Brinker posted sequentially better sales in August and September, these sales numbers were only less bad and margins declined. And, management hinted that restaurant margins would continue to decline in 2Q. If Brinker is able to replicate MCD’s success by reenergizing its brand (as management referenced), then Chili’s sales are moving higher and will outperform its peers, but the company did not say anything today that leaves me convinced of this outcome in the near-term.
Brinker has one of the best management teams in casual dining so it could surprise me, but I need to learn more and as they say, “the proof is in the pudding.” To that end, Brinker was one of the first casual dining operators to really cut growth. It was also one of the first to really create a leaner business model by implementing cost saving initiatives. And, now, EAT is really focused on improving its core business and improving 4-wall execution. This type of strategy often leads to better margins and returns (as we saw with MCD’s Plan to Win strategy and more recently, at Starbucks). Although management’s comments did not leave me any more confident about near-term sales trends, EAT will be better positioned going forward based on this unit by unit in-store focus.