EAT - UP IS UP

Brinker’s 2Q10 earnings of $0.29 per share (includes about a $0.04 per share benefit) came in much better than the street’s and my $0.22 per share estimate.  Same-store sales growth also beat expectations with Chili’s -3.2% and blended comps -3.1% versus my estimate of -4% for both and the street’s expectations of -4.2% and -4.3%, respectively.  Based on the definite change in management’s tone on today’s earnings call relative to last quarter, results may have exceeded management’s expectations as well.

 

Last quarter, Brinker did not provide any updates to the guidance it provided in its 4Q09 earnings release.  Today, EAT’s press release stated, “Brinker provides annual guidance as it relates to comparable restaurant sales, earnings per diluted share, and other key line items in the income statement and will only provide updates if there is a material change versus the original guidance.”  So although management maintained the same official guidance policy this quarter, the company did make comments about the specific guidance ranges it had provided at the start of the full year whereas last quarter management seemed unwilling to even repeat the prior ranges.

 

Last quarter, there seemed to be a question about whether the company’s unwillingness to reiterate guidance was due to management’s not feeling comfortable with the prior guidance.  Although management said that it just did not want to get into the habit of providing quarterly guidance, it was a little unclear in its answers to investors because it seemed unwilling to repeat any prior ranges. 

 

From the fiscal 1Q10 earnings call:

Question:
So that means it is suspended or the $1.15 to $1.30 is still a good guidance number or we do not have any guidance except for the line by line information?

 

Answer:
Chuck Sonsteby
CFO
I would say that the second piece would be accurate.

 

Today, management said it was comfortable with the higher end of guidance.  Management also said that comps during the quarter were -3%, “comfortably within the initial -2% to -4% range.”

 

Other management comments that signal a real shift in management tone:

 

“We are gaining share…we are excited about that.”

 

“Up is up.”

 

“We are seeing small bright lights in the economy.”

 

Echoing PFCB’s CEO Bert Vivian’s comments from last week, Brinker also stated that it is seeing improved business spending.  Specifically, management said that the banquet business at Maggiano’s was better in December, which it attributed to more expense account spending.

 

Although Chili’s traffic improved sequentially in the quarter and same-store sales came in 80 bps better on a 2-year average basis, it may be a little premature for the company to remove its 3 Courses for $20 promotion.  Management said that the promotion has gotten “a little stale,” but I think it could be increasingly difficult to drive traffic without it.  Management is aware that consumers are still looking for value so it will be important to watch whether the promotions currently being offered at lunch, along with the company’s upcoming value initiative, which is expected to highlight the company’s new and improved menu, will prove as successful as 3 for $20. 

 

The company has made a significant step in downsizing its menu (to 8 pages from 12), deemphasizing items less critical to guest loyalty.  This alone should lead to more efficient execution at Chili’s.  As I have said before, Chili’s needed to simplify its back of the house operations by reducing menu items to include only the core items that represent the bulk of the chain’s sales.  These menu changes will allow the company to increase the quality of the items left on the menu (75% of menu items now include a new recipe, new ingredient or have been replaced).  A menu that is simpler to execute will translate into better food delivered to the guest with fewer complaints, thereby allowing the concept to build increased customer loyalty.  Importantly, it will provide a better work environment for restaurant employees. 


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