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If you thought 3 for 20 was cheap…

For those following EAT closely it’s no surprise that Chili’s same store sales are trending below that of the overall industry, as measured by Knapp Track.  In fiscal 4Q, Chili’s SSS could be down as much as 4%.  In this environment, top-line sales are critical to the implied health of the company.  When sales are not good the market punishes the equity, as it should.  For EAT we are reaching maximum bearishness. 

Given our Bear Market Macro theme, there is the potential that the market could get even uglier - that is out of my control.  What I can control is what I understand.  EAT recently closed the sale of OTB and now has enough cash and debt capacity to buy back 25% of the company.  While it will not happen tomorrow, it will happen over the intermediate term.  That is good enough for me.

News of Chili’s struggling top line has sent the stock down 20% over the past month, with the stock now trading at 6.1x EV/EBITDA.  Looking a little more closely, things are even cheaper that they appear on the surface.  Examining the different pieces of EAT’s assets, the current implied value of the Chili’s business alone is 2.5X cash flow.

When we get within a six month window of a potential catalyst we like to press our bets, and we are getting close to that time.  As the calendar turns on 2011, EAT will be in a great position to show improving trends.  The catalysts are:

(1)    Lapping the self-inflicted wounds of shrinking the menu.

(2)    Getting past the excessive discounting of 3 for 20.

(3)    Building momentum on the in-store margin initiatives.

The last catalyst is critical and has the biggest potential for an upside surprise relative to street expectations.  For now the stock is trapped in the bearish sentiment for typical bar & grill companies.

In the meantime, while we wait for the catalysts to play out, the company is a big, big, big buyer of stock. 


Howard Penney

Managing Director