“Over the years, casual dining has been deemed for being overbuilt. We believe this is our opportunity to prove that maybe it isn't overbuilt, it's just underutilized.” -Wyman Roberts
A few weeks back I went to Chili's and had the best meal I can remember in a long time. A few weeks later I never thought I would be writing this note. Yesterday, we added several casual dining names to the long bias list thinking we would add a few best ideas LONG in the coming weeks. I don’t like to chase names and would rather be anticipatory of calls rather than being reactive, but the move that EAT made a few weeks ago is a game-changer.
The stock was up +14.5% after reporting 4Q20 adjusted EPS ($0.88) vs FactSet ($1.35) and Revenue of $563.2M vs FactSet $572.9M. The 1Q21 guidance was strong with adjusted EPS ($0.40)-($0.25) vs FactSet ($0.60) same-store sales down low to mid-teens vs FactSet (14.2%), with operating cash flow expected to be positive.
The blockbuster announcement from the company came with its announcement that in 6 months it has created a new “ghost kitchen” brand “It's Just Wings,” and rolled it out to over 1,100 company stores. The brand has the potential to do $150 million in revenues in the first year in business. To put this in perspective in 2020 WING is estimated to do $1.9 billion in systemwide sales over 1,500 stores. The simplicity of cooking wings allows the new brand to leverage existing buildings, equipment, and labor. The company commented that even after aggressive pricing and marketing, serving quality ingredients and packaging and paying the last-mile logistics partner fees, its generating strong incremental cash flow. The impact on the business is such that 36% of company-owned Chili's restaurants ran positive comp sales over the past month. In total, off-premise meals have grown from low teens to more than 50% in the fourth quarter, with only a slight dip as dining rooms reopen.
The CEO did mention the possibility of doing a second "ghost" concept, but that is getting ahead of reality. There is more work to do to see how this plays out but the potential is a complete game-changer.
OPERATING MARGINS
In 4Q20, the restaurant operating margin was 6.4%. As sales improved during the quarter margins improved to 12.2% for the June period, which is just 100bps below 2019 levels. Assuming an improving operating environment, the company is set up for additional margin improvement as they leverage identified efficiencies, further open dining room capacity and leverage sales from It's Just Wings.
BALANCE SHEET GETTING BETTER
Coming into the pandemic EAT had too much leverage. Lesson learned. Going forward I suspect that strengthening the balance sheet will be an important part of its financial strategy and debt reduction will also benefit the equity. The equity offering done in 2Q was a slight negative (raising approximately $139 million) it was used to pay down the revolver. Currently, overall total debt stands at $1.194 billion, a reduction of $234 million from the end 3Q20. The revolving credit borrowing stands at $473 million, with the facility now maturing in December 2022.
