EAT - NOTHING IS EVER EASY

I’m surprised that this stock was not down today

The consensus was right; EAT did not have a good quarter and chances are they are not going to have a good 1Q11 either.  4Q10 was not a disaster and the balance sheet and free cash flow are helping to support the stock (EAT could buy back as much as 25% of the market capitalization).  The short interest doubled during the quarter which speaks volumes to how the stock is trading today.  As a client told me today, ‘Chuck is scaring the shorts with the “I’m gonna start buying tomorrow speech”’.

I‘m completely on board with the changes the company is making to the Chili’s business model and convinced that at some point in the not too distant future the pay off will be what the company is expecting.

The trick is getting from point A to B.  As I sit here today the process seems slightly more challenging than it did when first proposed.  The current guidance is as expected; EPS from continuing operations is expected to increase between 10% and 20%, including a lap of the 53rd week.   

What scares me from today’s call is this: “we do need better top line results than we originally forecasted to hit that goal but were not prepared to walk away from the target today.”  My translation: “current sales trends are not good and we need to see a significant improvement to make the numbers.”  Chili’s same-store sales decelerated in 4Q10 and have continued to slide in 1QFY11 - not good.

Right now current guidance is for same-store sales to be flat to down 2%, while revenue will be down 2% to 4%.  Excluding the impact of the 53rd week, revenue will be flat to down 2%, and franchise revenue to increase in the mid single digits.  Traffic growth needs to improve over 500 bps in an extremely difficult environment. 

With 64% of their commodity exposure contracted for the fiscal year, lower cost of sales should be supportive in 1HFY11. Unfortunately, top line sales will likely not gain traction until FY 2H11.  Three months ago I thought we were 6 months away from seeing a turn in the fundamentals; unfortunately it now seems that we are still 6 months, or possibly even 9 months, away. 

I’m very much supportive of the direction the company is headed, but relative to current guidance for the top line, we are set up for more disappointments. 

EAT - NOTHING IS EVER EASY - EAT SSS 4QFY10

Howard Penney

Managing Director