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Brinker International Inc.’s (EAT - Analyst Report) fourth-quarter fiscal 2013 adjusted earnings of 77 cents per share beat the Zacks Consensus Estimate of 74 cents by 4.05% and the year-ago quarter’s earnings of 61 cents by 26.2%. Solid margins made up for the soft revenues to drive the earnings growth. Lower share count also boosted earnings significantly during the quarter.

Quarterly revenues inched up 0.2% year over year to $730.1 million. However, revenues missed the Zacks Consensus Estimate of $735 million by approximately 0.7%. Brinker witnessed sluggish sales environment in the quarter. Lower traffic pulled down the company-owned comparable restaurant sales (comps) by 0.5%, much less than the year-ago quarter’s comps growth of 2.1%.  

Behind the Headline Numbers

Brinker International primarily engages in the ownership, operation, development and franchising of various restaurant brands under the names of Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s).

Chili's reported revenues of $615.7 million, down 0.2% year over year due to a 2.1% drop in traffic and a 0.3% decline in domestic comps.

Maggiano's sales nudged up 0.1% to $93.4 million in the quarter, buoyed by effective menu pricing (up 0.5%) and positive mix (up 1.1%). However, comps at Maggiano's inched up only 0.2%, which was lower than the year-ago quarter’s comps of 1.9%. Comps in the quarter were hurt by a 1.4% decrease in traffic.

Franchise and Other revenues surged 14.8% to $20.9 million. The rise was mostly due to the presence of a one-time development fee refund in the year-ago quarter’s results which was absent in the second quarter. Comparable restaurant sales at franchised restaurants ascended 1%, aided by 0.5% and 2.3% growth in domestic and international franchise comps, respectively.

Margins

The company’s adjusted operating margin expanded 180 basis points (bps) to 11.6% benefiting from a 60 bps improvement in restaurant operating margin and lower general and administrative expenses.

Restaurant margins at both Chili’s and Maggiano's improved year over year, mainly due to reduced cost of sales.

Annual Results

In fiscal 2013, the company witnessed a 0.9% increase in revenues to $2.84 billion. Adjusted earnings were $2.34 per share, up 19.4% year over year. Earnings were also within management’s guidance range of $2.30–$2.45 per share.

Share Repurchase

During the quarter, Brinker bought back 3.5 million shares worth $141.6 million. In fiscal 2013, the company repurchased 9.3 million shares at the cost of $333.4 million.

Unit Update

During the quarter, the company acquired 11 restaurants from a franchisee in Canada. Apart from this, Brinker opened eight international franchise restaurants. At the end of fiscal 2013, Brinker operated 1,591 restaurants, of which 1,547 were Chili’s (including domestic and international) and the remaining 44 were Maggiano's. In fiscal 2014, Brinker expects to open nearly 11 to 12 restaurants under the Chili’s brand.

Outlook

For fiscal 2014, the company expects adjusted earnings per share in the range of $2.70–$2.85, up 15%-22% year over year. The company anticipates revenues to grow 3%-4% year over year. Moreover, management expects comps to increase 1%–2% year over year in fiscal 2014.

Following the implementation of the point-of-sale back-office systems and proper waste control management, the company’s cost of sales is expected to improve in fiscal 2014. Restaurant operating margin is estimated to be up 50 bps-75 bps, driven by lower labor costs and operational enhancement.

Our Take

With the help of its ‘plan to win’ initiative, continued margin expansion and menu innovation, Brinker has succeeded in posting double-digit earnings growth in the past three years. Brinker’s sales-driven initiatives including new kitchen equipment system, effective marketing strategy and integrated point-of-sale system are expected to reinvigorate its brands, going ahead.

However, this Zacks Rank #3 (Hold) company is witnessing declining comps due to frail industry sales trend, which remains a major headwind.

Some other players in the restaurant industry which look attractive at the current level include Yum! Brands Inc. (YUM - Analyst Report), Buffalo Wild Wings Inc. (BWLD - Analyst Report) and Burger King Worldwide, Inc. (BKW - Analyst Report). All these companies carry a Zacks Rank #2 (Buy).

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