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Dallas, Texas-based casual dining restaurant chain Brinker International Inc.’s (EAT - Analyst Report) first-quarter fiscal 2014 adjusted earnings of 43 cents per share missed the Zacks Consensus Estimate of 46 cents by 6.5% due to soft revenues. However, quarterly earnings were up 16.2% from the year-ago quarter’s earnings of 37 cents.

Quarterly revenues inched up 0.06% year over year to $683.9 million. However, revenues missed the Zacks Consensus Estimate of $687 million by approximately 0.45%. We believe the company’s declining comparable restaurant sales (comps) led to the top-line miss.  

Brinker continues to witness sluggish sales environment in the first quarter. Company-owned comps were 1.3% in the first quarter, much lower than the year-ago quarter’s comps growth of 2.6%. A 3.3% fall in total guest count seems to be the reason behind such lowered comps.

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 $581.6 million, up 0.05% year over year, following the company’s acquisition of 11 units in Canada offsetting the decline in comps.

Domestic comps at Chili's dropped 1.9% owing to 1.6% and 2.6% fall in the same at company-owned units and franchised restaurants, respectively. Chili's company-owned comps have declined due to a 3.4% drop in traffic.

Maggiano's’ sales nudged up 0.6% to $82.9 million in the quarter, led by effective menu pricing (up 0.6%) and positive mix-shift (up 2.1%).

Comps at Maggiano's went up only 0.6%, which was lower than the year-ago quarter’s comps growth of 0.9%. Comps in the quarter were affected by a 2.1% fall in traffic.

Franchise and Other revenues dropped 2.0% to $19.4 million as a result of a drop in domestic royalty income.

Comps at franchised restaurants were up 1%, driven by 2.7% comps growth at the international franchise restaurants, offset by 2.6% fall in domestic comps. Franchise comps were much lower than the year-ago quarter’s comps growth of 2.9%.

Margins

The company’s adjusted operating margin increased 40 basis points (bps) to 7.3% gaining from an improved restaurant operating margin and lowered general and administrative expenses.

Cost of sales have declined 60 bps to 27.2%, benefiting from favorable mix resulting from the addition of new menu items, improved waste control and better pricing, offset by increased meat and poultry costs.

Share Repurchase

During the quarter, Brinker bought back 1.6 million shares worth $66.3 million.

Unit Update

During the quarter, the company acquired 11 restaurants from a franchisee in Canada. Apart from this, Brinker opened three international franchised restaurants. At the end of first-quarter fiscal 2014, Brinker operated 1,596 restaurants, of which 1,552 were Chili’s (including domestic and international) and the remaining 44 were Maggiano's. In fiscal 2014, Brinker expects to open nearly 44–52 restaurants (domestic and international included) under the Chili’s brand.

Fiscal 2014 Outlook Lowered

Brinker has been experiencing macroeconomic headwinds for the past few quarters. Government budget cuts, high tax rates and still-tightened credit availability continue to hurt consumer discretionary spending which in turn lowered the restaurant’s traffic. 

Owing to the weak sales environment, the company now expects comps growth of (1%)–1% in fiscal 2014, down from the prior estimate of 1%–2%.

Following the anticipation of lower sales results in fiscal 2014, Brinker now expects its restaurant operating margin to increase 25 bps–50 bps as against the prior estimates of 50 bps–75 bps.

The company has also lowered its earnings guidance for fiscal 2014. Brinker now expects earnings in the range of $2.65 to $2.75, down from the previous guidance of $2.70–$2.85. The company has cut down its earnings projection owing to the lower sales and margin outlook.

Following the implementation of the point-of-sale (POS) back-office systems and proper waste control management, the company’s cost of sales is expected to improve in fiscal 2014.

Our Take

Brinker has been witnessing muted sales growth in the past two quarters due to continuous decline in traffic. Continuous fall in comps owing to frail industry sales trend remains a major headwind. A lowered outlook for fiscal 2014 adds to the woes.

However, the Zacks Rank #3 (Hold) company’s various sales-driven initiatives including new kitchen equipment system, effective marketing strategy and integrated POS system are expected to boost its business.

Other Stocks to Consider

Some other players in the restaurant industry which look attractive at the current level include Red Robin Gourmet Burgers Inc. (RRGB - Analyst Report), Cracker Barrel Old Country Store, Inc. (CBRL - Snapshot Report) and Bob Evans Farms, Inc. (BOBE - Snapshot Report). While Red Robin holds a Zacks Rank #1 (Strong Buy), Cracker Barrel and Bob Evans Farms carry a Zacks Rank #2 (Buy).

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