Brinker International, Inc.’s (EAT - Analyst Report) fiscal third quarter 2014 adjusted earnings of 84 cents per share were in line with the Zacks Consensus Estimate. However, the quarterly figure increased 15.5% year over year as decent margins made up for a relatively softer top line performance. Despite a year-over-year increase in the top and bottom lines, share price of this casual dining restaurant plunged 4.5%, possibly due to the declining traffic trend that led to the top line miss.
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Quarterly revenues edged up 2.1% year over year to $758.4 million. However, the top line missed the Zacks Consensus Estimate of $769.0 million by 1.4%. We believe that declining traffic trends in its restaurants due to harsh winter hurt sales in the quarter.
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).
Company-owned comps were up 0.7%, better than the prior year quarter’s decline of 0.9%, as relatively sluggish comps at Maggiano's were offset by a better performance at Chilli’s. However, comps were softer than last quarter’s increase of 0.8%, which reflects the declining traffic trends.
Comps at franchised restaurants were up 0.2%, comparing favorably with flat comps in the prior quarter. However, it was lower than the year-ago comps of 1.3%. Domestic comps of 0.1% made up for the relatively softer international franchised comps of 0.6%.
Behind the Headline Numbers
Chili's reported revenues of $645.8 million, up 2.1% year over year, driven by the company’s acquisition of 11 units in Canada, increases in domestic restaurant capacity, and increase in comps.
Domestic comps at Chili's increased 0.5%, better than the prior quarter increase of 0.3% as well as the year-ago quarter decline of 0.8%, on its menu innovation initiatives. Despite the 1.2% drop in traffic, Chili's company-owned comps increased 0.7% attributable to positive pricing impact.
Maggiano's’ sales nudged up 1.4% to $93.4 million in the quarter. Comps at Maggiano's went up 0.2%. However, it was lower than the previous quarter comps of 0.9% and the year-ago comps of 0.4%. Comps at Maggiano's reflect unfavorable mix-shift and traffic, partially offset by effective menu pricing.
Franchise and Other revenues increased 6.1% to $19.2 million driven by other revenues.
Expenses and Margins
Cost of sales ratio improved 90 basis points (bps) to 26.5% driven by the addition of new menu items and improved waste control, partially offset by higher meat and seafood costs.
Restaurant labor ratio improved 40 bps driven by improvement in productivity due to reduced employee health insurance expense, partially offset by an increase in salaries and bonus. Operating and expenses ratio improved 80 basis points driven by improved restaurant labor ratio, partially offset by an increase in restaurant expense ratio.
The company’s adjusted operating margin increased 90 bps to 11.8%, gaining from improved operating margin at both Chili's and Maggiano’s.
Fiscal 2014 Outlook Maintained
Brinker maintained its comps growth guidance in the range of (1%) to 1% for fiscal 2014. It expects restaurant operating margin to increase in the range of 25 bps–50 bps for 2014.
The company also maintained its earnings guidance in the range of $2.65 to $2.75 for fiscal 2014. The Zacks Consensus Estimate of $2.72 lies within the company provided range.
Following the implementation of 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. The company indicated that it expects commodity inflation rate to remain flat throughout calendar 2014 as its commodities are hedged for most of the year.
We note that sales-building initiatives of the company like menu innovation, extensive reimaging, better food presentation, kitchen system optimization and introduction of better service platform are aiding comps. Having said that, we cannot ignore the declining traffic trend observed over the past few quarters, which is denting the top line. It continues to be a concern for this Zacks Rank #4 (Sell) company.
Other Stocks to Consider
Some better-ranked stocks in the industry include Ignite Restaurant Group, Inc. , The Wendy's Company (WEN - Analyst Report) and Jack in the Box Inc. (JACK - Analyst Report). While Ignite Restaurant and Wendy's Company sport a Zacks Rank #1 (Strong Buy), Jack in the Box carries a Zacks Rank #2 (Buy).