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Brinker International Inc. (EAT - Analyst Report) recently reported third-quarter fiscal 2013 adjusted earnings of 72 cents per share, beating the Zacks Consensus Estimate by 4.3%. The earnings were also up 20% from the year-ago quarter, driven by the company’s higher margins and “Plan to Win” initiative.

Quarterly revenues remained nearly flat year over year to $742.8 million. However, revenues missed the Zacks Consensus Estimate by approximately 1%. Brinker has witnessed a sluggish sales environment with negative company-owned comparable restaurant sales (comps) of 0.9% during the quarter. Comps in the quarter were affected by a 2.9% decline in traffic offsetting 1.5% rise in pricing and 0.5% improvement in mix-shift.

Brinker has also witnessed a 0.2% decline in system-wide comps as compared with a 4.2% rise in the same in the year-ago period.

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 $632.6 million, down 0.7% year over year due to a 3.2% drop in traffic. Comps at Chili's Grill & Bar restaurant declined 1.1%.

Maggiano's sales nudged up 0.2% to $92.1 million in the quarter, buoyed by a 1.6% increase in pricing. Comps at Maggiano's inched up only 0.4% as compared with 3.9% in the year-ago period. Comps in the quarter were hurt by 0.2% fall in mix-shift and 1% decrease in menu price.

Franchise and Other revenues surged 38.2% to $18.1 million. Comps at franchised restaurants were up 1.3%, aided by a 5.1% growth in international franchise comps, partially offset by a 0.3% decline in domestic franchise comps.

Margins

Brinker’s restaurant operating margin expanded 70 basis points (bps) to 17.9% benefiting from increased margins in its two segments. Restaurant margins at Chili’s and Maggiano's also improved year over year, mainly due to reduced cost of sales.

Share Repurchase & Dividend

During the quarter, Brinker bought-back 1.8 million shares worth $60.4 million. In addition, Brinker also paid its regular quarterly dividend of 20 cents per share during the third quarter.

Unit Update

During the quarter, Brinker opened two international franchise restaurants while it has closed five franchised and two company-owned Chili’s units. At the end of the quarter, Brinker operated 1,588 restaurants, of which 865 were company-owned and the rest were franchised.

Outlook

Brinker has maintained its guidance for fiscal 2013. The company expects adjusted earnings per share in the range of $2.30–$2.45, up 17% to 25% year over year. The targeted growth is expected to come from 2%–3% comps growth, operating margin improvement of 100 bps and share count reduction of approximately 6%. Diluted weighted average shares outstanding are projected between 74 to 76 million in fiscal 2013.

Despite a slowdown in the restaurant industry, management expects comps to increase 2%–3% year over year in fiscal 2013 with a price increase of 1% to 2% at Chili’s.

Franchise revenues are expected to increase in the mid single-digit range, benefiting from the expansion of the restaurant base.

Brinker expects to open nearly 32 to 37 international franchise restaurants in fiscal 2013 with two new restaurants under the Chili’s brand. Along with this, Brinker is expected to complete the remodeling of 370 company-owned restaurants by the end of fiscal 2013.

Our Take

Dallas-based restaurant chain is witnessing declining comps due to frail industry sales. Along with this, food cost inflation is expected to remain headwind for the company. However, Brinker’s various sales-driven initiatives and remodeling program are going to spur growth, moving ahead. Management expects the re-imaged units to contribute about 1% of comps growth during 2013.

Another restaurateur McDonald's Corporation's (MCD - Analyst Report) first-quarter 2013 earnings of $1.26 per share missed the Zacks Consensus Estimate by a penny but grew 2% year over year.

Brinker currently carries a Zacks Rank #3 (Hold). Some other restaurateurs, BJ's Restaurants, Inc. (BJRI - Analyst Report) and The Wendy's Co. (WEN - Analyst Report) are expected to report their first-quarter earnings on Apr 25 and May 8, respectively.

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