Brinker: Earnings Scorecard

| About: Brinker International, (EAT)

Brinker International Inc. (NYSE:EAT) primarily engaged in the ownership, operation, development and franchising of various restaurant brands, posted fourth quarter and fiscal 2010 results on August 12, 2010. The company’s adjusted earnings for both fourth quarter and fiscal 2010 missed the Zacks Consensus Estimate on the back of sagging comparable restaurant sales, hurt by a sluggish economic environment. The recent earnings announcement, subsequent analyst estimate revisions and the Zacks ratings for both the short-term and the long-term outlook for the stock are covered in depth below.

Earnings Report Review

During the fourth quarter, total revenue inched up 0.1% year over year to $743.1 million, but missed the Zacks Consensus Estimate of $772 million. The year-over-year upside in revenues was driven by a 3.0% rise in restaurant capacity due to an additional operating week, but was partially offset by the sale of 21 restaurants to a franchisee and closure of 11 restaurants since fourth quarter 2009.

In fiscal 2010, total revenue dropped 12.8% from the previous year to $2.9 billion, but was in line with the Zacks Consensus Estimate.

Comparable-restaurant sales declined 3.4% during the fourth quarter. By restaurant concepts, comparable-restaurant sales fell 4.1% at Chili's Grill & Bar, but rose 1.3% at Maggiano's, driven by an improving traffic. In fiscal 2010, comparable-restaurant sales plunged 4.2%.

Cost of sales rose 30 basis points (bps) to 27.7% in the quarter, due to higher promotional expenses and costs related to the roll-out of a new Chili’s menu, partially offset by a decline in commodity prices related to beef and chicken and a value menu offer to drive traffic.

Brinker initiated its guidance for fiscal 2011. The company expects adjusted earnings to rise in the range of 10% to 20% in fiscal 2011, with earnings per share are anticipated in the range of $1.30 to $1.42. The company expects full-year revenues to decrease between 2% and 4% year over year and comparable-restaurant sales to be in a range of flat to negative 2%. Operating income margin is expected to expand 70-100 bps on a year- over-year basis in fiscal 2011.

The company plans to open 55 to 63 franchise restaurants in 2011, including 10 to 13 franchise restaurants under Chili’s brand and 45 to 50 internationally.

Earnings Estimate Revisions: Overview

Following the fourth quarter earnings release, the Zacks Consensus Estimate for the company has decreased; with the analysts covering the stock having a negative view on the stock. The company continues to expect a decline in traffic, as it projects comparable-restaurant sales to be in a range of flat to negative 2% in fiscal 2011. The earnings estimate details are discussed below.

Agreement of Estimate Revisions

From the table below, a negative inclination can be witnessed among the analysts. In the absence of any near-term positive catalysts, over the last 30 days, out of 18 analysts, 13 have reduced their estimates for fiscal 2011 and 1 has raised the estimate.

Negative revisions by the analysts are based on the year-over-year decline in top line due to softer comparable-store sales as restaurant industry remains under pressure, given the economic downturn, which has badly affected consumers’ disposable income.

One analyst has raised the estimate for fiscal 2011 as the company concentrates on expanding its margins through disciplined cost management and significant investments in kitchen technology, which will result in lowered labor costs. The company will also continue its share repurchases activity as it has a favorable free cash flow position.

For fiscal 2012, out of 12 analysts, 3 have raised their estimates and 3 have reduced their estimates over the last 30 days, thus providing no directional movement. (Click to enlarge)

Magnitude of Estimate Revisions

The table below indicates that earnings estimates have decreased by 6 cents to $1.35 for fiscal year 2011 and by 3 cents to $1.64 for 2012, over the last 30 days. The magnitude of estimate revisions indicates that the analysts expect earnings to remain under pressure. In the last 7 days, estimates have reduced further by 2 cents in both 2011 and 2012.

Our Recommendation

We believe Brinker remains one of the strongest long-term players in the casual dining segment. Brinker’s major brand Chili’s has a certain degree of pricing flexibility, given its lowest per person average check and one of the highest average unit volumes in the industry, demonstrating a strong consumer appeal and a well-received value proposition. Additionally, to immune itself from the economic downturn, the company resorted to measures such as the closure of underperforming stores, divesture of divisions, changing over to franchised operation, focusing on international expansion to move away from over-supplied domestic market and being on a cost-control mode for quite some time.

Although it has somewhat improved, we believe the tension about traffic growth and consumer spending is not over and will likely restrict Brinker’s revenue growth and comparable store-sales in the near term. Moreover, we remain cautious on the stock as the company faces increased competition from other casual dining operators.

Accordingly, we keep our conservative view on Brinker’s shares and have a Zacks Rank of #3 (short-term Hold recommendation). Our long-term recommendation for the stock also remains in the middle of the road at Neutral.

Apart from Brinker, another stock that promises long-term growth opportunities is Buffalo Wild Wings Inc. (NASDAQ:BWLD), in which we have a Zacks Rank of #1 (short-term Strong Buy recommendation), as it has a long track record of success, a viable business strategy and a debt-free balance sheet. Buffalo Wild Wings reported second quarter earnings of 50 cents that also topped the Zacks Consensus Estimate of 42 cents.

Disclosure: None