Brinker International: Earnings Preview

 |  About: Brinker International, Inc. (EAT)
by: Zacks Investment Research

Brinker International Inc. (EAT), primarily engaged in the ownership, operation, development and franchising of various restaurant brands, is slated to release its first quarter 2011 results on Wednesday, October 27. The current Zacks Consensus Estimate for the first quarter is 15 cents per share, representing an annualized negative growth of 12.1%.

With respect to earnings surprises, over the trailing four quarters, Brinker has outperformed the Zacks Consensus Estimate for two quarters and missed it for two quarters. Brinker has oscillated greatly, from approximately negative 9.8% to positive 31.8%.

The average earnings surprise was a positive 7.8%. This implies that the company has beaten the Zacks Consensus Estimate by the same magnitude over the last four quarters.

Previous Quarter Recap
Brinker posted fourth quarter and full year 2010 adjusted earnings per share of 44 cents and $1.18, respectively, which fell short of the Zacks Consensus Estimates of 46 cents for the fourth quarter and $1.22 for fiscal 2010.

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-based menu in order to drive traffic.

Brinker initiated its fiscal 2011 guidance. The company expects adjusted earnings to rise in the range of 10% to 20% in fiscal 2011, with earnings per share anticipated in the range of $1.30 to $1.42.

The company apprehends that full-year revenues will decrease between 2% and 4% year over year and expects comparable-restaurant sales 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.

Estimates Revisions Trend

Estimates have not moved up significantly in the last 30 days, implying that the analysts are maintaining their view on the stock. The current Zacks Consensus Estimate is $1.34 for 2011 (reflecting a year-over-year growth of 13.4%) and $1.63 for 2012 (reflecting a year-over-year growth of 21.5%).

Agreement of Estimate Revisions
In the last 30 days, 2 out of 18 analysts have raised their estimates for the first quarter of 2011, while 2 have moved in the opposite direction, thus providing no directional movement.

For fiscal 2011, 2 out of 19 analysts have increased their estimates and one has slashed the estimate. Thus, estimate revisions trend, though mixed, drifted to the positive side. For fiscal 2012, 1 analyst out of 15 has upped his or her estimate.

Consumer demand is improving, resulting in a higher traffic. The company is making efforts to expand its margins through disciplined cost management and significant investments in kitchen technology, which will result in lower labor costs.

The company is also expected to benefit from capacity contraction and the consequent lower unit capital expenditure. Moreover, the company will also continue its share repurchases activity as it has a favorable free cash flow position.

For fiscal 2011, one analyst has decreased the estimate, given that the company has registered sagging comparable restaurant sales for several quarters and expects it to be in a range of flat to negative 2% in 2011.

Over the 7 days, one analyst has raised estimates for first quarter and fiscal 2011. But for fiscal 2012, there has been no movement in analysts’ estimates.

Magnitude of Estimate Revisions
There has been no change, in the last 60 days, in the earnings estimate of 15 cents and $1.34 for the first quarter and fiscal 2011 as seen from the magnitude of the Zacks Consensus Estimate trend. Therefore, the analysts expect the company to report in line.

In the last 30 days, estimates for fiscal 2012 remained unchanged at $1.62, but increased by 1 cent to $1.63, in the last 7 days.

Our Take
We expect Brinker to provide earnings above expectations as the economy is improving.

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 #3 Rank (short-term Hold recommendation). Our long-term recommendation for the stock also remains in the middle of the road at Neutral.

Brinker’s primary competitor, McDonald’s Corporation (MCD), reported its third quarter 2010 earnings of $1.29 per share, beating the Zacks Consensus Estimate of $1.24. The better-than-expected results were driven by a rise in comparable-store sales across all regions.

Another competitor, Yum!’s Brand Inc. (YUM), reported adjusted earnings of 73 cents per share for its third quarter 2010, which inched past the Zacks Consensus Estimate by a penny. The earnings increased 5% year over year, mainly on the back of strong performances in its China division.