Brinker International Earnings Preview

| About: Brinker International, (EAT)

Dallas-based Brinker International Inc. (NYSE:EAT) is slated to release its second quarter 2012 results on Tuesday, January 24, before the market opens. The current Zacks Consensus Estimate for the second quarter is pegged at 45 cents per share, representing an annualized growth of 18.27%. The Zacks Consensus Sales estimate is $686.0 million.

With respect to earnings surprises over the trailing four quarters, Brinker has outperformed the Zacks Consensus Estimate in all the quarters. The average earnings surprise stands at positive 9.11%, implying that the company has outdone the Zacks Consensus Estimate by the same magnitude over the same period.

Previous Quarter Recap

The owner of Chili’s Grill & Bar and Maggiano's Little Italy restaurant posted first quarter 2012 adjusted earnings per share of 30 cents, surpassing the Zacks Consensus Estimate of 27 cents and the prior- year quarter earnings of 21 cents. The upside in earnings was attributable to higher restaurant margin as well as lower share count.

During the quarter, total revenue climbed 2.1% year over year to $668.4 million attributed to a 2.0% upside in system-wide comparable restaurants sales. Restaurant operating margin expanded 80 basis points (bps) year over year to 15.8%.


The casual dining restaurant company reaffirmed its adjusted earnings guidance range of $1.80 to $1.95 for fiscal 2012. The company continues to expect full-year revenues and comparable-restaurant sales to increase 2%–3% year over year.

Agreement of Estimate Revisions

In the last 30 days, out of the 17 analysts covering the stock, none of the analysts slashed the estimates but 2 analysts raised the same for the second quarter. Likewise, for the third quarter, 2 out of 16 analysts increased their estimates but none moved in the opposite direction. Similarly, for fiscal 2012 and 2013, 2 analysts have made upward revisions while not a single analyst moved in the opposite direction. This implies that the analysts are slightly positive regarding the performance of the company.

In the last 7 days, none of the analysts have budged their estimates, implying that the analysts do not see any near-term catalysts and thus are maintaining their view on the stock.

The upward revision in the analysts’ estimates was based on improved comps at both Chili’s and Maggiano’s, operating margin expansion, unit growth and benefit from share repurchases.

Magnitude of Estimate Revisions

Over the last 60 days, there has been no change in the earnings estimate of 45 cents for the second quarter of 2012 and 55 cents for the third quarter of 2012. Therefore, the analysts expect the company to report in line. In the last 30 days, estimates for 2012 and 2013 have jumped by a penny to $1.85 and $2.15, respectively.

The current Zacks Consensus Estimate for the third quarter, fiscal 2012 and 2013 reflect a year-over-year growth of 16.76%, 21.82% and 15.91%, respectively. The Zacks Consensus Sales Estimates for the third quarter, fiscal 2012 and 2013 are $727 million, $2.81 billion and $2.88 billion respectively.

Earning Surprises

The current Zacks Consensus Estimates for the ongoing quarter reflects a 4.44% upside potential while the third quarter of 2012 reflects a 1.82% downside risk (essentially a proxy for future earning surprises). Similarly, fiscal 2011 contain a 0.00% growth potential. However, 2012 has a downside potential of 0.93%.

Our Take

We believe that Brinker remains one of the strongest long-term players in the casual dining segment and besides repositioning its Chili’s brand, the company is also undertaking several sales initiatives to sustain its positive sales momentum and record more sustainable and stable growth.The company’s strategy to shift to franchised operation, focus on international expansion in order to move away from the over-supplied domestic market and remain in a cost-control mode for quite some time, also looks promising for its business. The company remains on track to double its EPS and achieve margin expansion of 400 bps by 2015.

On the flip side, food cost inflation, lower consumer spending due to uncertain economic environment and stiff competition with respect to price, service, location and concept in order to drive traffic may adversely affect Brinker’s top and bottom-line growth.

Hence, the company holds a Zacks #2 Rank, which implies a short-term Buy rating. We also reiterate our long-term Neutral recommendation.

One of the competitors of Brinker’s, McDonald’s Corporation (NYSE:MCD), is slated to release its fourth quarter results on January 24, 2011, before the opening bell, while another rival, Yum Brands Inc. (NYSE:YUM) will announce fourth quarter results on February 1, after the market closes.

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