John Gordon's  Instablog

We were able to get into a Chili's (EAT) test unit for lunch today, and there are some interesting menu items in the works. All are lower priced, menu adds or new platforms that may give Chili's some new news to talk about, particularly at lunch, or in conjunction with bar themes.

Chili's has redone its menu face and is featuring its burgers, ribs and fajitas heritage, while adding the triple dipper menu (preset items, $9.99). It's also featuring $4.99 Margaritas and happy hour begins at 300P in many units, as well.

The new items added are mostly lower than $10 and speak to a more lunch time, snack, sandwich focus:

4 new entree salads: Caribbean, Asian Noodle, BBQ Chicken, Chicken Caesar for $8.79 (most) to $11.29 (shrimp, salmon)

4 new sandwiches/wraps: Turkey, Carne Adada , BBQ Pulled Pork, Chicken Wrap: for $6.99 to $7.99

5 new taco items: chicken, shrimp, pulled pork, ground beef and combination, for about $8.99.

Store management indicated that while it was a test, the tacos and sandwiches were selling well and had largely favorable reaction. 
While we haven't seen all of the menu items, the percentage gross profit shouldn't be bad.

We all know it will take some promotional muscle to establish these new items in the marketplace. The market is so crowded, and messages get lost quickly. For
example, Macaroni Grill (former EAT, now privately held) began broadcast featuring its almost totally redone menu recently. 

The valuation is still cheap and has a run of upgrades since November, 2008.
Current year EPS estimate is $1.31, about a 13 multiple. We'll see how earnings go tomorrow. I've been in four Chili's in the last month and they look about steady to me.  

Disclosure: no positions




     

The Burger King $1 doublecheeseburger campaign starts nationally on October 19. For Burger King, its high stakes. For the QSR sector, its a way to detect whether the $1 value focus will actually payoff.

In its August 25th earnings call, CEO John Chidsey indicated they were happy with the early $1 double results in about 40 markets. Earlier this year, Burger king and its franchisees failed twice to come to agreement to promote it, and these must be test markets or company markets.

Burger King noted the $1 double promotion narrowed the traffic losses it was realizing earlier, and market profitability outperformed the assumed gross profit dilution. The VP of Strategy said it was a superior sandwich at an exceptional value. And, they declined to provide actual traffic gains in these markets.

While these words aren't very specific, this will be a big event to watch. The chain restaurants operators are separating into a value focus vs. non-value focus marketing strategy group. They all hope to execute the barbell strategy, drawing people in and then trading them up. But a few companies, like Carl's/Hardees, Panera, Red Robin California Pizza Kitchen and Cheesecake Factory, say they won't discount. But they all have value oriented items but won't feature it in the media.

No one wants to discount, but the publicly traded chains are starved for comps. They are beaten silly by the business press and the analyst community if there is not a perfect upward line.

Burger King will have a big traffic breakeven that it must generate to offset the average check loss.  Success isn't guaranteed. This is important for them, as their sales trend line had been weakening for some time, but went negative in May, 2009. And the analysts are reacting, one down grade last week from Stifel and an essentially negative comment from Citi. And, the franchisee relationships and profitability are in play, as well.

Disclosure: no stock positions


John A. Gordon
Chain Restaurant Earnings and Economics Expert
www.pacificmanagementconsultinggroup.com