This Restaurant Chain Can Deliver Good Gains in the Long Run

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Nov 18, 2014

Brinker International (EAT, Financial) has seen a strong start to the new fiscal year. The company posted impressive results with commendable increase in both top line and bottom line. The company also saw good improvement in the comp sales which became the key reason for Brinker to post such good numbers on the board. Brinker has gained considerably on the exchange on the back of its terrific results. The management is expecting better consumer behaviour in future which is expected to increase its sales further. Even the good improvement in the earnings might help Brinker to attract more investors to the stock. Let us see how?

Improving performance

Brinker’s quarterly revenue rose by 3.8% to $711 million which marginally topped consensus estimates of $709 million. Brinker’s same restaurant sales rose by 1.9% while Chili’s same-restaurant sales rose by 2.6%. On the earnings front, Brinker posted EPS of $0.49 per share which is more than $0.42 per share which it posted in the same quarter last year. This also beat analysts’ estimates of $0.43 per share on the earnings.

Brinker is having good times. The sales of the company are improving which indicates that Brinker is having a positive impact on the customers. The company is further trying hard to improve its sales to create more opportunities for profitability. It is undertaking many strategies to grow its sales and customer traffic through various initiatives. It is already seeing significant growth in both of its brands namely Chili's and Maggiano’s.

Plans for the future

However, Brinker’s management thinks that the customers are still cost conscious and aren’t eating out much due to the economic downtown. While, the higher prices at its Chili’s brand is also eroding its margins somewhere. But the company thinks that the customers are now showing some positive signs and it is expecting better customer response in the coming days which can help Brinker to improve its financial position in the coming quarters.

However in the past as well Brinker had been alert towards its strategy of adjusting towards the changing consumer behaviour. It worked on reducing the labour cost through effective staffing measures. In fact, even now Brinker is positive about its growth strategy. It is facing stiff competition from other peers as well who are also making aggressive efforts to hold a competitive position in the market. It is laser focusing on creating a relevance and differentiation through culinary marketing and technology initiatives.

Moving forward, Brinker is busy in innovating and renovating its menu to improve traffic in its restaurants. For example, in the last quarter Brinker launched Fresh Mex platform last year, with Fresh Mex Bowls, new mix-and-match fajitas and table side guacamole which are so popular in the market and the guests are loving it. Brinker is further planning for more innovations in its menu which can be growth driver for it in future.

In this league, Brinker is also seeing good opportunities in the burger segment. It is innovating the burger menu as well to add value to it. It has introduced a new potato bun with lettuce and home-made fresh garlic pickle which are specially made for Chili’s. In addition, Brinker also launched Craft Burger by adding a double burger to it. This is also gaining good response by the customers and is expected to grow further in the coming days. Besides these, Brinker is also working on brand promotion through some unique marketing stunts. It is focusing on branded messages giving customers a compelling relevant story about Chili’s.

Brinker is also making the best of the technology. It is now nearing the completion of installation of Ziosk tablets in all of its domestic franchises which will further help the company to extend its leadership in the food market. It is also investing significantly in the guest centric technology to upgrade Chili’s website on the mobile platform as well. This will improve its reach creating more traffic to its food joints, helping it to gain much market share in future on the back of improved sales. However, the company is also worried about the weak comp sales on the international franchises but it is working with its partners to improve its business on these franchises as well.

Conclusion

Moving to the valuation, Brinker International looks reasonable with trailing P/E of 23.11 at these valuation levels. The forward P/E of 15.37 also gives an idea of good earnings growth in future. Even in the next five years its earnings are growing with a CAGR of 13.38% which is quite closer to the industry average of 14.52%. in addition, the economy is improving and Brinker is expecting better consumer behaviour in the coming days which will surely improve its sales. Thus considering all these points, Brinker International is a good pick and definitely worth your dollars.