Brinker (EAT) Beats Q4 Earnings, Sales Estimates; Stock Up

Brinker International, Inc. (NYSE:EAT) posted better-than-expected fiscal fourth-quarter 2016 results with both earnings and revenues beating the Zacks Consensus Estimate.

Share price of this Texas-based casual-dining restaurant was up over 12% on Thursday in response.

Earnings and Revenue Discussion

Adjusted earnings of $1.24 per share beat the Zacks Consensus Estimate of $1.23 by a penny. Further, earnings increased 31.9% year over year, benefitting from improved revenues and lower share count. However, margins remained weak in the quarter.

Quarterly revenues rose 15.4% year over year to $881.7 million supported by the increased restaurant capacity as a result of the Pepper Dining acquisition on Jun 25, 2015 and an extra week of sales, which were partially offset by lower comps.

Company sales rose 15.8% and franchise and other revenues also rose 2.1%. Revenues beat the Zacks Consensus Estimate of $875 million by 0.76%.

Comps declined 1.8% in the quarter. However, as expected, comps improved sequentially from a 3.6% decline in the prior quarter.

Behind the Headline Numbers

Brinker International primarily engages in the ownership, operation, development and franchising of various restaurant brands under the names Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s).

Chili's

Chili's reported revenues of $747.3 million, up 17.1% year over year. This was primarily due to an increase in restaurant capacity, improved comps as well as an additional operating week.

Chili's company-owned comps fell 1.8% due to a 4.1% decline in traffic. Comps compared favorably with the prior-quarter decline of 3.6%. We note that comps had decreased 0.8% in the year-ago comparable period.

Comps at Chili’s franchised restaurants went down 3.4% as against 1.9% growth in the year-ago quarter and 1.7% decline in the last quarter. Notably, increased competitive activity in the QSR category continued to affect sales and traffic trends in the quarter.

Chili's restaurants are comparatively heavily concentrated in Texas and Louisiana, where declining oil prices have led to macroeconomic slowdown, which hurt traffic trends in those key markets. Restaurants in markets with significant exposure to the energy industry, which constitute about 17% of its system, witnessed 4.5% decline. However, it improved approximately 310 basis points (bps) from the third-quarter.

While comps declined 5.5% in international franchised Chilli’s restaurants, it fell 2.1% in the domestic franchised units. Domestic comps grew 2.1% and International comps grew 1.2% in the year-ago quarter.

Domestic comps (including company-owned and franchised) at Chili's declined 1.8%, as against the prior quarter improvement of 0.1%. We note that comps were down 3.6% in the prior year quarter.

Maggiano's

Maggiano's sales increased 7.9% to $108.1 million. However, comps were down 1.7%, comparing unfavorably with a decline of 0.1% a year ago. We note that, comps had increased 0.2% in the prior quarter. The decline in the quarterly comps was due to the timing of marketing spending and seasonal softness in the banquet business.

Expenses and Margins

Total costs and expenses increased 15.8% to $782.3 million, mainly due to higher restaurant expenses and restaurant labor costs.

Cost of sales ratio declined 10 bps year over year due to unfavorable mix partially offset by favorable menu and commodity pricing.

Restaurant labor, as a percentage of revenues, was down 110 bps in the quarter due to higher wages and deleverage.

Restaurant operating margin, as a percent of company sales, decreased 20 bps to 18.3%, reflecting unfavorable mix impact of the lower margin Pepper Dining acquisition. Excluding Pepper Dining, restaurant operating margin was up 20 bps, reflecting the impact of the 53rd week of sales.

2016 Results

In fiscal 2016, Brinker’s earnings increased 14.9% year over year to $3.55, meeting the lower end of the guidance.

Revenues were $3.26 billion, up 8.5% year over year but lower than the company’s expected revenue growth of 10%–12% year over year.

Fiscal 2017 Guidance

For fiscal 2017, Brinker maintained its previously issued (Jun 2016) earnings per share guidance in a range of $3.40 to $3.5.

The company expects revenues to be in the range of down approximately 1.5% to up 1%.

Further, the company expects restaurant operating margin to be down approximately 50 bps year over year.

It expects average shares outstanding to range between 50 million to 53 million in fiscal 2017. It raised the lower end of its previous comps guidance to 1.5%-2% from 0.5%-2%.

Zacks Rank & Stocks to Consider

Brinker currently has a Zacks Rank #4 (Sell). Better-ranked stocks in the same industry are Arcos Dorados Holdings Inc. (NYSE:ARCO) , Del Taco Holdings, Inc. (NASDAQ:TACO) and Denny’s Corp. (NASDAQ:DENN) . All these stocks carry a Zacks Rank #2 (Buy).