Sunday, November 7, 2010

Brinker International: Challenge for Casual Dining

Brinker International, Inc. owns, develops, operates and franchises the Chili’s and Maggiano chains and has a minority interest in the Macaroni Grill chain of casual dining restaurants. The Company describes itself as “one of the world’s leading casual dining restaurant companies. With more than 1,700 restaurants and over 125,000 team members in 27 countries and two territories, Brinker and its brands welcome more than one million guests into our restaurants every day.”

Brinker’s recently announced results for the fiscal first quarter ended September 29, 2010.

Highlights for the first quarter of fiscal 2011 include the following:

  • Earnings per diluted share, before special items, increased to $0.21 compared to $0.12 for the first quarter of fiscal 2010 (see non-GAAP reconciliation below)
  • On a GAAP basis, earnings per diluted share increased to $0.21 from $0.15 in the first quarter of the prior year
  • Restaurant operating margin(1) improved 190 basis points to 15.0 percent
  • Total revenues decreased 6.0 percent to $654.9 million
  • Same restaurant sales at company-owned restaurants decreased 4.2 percent consisting of a 5.0 percent decrease at Chili's and a 1.4 percent increase at Maggiano's
  • Cash flows used in operating activities were $6.6 million and capital expenditures totaled $15.6 million
  • The Company repurchased approximately 5.3 million shares of its common stock for $92.7 million in the first quarter and repurchased an additional 4.3 million shares of its common stock for $83.1 million subsequent to the end of the quarter
  • The Company paid a dividend of 14 cents per share in the first quarter, an increase of 27.3 percent over the prior year quarter”

(1) Restaurant operating margin is defined as Revenues less Cost of sales, Restaurant labor and Restaurant expenses.

Brinker reports declining gross revenues at Chili’s. This is, at least in part, because the company shed 21 Chili’s restaurants in sales to franchisees and closed nine additional locations. Maggiano’s showed a 1.4% increase in same store sales due to increased traffic.

On the positive side, Brinker has consistently reported positive free cash flow. What is not so good is that free cash flow has been all over the place. Since FYE June 2004, free cash flow has ranged from a low of $0.11 per share to a high of $2.34 in FY10. For the trailing four quarters ending September 2010, free cash flow was $1.58 or 12X the recent stock price.

Depending on how you evaluate debt, we think Brinker has a problem. We find that long term debt is greater than working capital though it is a modest 3.26X free cash flow. The current ratio, at 1.0, is in line with the industry, as is times interest earned at 4.8X. Long term debt to equity is a heavy 80.4%.

The company’s long term growth rates are not impressive. Annualized seven-year growth rate for sales is negative at -1.3%. Similarly, the seven-year growth rate for EPS from continuing operations is -1.8%. Reported EPS for 1Q11 at $0.21 is 40% higher than for 1Q10 at $0.15. EPS for the trailing four quarters, at $1.21, is 42% higher than the year-ago period.

As previously mentioned, sales is a concern. In the quarter ending 9/10, sales were $654.9 million as compared to $778.1 million for the quarter ending 9/09. The TTM ending 9/10 has revenues at $3,513.5 million as compared to $4,054.5, year-over-year.

The company is widely followed by the investment community. Twenty analysts estimate earning for FYE 6/11 in the $1.28 to $1.45 and average $1.38. Some 18 analysts project FYE 6/12 earnings as being in the $1.38 to $2.19 range; the consensus is $1.63.

Brinker pays a dividend of $0.50 per share which provides a yield of 3.0%. This may be sufficient reason to hold Brinker a bit longer while the company gets its house in order.

Disclosure: Author is long EAT.

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