By Rick Aristotle Munarriz
January 23, 2008
There's more to Brinker International's (NYSE: EAT) fiscal second-quarter report than meets the taste buds.
The parent company behind Chili's, On The Border, and Maggiano's Little Italy saw its earnings from continued operations soar 38% higher, to $0.44 a share for the period. But this particular Awesome Blossom isn't entirely remarkable. The company's results were fueled by a one-time gain of selling dozens of its company-owned Chili's locations to a franchisee. Back out all of the special gains and charges, and you'll see that the casual-dining giant's profits actually dipped to $0.31 a share.
That's exactly what the market figured it would earn. However, the company has been aggressively repurchasing its shares. That's a commendable move, but things aren't going well if earnings per share dip even after you're dividing profits by 17% fewer shares outstanding than you were a year ago.
The company also missed on the top line, where revenue dipped 3.5% to $868.2 million. Brinker's largest concepts let it down. Chili's, which accounts for 1,419 of the company's 1,872 eateries, suffered a 2.4% comps dip, while On The Border, with its 167 units, watched store-level sales fall by 4.3%.
The bright spots in the Brinker family came from its Italian restaurants. But with just 41 locations, Maggiano's is too small to move the needle, and the company is in the process of selling its Romano's Macaroni Grill concept.
Maybe Brinker needs to rethink that strategy. Bailing on Macaroni Grill and tacking on just one more Maggiano's this year seems to go against the company's recent trends. Yes, Italian eateries are a mixed bag. Buca di Beppo (Nasdaq: BUCA) is struggling, and California Pizza Kitchen's (Nasdaq: CPKI) shares have lost half of their value over the past year. Even the pizza-delivery chains, including Papa John's (Nasdaq: PZZA) and Domino's (NYSE: DPZ), are hugging their 52-week lows. Darden's (NYSE: DRI) Olive Garden was the lone positive standout in last month's quarterly report.
Investors are shying away from casual-dining chains, out of fear that continued economic weakness will fill the tables even more slowly. I argue that this sector is ripe with opportunities, given that most of the key players are already discounted from pronounced slumps.
In time, the economy will bounce back. In time, patrons -- and investors -- will grow hungry again.
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