What You Need to Know About This Restaurant Group

Restaurant group Brinker International (NYSE: EAT  )  -- home of Chili's and Maggiano's -- is coming off of a pretty bland quarter. Revenue was essentially flat and same-store sales actually decreased. After a quarter like this, what do long-term investors need to know?

Not a high-growth investment
Over the next year, Brinker is looking to open 10-12 new locations. Given the fact that the company operates more than 1,500 restaurants currently, this is less than 1% annual unit growth. Management is keeping unit growth slow, fearing restaurant cannibalization -- something that bit BJ's Restaurants.

Since investors don't have unit growth, what kind of growth is the company focused on, and how are shareholders being rewarded?

Sales growth is needed
In the most recent earnings call, CEO Wyman Roberts said the company's "primary focus for the remainder of fiscal '14 is growing sales." One thing that could boost Brinker's sales is increased spending on advertising.

DineEquity (NYSE: DIN  ) -- home of Applebee's and IHOP -- is currently one of the few casual-dining restaurants that's actually increasing same-store sales. Interestingly, advertising is one of its "pillars" of growth. Television advertising is something that Brinker had neglected recently, shifting toward digital advertising. Now the company looks to shift some money back to TV ads, and hopefully experience results similar to DineEquity's.

Both Brinker and DineEquity advertise value menu items -- and both offer very similar items at similar prices. The difference often lies in which restaurant the consumer thinks of first. Effective advertising can drive traffic. But it's important to note that even if Brinker's advertising is successful, the sales growth will likely only be in the low single digits. 

And what about shareholder value?
Brinker's primary success is in creating shareholder value. The most recent quarter's earnings per share came in at $0.43 per share -- an increase of 16% year-over-year. This was also the 13th consecutive quarter it was able to grow earnings per share. How is it that revenue can be flat but earnings per share continue to grow?

One of the big earnings-per-share growth drivers has been new menu items, which have a higher profit margin. Therefore, even though same-store sales and restaurant traffic have been decreasing, the company is able to squeeze more profits out of the sales it is getting. While this is good news, this doesn't look to be sustainable over the long term. Only so much profit can be squeezed out of new menu items.

Brinker is also updating its cooking equipment. Now complete, the company is still feeling the benefits from the installation of Middleby's (NASDAQ: MIDD  ) Kitchen of the Future. This new kitchen equipment helped improve Brinker's bottom line by helping the company to save on labor and increasing operational efficiency. Similarly now the company looks to increase efficiency further by installing new fryers systemwide. These things -- while good moves -- don't look to deliver long-term earnings-per-share growth either.

This is actually better long-term news for Middleby than it is for Brinker. Since Brinker has successfully installed the Kitchen of the Future, and is realizing the cost effectiveness of the investment, other restaurants that are struggling with comp-sales growth will look to implement kitchen updates as well. Middleby is finishing up the Chili's update, and will soon begin working on rolling out these improvements in other places as well.

While menu items and kitchen updates are temporary factors, Brinker's use of cash is the real earnings-per-share growth driver.

EAT Shares Outstanding Chart

Brinker International shares outstanding data by YCharts

By using cash smartly, Brinker has been able to grow earnings by 90% over the past five years, despite revenue falling 5% during that same time. First, the company invests in things that will grow earnings, like the above-mentioned kitchen update. Then the company pays out 40% of earnings in a dividend, maintains $50 million in cash on the balance sheet, and pays down $25 million in debt a year. All leftover cash is used for buying back shares.

The long-term investor's conclusion
This is a tough time to be in the casual-dining business. Yet even with restaurant traffic and revenue on the decline, Brinker has been able to deliver earnings-per-share growth.

The restaurant sector frequently experiences ups and downs, and if Brinker can deliver during the down time, you've got to feel good about the future. Currently trading with a forward P/E of 13 and a 2.3% dividend yield, long-term investors should hang in there even after an otherwise bland quarter.

For Middleby, investors must keep an eye on which restaurant chain will be the next to implement kitchen updates. An order from a big player could deliver huge revenue growth. As for DineEquity, the company reports earnings on Oct. 29. I'm going to be watching to see if the falling restaurant traffic plaguing the majority of casual-dining players makes an impact DineEquity's top line as well. 

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