Brinker's Sales Growth Not Yet a Buy

Corporate quick-service restaurant company Brinker International (NYSE: EAT  ) is finding more success than its biggest competitor, Darden Restaurants (NYSE: DRI  ) . The former's recently released earnings showed more favorable figures, if more tuned to short-term rather than long-term improvements.

Chili's, which goes head-to-head with Darden properties Olive Garden and Red Lobster, showed resilience in a still tepid consumer-spending environment, while Brinker's higher market Maggiano's grew more. Behind the brand names, management is focusing on operating efficiencies aimed at boosting margins in coming periods. While Darden is mired in activist investors and a lack of direction, is Brinker the industry pick?

Earnings recap
Brinker didn't deliver blowout numbers, but it was still enough to impress the Street -- especially compared to its peers. Sales grew 2.1% to more than $704 million, ahead of the consensus analyst estimate of $697 million. The growth came from a favorable source: same-store sales improvements.

Chili's same-store sales grew 0.3% domestically, while Maggiano's comped up 0.9%. Overall, Brinker same-store sales ticked up 0.8%.

Investors should note a few things about these headline numbers. For one, the comparable quarter from last year was coming off a 1.3% decline in same-store sales -- so the two-year change is still negative. Furthermore, the increase came mainly from a 1.5% price hike. Overall, store traffic actually drifted down 1.5%.

Brinker was able to show much more favorable numbers than Darden's tanking properties: Olive Garden and soon-to-be-spun-off Red Lobster. Looking ahead, management reiterated fiscal 2014 guidance of roughly flat same-store sales growth, with margin improvements and earnings estimates of $2.65-$2.75 per share.

Strengths and weaknesses
Brinker management is investing in kitchen equipment, new POS systems, and waste control to boost margins. This appears to be working and allows the company to drive higher during times of macroeconomic tepidity. While the effort shouldn't be undersold, it's also not a substitute for organic growth.

Brinker needs to show more people coming into the restaurants. Price hikes are a short-term solution for better numbers, but certainly not a way to attract new customers -- especially in its target demographics.

At 16 times earnings, Brinker isn't pricey or cheap. The company trades at a slight discount to both Darden and DineEquity (the company behind IHOP and Applebee's). For investors interested in the space, Darden is the least desirable of the bunch. Management tried to assuage concerns by announcing the spinoff of Red Lobster, but the effort is proving to generate even more controversy. Darden still fundamentally lacks direction, as its numbered chains (at many different price points) require individual strategies.

Between Brinker and DineEquity, valuation would point to Brinker, but the sales data is not yet compelling enough to suggest that the company's downside risk is worth its potential upside. Investors may want to wait on this one before jumping on the market's bull train.

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