The last quarter of 2013 was a tough one for many casual restaurants, though Brinker International (NYSE:EAT) fared better than most. In the just-ended period, the company seems to have maintained its respectable earnings performance, coming in right around where analysts had expected it. Brinker may not be a household name, but its two chief properties, Chili's and Maggiano's, certainly are. The no-brainer casual restaurant concept of the 1990s and early 2000s is under fire these days, as evidenced by many of Brinker's peers. So what is it that Brinker does to keep the numbers positive and achieve forward momentum? From the looks of it, a steady increase in prices and trend toward franchised stores is leading the charge.
To be clear, Brinker's results were by no means amazing. This is not a business experiencing the same kind of tailwinds as some quick-service restaurants and trendy chains. But when compared to its most similar peers, such as Darden Restaurants' Olive Garden (which cannot seem to plug the customer drain at the bottom of its locations), Brinker's positive trends are encouraging.
Traffic at Chili's was down in the quarter by about 1.2%, even though the franchise ultimately netted a 0.7% same-store sales gain. Compensating for the fewer customers was a higher average check and product mix. Maggiano's posted more anemic figures -- up just 0.2% and held back by a 0.9% drop in traffic. International Chili's locations as well as Maggiano's in its entirety marked the 17th quarter in a row of positive same-store sales. While this quarter's gains weren't thrilling, the collective gains over a four-year period are worth paying attention to.
Investors may have gawked at the 16.7% jump in adjusted earnings per share, though keep in mind that Brinker has steadily bought back shares throughout its fiscal year -- nearly $200 million worth, year to date. The company did improve its operating margins, which was also partially responsible for the substantial EPS jump.
The good, the bad
Franchise businesses are great. They require less up-front capital for expansion and generally encourage healthier margins than their company-owned brethren. In Brinker's last quarter, franchise fees rose more than 6%. There is significant potential here, as the company has only a fraction of its restaurants under the franchise model. To illustrate, Chili's company-owned stores accounted for $645.8 million in sales this past quarter. Brinker's total franchisee revenue was only $414 million, with the company's take coming in just shy of $20 million.
On the less appealing end of things is the fact that Brinker trades at nearly 16 times forward earnings and is not growing at a rate that justifies the multiple. For some, this doesn't matter, but price-conscious investors will not find much here for them. Average estimates for full-year 2014 earnings come in at $2.74, with the next year's at $3.14 per share -- a year-over-year rate of 14.5%. That's certainly not bad in isolation, but keep in mind some of this earnings growth will come in the form of share buybacks. Revenue is due to climb just 3.4% over the same period.
Brinker is doing better than many of its peers, and its chains have found a way to remain relevant in today's extremely challenging casual-restaurant landscape. While the company isn't necessarily a buy today, it is certainly one to keep an eye on in the long run.
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