Not Biting on Brinker

You've got to hand it to Brinker International (NYSE: EAT  ) .

Earlier this month, the company executed a flimsy Dutch auction buyback, a sucker's bet in which shareholders tendered just 1.3 million shares of the 11.7 million shares it was originally looking to repurchase at $40 a pop.

Tuesday morning, Brinker gave those who had bailed a bad taste in their mouths after a robust quarterly report that lifted the stock as high as $45.78 in early trading.

What was so special about the quarter? Glad you asked. For the company behind Chili's, Macaroni Grill, and other casual dining concepts, fiscal first-quarter profits from continuing operations came in at $0.54 a share before favorable charges. It had earned $0.42 a share on that basis a year ago, and Wall Street was looking for the bottom line to only move up to $0.46 per share.

The market's eating up the results, but let me tell you why I'm not convinced. Brinker achieved those healthy earnings gains despite suffering comps declines at all four of its major concepts. Making matters worse, the company has implemented menu price hikes at all four concepts over the past year. In other words, the traffic defection was likely even worse than the overall 2.1% same-store sales decline would seem to suggest.

Sales grew by 7%, but only as a result of increased capacity due to heady expansion. As a rule, I find a drop in popularity to be a troubling long-term trend even if I can't help but to applaud -- along with the masses -- Brinker's improving margins in the near term.

So you will have to forgive me if I head on over to Motley Fool CAPS and tag Brinker with an underperform rating over the course of the next year. (That was easy. It took me all of 30 seconds.)

Even if the company is sticking to its target of providing investors with 15% bottom-line growth in the future, I'm going to wait until folks start coming back to their local Brinker restaurants. Only Macaroni Grill showed slight improvement for September.

I'm also still not over the poorly executed buyback process. By dragging its feet and setting unattractive prices -- instead of just physically hitting the open market to buy back more than 1.1 million shares that it repurchased during the period the old-fashioned way -- Brinker wound up taking back just 1.5% of its outstanding shares instead of the 14% it had originally looked to acquire.

Dutch auctions have become a popular buyback vehicle for restaurateurs. Sonic (Nasdaq: SONC  ) and CBRLGroup (Nasdaq: CBRL  ) have gone that route recently. They didn't drop the ball the way Brinker did in pricing the tender offers too low and taking too long to acquire shares at attractive prices.

So enjoy your today, Brinker. Let's see if a turnaround in comps vindicates your tomorrow.

For more culinary critiques, check out:

None of these stocks have been singled out in any of our newsletters, thoughInside Valuereaders were treated to a restaurant stock pick in last month's issue.

Longtime Fool contributor Rick Munarriz loved when NBC's The Office hosted the Dunder-Mifflin awards inside a Chili's. He does own shares in CBRL Group. He is also part of theRule Breakersnewsletter research team, seeking out tomorrow's ultimate growth stocks a day early.The Fool has a disclosure policy.


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