Maybe Customers Don't Want Their Baby Back Ribs
By
Rob Plaza
October 23, 2009
|
With Chili's resorting to a new version of its old baby back, baby back, baby back ribs commercial to drum up sales, it shouldn't be too surprising to find out that Chili's owner Brinker International (NYSE: EAT) reported disappointing results for its fiscal first quarter.
Brinker's latest quarterly revenue fell 21% year-on-year, to $778.1 million. The large drop-off was due to Brinker's sale of 198 restaurants and closure of another 49 in the last twelve months. But that didn't explain all the drop. Comparable-restaurant sales declined 6% with its three chains (Chili's -6%, Maggiano's -6.6%, and On The Border -5.1%) all negative. However, the company did manage to beat analyst earnings estimates. Its first-quarter EPS of $0.17 was $0.02 above estimates, thanks to the company keeping its costs in check. Still, earnings per share were down 35% from the year-ago quarter.
Consumer appetites are changing
Brinker finds its restaurants in a tough spot right now. Consumers are looking for cheaper prices and faster service. That's why restaurant chains such as Panera Bread (Nasdaq: PNRA), Chipotle (NYSE: CMG) and Buffalo Wild Wings (Nasdaq: BWLD) are registering solid sales gains, while casual dining chains DineEquity (NYSE: DIN) and Darden (NYSE: DRI) continue to struggle in the current environment. Even tried-and-true McDonald's (NYSE: MCD) is rocking the world with its comps.
Brinker is doing what it can to encourage consumers to visit its restaurants. The company is focused on improving its menu selection with an emphasis on ribs and burgers. However, the best response has come from its "3 for $20" promotion, which allows customers to choose three courses for $20. While this promotion is popular, it does eat into the company's profit margins.
Too many restaurants
Consumers have several choices for dining out at a casual restaurant. And, let's be honest, how much of a difference is there between a Chili's, Applebee's, or TGIFriday's? Not much. Most carry the same types of meals and have a similar atmosphere. As a result, consumers are choosing to eat at the restaurants with lowest prices. That points to further pressure on sales and profit margins in the future for casual dining restaurants as companies increase promotional activity to drive restaurant traffic. That may very well be the "new normal" for casual dining until we see fewer restaurants competing.
Brinker shares were down in the days after reporting first-quarter results. Even after that price cut, the shares don't look too tempting at a trailing P/e of nearly 20.
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