Despite a number of pressures in the fast-casual dining industry, including declining traffic trends, higher food and labor costs, and the proliferation of third-party delivery services (which eats into restaurant margins), Brinker International (NYSE:EAT) is still achieving revenue and earnings growth -- albeit slightly -- for its shareholders. The operator and franchisor of the popular Chili's and Maggiano's Little Italy chains released its fiscal fourth-quarter earnings on Aug. 13. Below, let's walk through headline numbers and review pertinent details from the quarter, as well as the catalyst behind higher sales projected for fiscal 2020.
Note that all comparable numbers that follow refer to those of the prior-year quarter.
Brinker International: The raw numbers
|Metric||Q4 2019||Q4 2018||Change|
|Revenue||$834.1 million||$817.1 million||2.1%|
|Net income||$46.7 million||$43.8 million||6.6%|
|Diluted earnings per share||$1.22||$1.01||20.8%|
What happened with Brinker International this quarter?
- Chili's comparable sales increased by 1.5% during the quarter, paced by higher "to go" sales. Chili's total revenue rose 2% to $701.9 million.
- Maggiano's sales dipped 0.3% to $102.9 million as comparable sales fell slightly, by 0.2%.
- Both Chili's and Maggiano's were able to mitigate a drag from reduced traffic through menu price increases at company-owned units during the quarter. Chili's increased prices by 3.6%, while Maggiano's passed through menu price hikes of 3.9%.
- Restaurant operating margin (i.e., direct restaurant operating income as a percentage of sales) dipped by 100 basis points to 14.9%. The decrease was driven primarily by higher rent expenses at certain Chili's restaurants that were involved in a sale-leaseback transaction, as well as the company's adoption of a new revenue accounting standard, ASC 606. After adjusting for the sale-leaseback transactions and the new revenue standard, restaurant margin increased by 60 basis points to 16.5%.
- Operating margin slipped by 90 basis points to 7.7% due to the compression in restaurant margin, as well as higher general and administrative expense, which rose by 15% to $39.1 million.
- The company confirmed that it plans to close on the previously announced acquisition of 116 Chili's restaurants from a franchisee in the first quarter of fiscal 2020. For context, Brinker ended the quarter with 1,612 Chili's locations and 53 Maggiano's units. Bringing these restaurants under corporate ownership is expected to boost total revenue by 9% to 10% in the coming fiscal year.
What management had to say
In Brinker International's earnings conference call, CEO Wyman Roberts discussed the impending acquisition of the franchised units next quarter, highlighting the potential for improved performance through store upgrades and the possibility of achieving greater economies of scale:
So with regard to the acquisition, we think this is similar to the acquisition we made a few years ago of a franchise partner. I think there is some opportunity with a remodel program [that] some of these restaurants haven't experienced, so we know there's power in that program. ...
[W]e were just excited to get the opportunity to bring 116 Chili's back into the company because it really fits our strategy around scale. We believe in this market, in this environment right now, scale is, it's powerful. And you can bring so much more to the restaurants when you can leverage these investments in technology across the broader base, for example.
Alongside the projected 9% to 10% revenue growth in fiscal 2020 via restaurant acquisition, Brinker International expects comparable sales to improve by 1.75% to 2.50%. Restaurant margin will remain challenged, as management expects it to range from a dip of 20 basis points to flat against fiscal 2019's 13.2% mark. The company anticipates that it will hold general and administrative expenses flat in the coming year.
Heading into fiscal 2020, it's important for investors to note that slight progress is preferable to revenue and earnings deceleration. Moreover, while Brinker International has eked out modest growth in the last few quarters, it may be laying the groundwork for more aggressive bottom-line expansion as it brings a new group of restaurants into the corporate fold and begins to optimize their operations.