Most restaurant chains are thrilled that oil prices are moving lower. When you think about it, there are several ways that an eatery benefits from cheap gas prices:
- Less pain at the pump puts more disposable income in the pocket, giving folks more money to spend on the simple pleasures in life -- like going out to eat.
- Lower fuel prices also make it a less taxing decision to drive out to a restaurant for a meal instead of eating at home or bagging a lunch for the office.
- Food doesn't just magically show up at an eatery's prep kitchen. Ingredients need to be shipped from all over the country, if not the world. Cheaper transportation costs help keep food costs low, improving the bottom line for operators.
It's against this seemingly industry-friendly trend of cascading fuel prices that at least one chain is blaming cheap gas on its recent sales slump.
Chili's Grill & Bar parent Brinker International (NYSE:EAT) posted disappointing sales trends for its latest quarter on Wednesday. Revenue and adjusted earnings per share rose 6% and 10%, respectively, but there's more to that than meets the eye. The bottom-line boost is almost entirely the handiwork of aggressive share buybacks at Brinker, as adjusted net income itself only rose 1%. The top-line gain is also not a fair comparison since Brinker acquired 103 franchisee-operated Chili's locations this past summer.
Back out the deal to turn those franchisee locations into company-operated restaurants and sales would've been negative. Folks just aren't eating at Chili's these days. Its comparable-restaurant sales slipped 2.1% in Brinker's fiscal second quarter when pitted against the prior year's holiday quarter. Its smaller sister concept -- the slightly higher-end Maggiano's Little Italy -- clocked in with a 1.6% dip in comps.
However, Brinker is making waves because it is blaming at least part of the slide in comps on the recent slump in oil prices. It broke down its regional performance during yesterday's subsequent earnings call, pointing out that comps at Chili's plunged 6.6% if we focus on the states of Texas, Louisiana, and Oklahoma that have a significant exposure to the energy industry. These are the states where production is scaling back in light of the drop in energy prices, generating layoffs and job uncertainty.
It's a fair knock on the surface, but it's a flimsy scapegoat as you dig deeper. Just as there's more to Brinker's financial performance on both ends of the income statement than meets the eye, investors shouldn't give the restaurant operator a free pass here.
It's true that things aren't going well on its home turf. Chili's was birthed in 1975 after Larry Lavine was inspired by the Terlingua Chili Cook-Off in southwest Texas to open Chili's Hamburger Grill & Bar in Dallas. Those three states account for 17% of its system sales. That's a pretty heavy concentration for the national chain, but the rest of its company-owned Chili's locations still suffered a 1.9% drop in comps. That's happening in the states where many of the positive factors of cheap gasoline aren't helping out.
It's also important to realize that comparable-restaurant traffic declined 4% since the prior year's fiscal second quarter. In other words, folks that do wind up at Chili's are spending slightly more than they used to a year earlier. That would seem to zap the notion that patrons are being more careful with their money.
We'll get a better indication on how feasible Brinker's theory is in the coming days as other regionally concentrated eateries report. Chuy's (NASDAQ:CHUY) will report fresh financials in about a month. Austin-based Chuy's has more than 17% of its 67 restaurants in its home state of Texas, and offers some of the Tex-Mex staples offered at Chili's.
You haven't seen Chuy's bellyaching about the drop in fuel prices. We also saw it post healthy positive comps a quarter earlier, just as Brinker put up negative store-level sales for its fiscal first quarter. This doesn't mean that Brinker is lying. It clearly felt a pinch in states that rely heavily on jobs in oil production. However, it's clearly not the only problem with Brinker -- and it's more than likely not its biggest problem.