The restaurant industry is constantly diversifying and the consumers claiming for new experiences. Brinker International Inc. (NYSE:EAT) owns, operates, develops and franchises restaurants under two brands: the well-known Chili’s Grill & Bar and Maggiano’s Little Italy. Chili’s was the brand with which the company started off in 1975, so it is no wonder Chili’s restaurants are actually 97% of the company’s total owned operated or franchised restaurants. Maggiano’s is growing, and has recently opened eight locations this quarter, posting record holiday sales. The competition is always intense, and although Brinker has a franchise model that offers revenue stream, the consumer’s preferences make it difficult for firms to generate excess returns.
Overhaul and innovate
Despite the fact that the weather was indeed this season a major setback for the industry, Brinker managed to increase comparable sales in both its restaurant brands, expanding operative margins as well. The introduction of new menu items, such as Fresh Mex in Chili’s lifted the restaurant margins to 16%, and EPS rose to $0.58.
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The strategy for Brinker’s seems to be a combination of innovation and expansion, especially for Chili’s, with a reimaging program for the restaurants, the introduction of tabletop entertainment and other technology-driven initiatives like online ordering, and the development of new delivery solutions for nearly 450 locations.
Indeed they have focused the past years on keeping Chili’s innovative, remodeling and optimizing the brand. The introduction of higher-margin alcoholic beverages, for instance, has given the firm higher levels in sales. Also, the introduction of updated kitchen equipment allowed the company to save on labor costs and food waste, as well as improving general management. Still, we have to keep an eye on the firm’s ability to gain and keep competitive advantages, given the industry’s switching costs and competition.
Maggiano’s is relatively small, with only 45 locations in the US. It seems for now there are no plans of expansion, though the company is experimenting with new restaurant concepts. Brinker’s is cautious with Maggiano’s and this strategy might be the right one, as the casual dining and quick-service industries are always subjected to difficulties and setbacks that make it hard to sustain growth in sales. The competition is relentless, and Brinker International is, as many firms, in a difficult place given the low barriers to entry.
The massive overhaul of Chili’s paid off, and the company has been able to maintain a solid upward trajectory over the last years. Nevertheless, the expectation for the years to come is not as promising as the last two fiscal years, as expert analysts say the company’s growth will indeed become more dependent on international expansion. Meanwhile, it seems Maggiano’s is lacking a clear development plan.
Hit the Spot
Brinker has reported year-over-year growth in profitability, driven by its sales leverage and cost saving efforts. The implementation of the point-of-sale (POS) back-office systems and waste control management, the costs of sales are expected to improve during 2014. This means the company is trying to increase its profit margins.
The firm has also recently posted some promising results as company-owned comps were up 0.8% in the quarter, overcoming and exceeding the previous quarter 1.3% decline. We are very optimistic about this outcome, showing the company’s sales-building initiatives are paying off.
The solid franchise system allows the quick-restaurant firms to sustain a revenue stream, while expand into new markets, and focus on developing marketing strategies and new products. The firm also delivers value to shareholders in the form of share buybacks and increased dividend payments. Return on equity is 88.9, which means 60 points over the industry 26.0 average. The company is conducting an aggressive expansion to sustain revenue, and is likely to do so. Brinker has also launched its first street-side prototype restaurant concept Chili's Express in Mexico
What to Expect
The POS programs and improved supply chain management are expected to augment sales. Most of these innovations have been applied to Chili’s restaurants. What about Maggiano’s? Well for the time being, Brinker seems interested in keeping a petit-restaurant concept for the brand, and improving sales through cost reduction and a tepid expansion.
Despite some think that Brinker’s will have a hard time building a sustainable competitive advantage in the industry, the company is maintaining its growth. Brinker hiked quarterly dividend to 0.24$ per share last august. This stock is interesting, as the price is lower than the industry average, and the return on equity pretty high. Also, the innovations being conducted promise a sustained growth and, more importantly, an eager to keep up with the pace of the market and fierce competition of the industry. The stock certainly looks good enough for Steven Cohen (Trades, Portfolio), who recently started a position in the company, with 28,210 shares, worth more than $1.4 million. Is it alluring enough for you to add it to your portfolio as well?
Disclosure: Damian Illia holds no position in any stocks mentioned.