Brinker warns on cautious consumer sentiment

While Dallas-based Brinker International saw modest gains in its first quarter of fiscal 2013, its management noted that same-store sales would trend lower in the second quarter because a “persistently cautious consumer” would likely cut back across the casual-dining segment.

However, the 1,585-unit parent to Chili’s Grill and Bar and Maggiano’s Little Italy expressed confidence that its major initiatives to upgrade facilities and menus would enable it to take market share from casual-dining competitors in the near term. The company will also look to gain market share for Chili’s with a new ad campaign and completing the installation of new point-of-sale systems and kitchen equipment.

Speaking for Chili’s, brand president Wyman Roberts said the chain would stay the course with its customer-facing value proposition built around 2 for $20 at dinner and Lunch Combos, and would be able to resist following competitors’ aggressive discounting. “We’re sticking with our strategies, and value has always been part of it at Chili’s,” he said. "We continue to outperform the category, and we think we’ll continue to take share, but it’s a softer segment than we’d seen this summer.”

Brinker would rather tweak its popular value platforms with line extensions or new flavors, while testing what kinds of new products it could execute with new culinary equipment, Roberts added. All company-owned units would finish installation of new kitchen equipment and a new point-of-sale system by the end of the second quarter, and the franchise system would complete its rollout by the third quarter, Roberts said.

New menu items would flow from Chili’s with the enhanced capabilities the brand expects to have after it completes its full adoption of new kitchen equipment. One possible new menu platform could be a new pizza, which is being tested in 41 stores and is what Roberts called “the worst-kept secret out there.”

“It’s going to be difficult to knock off our pizza if you don’t have the equipment to do it — these impinger ovens that most bar-and-grill chains don’t have,” Roberts said. “It makes something like pizza possible for us. We’ve also saved on labor because it’s a simpler kitchen to run, and it allows us to put more in it and do more things without risking a negative guest experience.”

Roberts and other Brinker officials did not want to overstate the size of the sales-building opportunity in pizza, but he noted that Brinker’s typical hurdle for adding a new platform to the menu is a sustained menu mix between 5 percent and 10 percent of sales.

Remodeling to accelerate, price increases won’t

Brinker’s chief financial officer, Guy Constant, noted that 25 percent of Chili’s restaurants in the U.S. have been remodeled, and the pace of that initiative will increase. The goal is to have half the system updated by the middle of fiscal 2014.

“We were shooting for a 15-percent return on invested capital and needed to hit 3 percent in same-store sales to get that, and in some markets the numbers are higher than even that,” Constant said. “It has led to important regional trends. California results are very strong, and that’s where we’ve done a lot of reimages. It bodes well as we roll it out to the rest of the system.”

Brinker officials are encouraged by how guests have responded to a new location in Dallas, which was built new from the ground up but with all the elements of remodeled Chili’s locations. They said that model would be the basis for new-unit growth, which would begin again in earnest next fiscal year at a pace of 10 to 12 locations per year.

Constant added that Brinker would have the flexibility in the coming fiscal year to take about 1 percent to 2 percent of menu price increases but would prefer to hew to the lower end of that range.

“It’s important to look at the difference between sales growth and traffic growth, and ours is one of the smallest ones you’ll see out there,” Roberts said. “We think it’s risky long-term to take a lot of pricing [increases], and that will work against you down the road.”

Brinker will have to lap stronger same-store sales comparisons from last year’s second quarter, when weather was far more favorable, “but beyond that headwind, we feel good about the stability of what we’ve got,” Roberts said.

For the Sept. 26-ended first quarter, Brinker’s net income rose 18.2 percent to $27.9 million, or 36 cents per share, compared with $23.6 million, or 28 cents per share, a year earlier. Revenue rose 2.3 percent to $683.5 million, reflecting same-store sales gains of 2.8 percent at Chili’s and 0.9 percent at Maggiano’s.

Brinker’s quarterly traffic numbers were a mixed bag, as Chili’s managed a 0.4-percent increase while Maggiano’s guest counts decreased 2.5 percent.

Operating margins at company-owned restaurants improved 1.5 percent to 14.6 percent, Brinker officials said.

Securities analyst John Ivankoe of J.P. Morgan wrote in a research note that the restaurant industry overall produced a same-store sales decline of 0.8 percent in September and was on pace for about a 1.5-percent decline in October.

“The casual-dining industry is performing below-trend based on a well-tested relationship between total employment growth and industry traffic growth,” he wrote. “We do believe election uncertainty may be affecting consumer sentiment regarding restaurant spend.”

Brinker International operates 821 Chili’s units and 44 Maggiano’s restaurants domestically and franchises another 453 Chili’s locations in the United States. The company also franchises 267 restaurants internationally.

Contact Mark Brandau at [email protected].
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