Brinker Tops Q1 Earnings, Lowers 2016 Top-Line View

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Shares of Brinker International, Inc.EAT declined 7.6% after the company reported mixed fiscal first-quarter 2016 results, on Oct 20, 2015.

Moreover, comps were sluggish which caught investors' attention. Further, the company's lowered revenue and comps guidance dented investors' confidence

Earnings and Revenue Discussion

Adjusted earnings of 56 cents per share beat the Zacks Consensus Estimate of 55 cents by 1.8%. Further, earnings increased 12% year over year backed by improved revenues and margins.

Brinker International Inc. - Earnings Surprise | FindTheBest

Quarterly revenues rose 7.2% year over year to $762.6 million backed by a 7.8% increase in company sales and 8.6% rise in Franchise and Other revenues. However, revenues missed the Zacks Consensus Estimate of $783 million by 2.6%.

Brinker International primarily engages in the ownership, operation, development and franchising of various restaurant brands under the names Chili's Grill & Bar (Chili's) and Maggiano's Little Italy (Maggiano's).

Company-owned comps were down 1.6%, comparing unfavorably with 2.4% growth in the year-ago quarter and 0.7% decline in the prior quarter. A decline in comps at both Maggiano's and Chili's hurt Brinker's comps.

Behind the Headline Numbers

Chili's reported revenues of $653.1 million, up 8.8% year over year, primarily on the back of an increase in restaurant capacity.

Domestic comps at Chili's declined 1.1%, comparing unfavorably with the year-ago quarter growth of 2.3%. Chili's' company-owned comps fell 1.6% due to 1.9% decline in traffic and 1.4% unfavorable impact from the mix shift.

Comps at Chili's' franchised restaurants went up 2.2%, better than 1% growth in the year-ago quarter backed by domestic comps growth of 0.8% and 4.8% rise in international franchised comps. Domestic comps grew 1.7%, while international comps declined 0.5% a year ago.

Maggiano's' sales increased 5.3% to $100.2 million. Comps at Maggiano's went down 1.7%, comparing unfavorably with comps decline of 0.1% in the prior quarter and growth of 0.6% in first-quarter fiscal 2015. Comps at Maggiano's reflect traffic decline and a negative impact of the menu shift, partly offset by the impact of favorable menu pricing.

Expenses and Margins

Cost of sales ratio declined 40 basis points (bps) year over year to 26.1% driven by favorable menu pricing and commodity pricing, partly offset by negative mix.

In fact, total costs and expenses increased 7.5% to $706.3 million, mainly due to higher restaurant expenses, and general and administrative costs. However, restaurant labor, as a percentage of revenues, remained stable.

Restaurant operating margin improved approximately 10 bps to 14.6% supported by margin improvement at both Chili's and Maggiano's.

2016 Revenue and Comps Guidance Lowered

For 2016, Brinker International reaffirmed the earnings per share guidance range of $3.55 to $3.65, up 15% to 18% year over year. Further, the company continues to expect restaurant operating margin to be flat to down 25 bps year over year. Excluding the impact of the recently acquired Chili's restaurants, restaurant operating margin is likely to increase 25 bps to 50 bps year over year.

However, the company lowered the revenue growth guidance for 2016 to 10-12% year over year from 12-14%. This reflects 0.5% to 1.5% decline in comps compared with the prior outlook of 1.5% to 2% comps growth.

Our Take

We note that sales-building initiatives undertaken by Brinker, such as menu innovation, extensive reimaging, better food presentation, kitchen system optimization and introduction of a better service platform are aiding revenues, despite the comps decline. Nevertheless, we cannot ignore the rising expenses due to technological investments, and increasing food costs that continue to be a concern for this Zacks Rank #3 (Hold) company.

Stocks to Consider

Some better-ranked stocks in the same industry are Cracker Barrel Old Country Store, Inc. CBRL , Carrols Restaurant Group, Inc. TAST and Jack in the Box Inc. JACK . All these stocks sport a Zacks Rank #1 (Strong Buy).

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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