Earnings Preview: Brinker International (EAT)

Texas-based Brinker International Inc. (EAT), primarily engaged in the operation, development, and franchising of various restaurant brands under Chili’s Grill & Bar and Maggiano’s Little Italy brand names, is slated to release its fourth-quarter 2010 earnings on August 12. The current Zacks Consensus Estimate for the quarter is 46 cents per share, representing an annualized decline of 11.54%.

Over the last trailing four quarters, the company outperformed the Zacks Consensus Estimate thrice and lagged only once in the previous quarter. The average earnings surprise over the trailing four quarters was 11.51%.

Previous Quarter Performance

Brinker International posted lower-than-expected third-quarter 2010 results, which was hurt by adverse weather conditions and costs related to the roll-out of Chili’s new menu.

The quarterly earnings of 37 cents per share, excluding special items and net income from On The Border Mexican Grill & Cantina, fell short of the Zacks Consensus Estimate of 41 cents and dropped 7.5% from 40 cents posted in the prior-year quarter. On a reported basis, Brinker earned 39 cents, up 14.7% from $0.34 earned in the year-earlier quarter.

Total revenue slipped 7.8% to $713.4 million, reflecting a 4.2% decline in comparable-restaurant sales and a 5.3% fall in restaurant capacity following the sale of 21 outlets to a franchisee and closure of 19 restaurants since third-quarter 2009. Adverse weather negatively affected comparable-restaurant sales by about 90 basis points.

Estimates Revisions Trend

Estimates for the coming two quarters and fiscal years have moved down in the last 30 days, implying that the analysts are pessimistic on the stock. Let’s dig into the details.

Agreement of Analysts

Over the last 30 days, out of 20 analysts covering the stock, 4 analysts lowered their fourth-quarter estimates while none went for any increment, thus providing a downward directional movement. Estimates for fiscal 2010 and 2011 were slashed by 4 and 3 analysts out of 19 and 21 analysts, respectively, while none increased the same.

The analysts reduced the estimates primarily based on the belief that Chili’s (accounts for more than 80% of sale) same-store sales will fall short of industry averages due to intense competition in the bar and grill category and less usage of promotions. Although Chili’s is aggressively reformatting its menu, it is difficult to get consumer credit for menu improvements with a more mature and saturated bar and grill sector. Hence, the segment continues to show weak pricing power. However, the segment is expected to fare better in the first quarter of 2011 with the reintroduction of Chili’s ‘2 for $20 Offer’.

The analysts expect Brinker’s efficiency derived from the cost-control initiatives as well as increased franchise revenue to be muted in the near term, due to the prolonged promotional environment prevailing in the restaurant industry.

Rising food cost and depreciation resulting from increased capital spending activity also remained concerns for the company.

Estimates trended downward in the last 7 days as well, with no movement in the opposite direction, pronouncing the analysts’ negative bias on the stock for the time being.

Magnitude of Estimate Revisions

The magnitude of earnings estimate revisions has also been minimal since Brinker reported its third-quarter results. The estimate for the upcoming quarter has gone down from 48 cents 90 days ago to 46 cents currently. Currently, the Zacks Consensus Estimates for fiscal 2010 and 2011 are a respective $1.22 and $1.41 per share, down from $1.24 and $1.44, respectively, expected 90 days ago. Estimates for 2010 and 2011 reflect a year-over-year decline of 15.61% and a growth of 15.91%, respectively.

Over the past 30 days, Brinker’s estimate for the coming quarter was trimmed by a penny.

Neutral Rating Reaffirmed

Brinker’s recent results were hurt by a sluggish economic environment as it registered sagging comparable restaurant sales in the past several quarters. However, to immune itself from the economic downturn, the company resorted to measures such as the closure of underperforming stores, divesture of divisions, shift to franchised operations, and focusing on international expansion to move away from a saturated domestic market. We believe that challenges pertaining to traffic growth and consumer spending have improved slightly but are still looming over and will likely restrict Brinker’s revenue growth in the near term. Hence, we maintain a long-term Neutral rating on the stock.

We believe that recent initiatives taken by Brinker − the re-imaging program, menu transformation and reformatting the kitchen − will take some time to stabilize and might result in the customer loss in the near future. Hence, we currently have a Zacks #4 Rank on Brinker, which translates into a short-tem Sell rating.

BRINKER INTL (EAT): Free Stock Analysis Report

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