Demographics, personal income, and consumer tastes drive the demand for casual dining. The industry is in a new era, one in which consumers are trading mid-priced sit-down restaurants for cheap fast food–or they are saving for a splurge. Ask one of the world’s leading casual-dining restaurant companies, Brinker International Inc. (EAT), which held off expansion for the past four years because of struggling sales coming out of the recession.
Although stock prices have just reached a record high and unemployment has fallen to a four-year low, many customers are cognizant of the economic times and are still pulling back from spending due to the recession in 2008. But Brinker knows there is still a market for consumers who have a desire to dine out. The 10Q filed February 4th, 2012 for the quarter ending December 26, 2012 showed strong growth from the same quarter in 2011. Total revenues for this period were $690 million, up 1.15% from a year ago, and net income was $37.2 million, up 4.2%.
“The restaurant industry is slowly starting to recover, however with increased payroll taxes and health care uncertainty looming, the industry as a whole has noticed consumers are being more fiscally conservative,” said Julie Flowers, Brinker’s public relations specialist.
Wyman Roberts became the company’s Chief Executive Officer and president. Doug Brooks, after serving Brinker for more than 35 years, stepped down and handed over the reins but will remain on as chairman of the board through Dec. 2013. Wyman is responsible for the reinvigoration of Brinker since he became president of Chili’s in 2009.
“The category is under attack,” Roberts said in the quarterly earnings conference call on February 27, 2013. “We know casual dining is not the bright, shining star that it used to be and that there is pressure. There is pressure from fast casual. There is pressure from casual-plus…Nothing’s easy, but we see ourselves being able to do this.”
Founded in 1975 and based in Dallas, Texas, Brinker currently owns, operates, or franchises 1,593 restaurants. In 2008, Brinker began selling some of the company’s less profitable brands to focus on Chili’s and Maggiano’s. Brinker sold Romano’s Macaroni Grill to Golden Gate Capital in 2008 and On The Border Mexican Grill & Cantina to Golden Gate in 2010. Chili’s Grill & Bar makes up for 86% of total sales with 1,549 restaurants and Maggiano’s Little Italy makes up for 44 of its restaurants and 14% of sales. Brinker also holds a minority investment in Romano’s Macaroni Grill. Total revenue grew 2.1% in fiscal 2012, ended June 27, to $2.28 billion and net income grew to $151 million.
Coming off the recession, Brinker has spent the last couple of years reducing costs, altering its menu and renovating its restaurants, in hopes of doubling its fiscal-2010 per-share profit by 2015. Brinker said in the analyst meeting it may actually achieve that goal of $2.75 to $2.80 in per-share earnings in fiscal 2014, given the momentum of sales.
“In 2010, Brinker announced to The Street the company was going to lower operating costs by 400 basis points while doubling earnings per share for our stockholders. The initiatives put into place are working,” Flowers said on the call.
Chili’s Grill & Bar will focus on food innovation, and remodeling its kitchens to allow for new menu items, such as pizza and flatbreads, which will help the competition with higher end chains like Cheese Cake Factory Inc. and California Pizza Kitchen Inc. It will also offer new deals such as a $20 “dinner for two” and $6 lunch combinations in an effort to address the competition in the fast-casual chains that include Chipotle Mexican Grill Inc., and Panera Bread Co.
“With any promotion or special offer the traffic is bound to increase; however, our location is not in the typical Chili’s demographic, but we haven’t lost our family and after-work crowd,” said Heather McDonald, manager of the Chili’s in the Knox-Henderson area of Dallas.
A combination of price increases and costs decreases has been put in place to boost profits. The number of visits to company-owned restaurants is down 2.1% for the quarter, according to the latest 10Q. However, comparable-store sales are up 0.9%. This is because of the price increases of 1.8% and mix shift of the 1.2%. It is selling more of its higher-priced items and less of the lower-priced. This is proof that changes to the menus are producing higher sales.
Brinker’s new strategies have taken hold. Although total revenues rose just 1.2% to $689.8 million in the latest quarter, operating income rose 10.1% to $61.6 million. In other words, operating income rose a lot faster than revenues, which indicates that the cost controls are working-Brinker is becoming more profitable. Since hitting an all-time low in 2008, the stock is now up more than 900%. Many of the changes to Brinker’s value strategy and efforts to improve profit margins are working. Right now, guests are focused on value and quality of food and service when dining out-and so is Brinker.
