The New America
Friday, February 1, 2002
As Others Retreat, This Company Advances
BY MARILYN ALVA
INVESTOR'S BUSINESS DAILY
A lot of companies tighten their belts during a sluggish economy. Not Brinker International Inc. (EAT)
The parent company of Chili's Grill & Bar and six other casual-dining concepts takes a more expansive approach.
It's splurging on new-unit openings and remodelings, buying back stock and acquiring large franchise groups to operate as its own.
--------------------------------------------------------------------------------
Image: Staying The Course
--------------------------------------------------------------------------------
Chief Executive Ron McDougall recently promised to "stay the course" in a challenging economic environment.
Why the urge to splurge?
"In the short term, new capacity can drive top-line revenue and bottom-line profit," said Brinker spokesman Tim Smith. "Longer term, it positions us very well to take advantage of the economic turnaround."
Brinker has roughly 1,200 units. It intends to add more than 100 this fiscal year, which ends in June. That's about the same number it opened last year.
About half will be Chili's. The rest will mostly be split between Romano's Macaroni Grill and On The Border Mexican Grill & Cantina.
The firm's optimism comes in the face of its lowest quarterly earnings growth in two years. In the fiscal second quarter ended Dec. 26, earnings rose 9% vs. 28% a year earlier.
Second-quarter revenue grew 21% to $704.7 million. But much of that growth came from added units, including 39 franchised restaurants acquired from Sydran Group LLC.
Unlike some chains, Brinker restaurants are mostly company-owned and operated. To gain fuller control, it's been buying back franchises it sold when it was much smaller.
"They do a terrific job of managing a wide variety of concepts. That's not easy to do," said Mark Kalinowski, analyst with Salomon Smith Barney.
In a conference call with analysts, Brinker Chief Financial Officer Chuck Sonsteby said officials expect earnings growth to pick back up in the fiscal third quarter. He projects earnings of 39 cents to 41 cents a share, up about 18% from last year.
Analysts polled by First Call expect full-year earnings to rise 15% to $1.63 a share, then move up 17% to $1.90 in fiscal 2003.
Same-store sales at all Brinker brands edged up 1.6% in the last quarter. Chili's saw a 2.5% gain, while On The Border's same-store sales grew 0.8%. Macaroni Grill, Brinker's second-biggest concept, fell 0.2%.
From 1998 to 2000, Chili's same-store sales growth typically reached 5% to 7%, says analyst Andrew Barish of Banc of America Securities.
"I don't mean to imply they will get back to those levels," he said. "But they could see 3% to 4% same-store sales growth in a stronger economic environment."
Macaroni Grill has been hurt by a slowdown in sales of appetizers, side dishes and alcoholic beverages.
"We're hoping when the economy returns, people will return to their old habits," Sonsteby said.
Barish says Brinker erred with Macaroni Grill when it failed to focus on value quickly enough after rival Olive Garden, owned by Darden Restaurants Inc. (DRI), waved the value banner in its ad messages.
To distance itself from its image as a special-occasion restaurant, Macaroni Grill added $5.99 lunch and $9.99 dinner specials, as well as more affordable menu items.
Turnaround Job
Previously, On The Border was Brinker's problem child. But new menu items and larger portions have reinvigorated the Tex-Mex concept.
In December, its same-store sales rose nearly 4% - the same as Chili's.
"Chili's and Macaroni Grill are really the predominant drivers of earnings," Barish said.
Still, Brinker continues to ready budding concepts for prime time. That includes Maggiano's Little Italy, a family-style Italian eatery that's close to national rollout.
"It's graduated from research-and-development status," Sonsteby said.
Brinker plans to open as many as five Maggiano's units this year to boost the total above 20. That might not sound like many. But since each one takes in $9 million in sales annually, that's equal to about three Chili's.
Since they're large and costly to open, it's not likely that more than one or two Maggiano's would open in any given market.
That's not the case with Corner Bakery, Brinker's answer to the neighborhood bakery-cafe. They could theoretically go everywhere.
The concept is still being tweaked, most recently with a smoother service style and new flash-frozen baking technology.
"They want to make improvements before rolling out the concept in an aggressive way," Barish said. "They realize (rival) Panera Bread Co. (PNRA) has a very big lead in this category."
Brinker plans to open 11 to 14 Corner Bakeries this year, for about 80 units in total.
Meanwhile, Chili's still sports some new tricks. Small-format Chili's, with profits almost as good as typical units, are setting down in smaller markets such as Bartlesville, Okla., and Gallatin, Tenn. "To Go" side entrances continue to add incremental sales.
Now there's star power as well. To take advantage of lower ad rates, Chili's has hired its first-ever celebrity backer - the mega-successful pop band 'N Sync.
Ads featuring the band are expected to reach a much younger and more female audience than the chain's core baby-boomer customers.
"This concept is by no means tapped out," Kalinowski said. |
