Brinker's cost cuts, menu in the spotlight

Analysts expect improved margins, but slow sales in 2Q report

Brinker International Inc.’s back-of-house cost-cutting initiatives and recent menu promotions will be garnering analysts’ attention when the parent company of Chili’s Grill & Bar reports its second-quarter earnings Tuesday.

Destin Tompkins, a securities analyst with Morgan Keegan, said Monday he would be listening for Brinker to offer perspective on two new menu initiatives that debuted earlier this month at the 1,500-unit Chili’s.

Chili’s expanded its lunch lineup last week by adding $6, $7 and $8 combo meals, which include soup or salad, half a sandwich or other entrée and fries. The deal is offered Monday through Friday from 11 a.m. to 4 p.m. Earlier in the month, Chili’s also debuted a Wild or Mild limited-time offer, which Tompkins said “plays to the strengths in Chili’s flavor profiles.”

Analysts with Sterne Agee said Chili’s new lunch combos could be a midday sales driver for the chain.

“Looking forward, into [third quarter 2011], we believe that the launch of a new lunch program at Chili's (early January) could potentially improve lunch traffic given strong test results,” the firm said in a research note.

Sterne Agee analysts also said they expected to see improved margins in the second quarter because of Brinker’s back-of-house cost-cutting efforts.

Sterne Agee projected Brinker, which is also parent to the Maggiano’s Little Italy chain, to post second quarter earnings of 31 cents per share, while Tompkins of Morgan Keegan predicted earnings of 33 cents per share. Brinker recorded earnings of 25 cents per share in the same quarter last year.

Morgan Keegan analysts expect Brinker’s total revenue for the second quarter to be down 5.3 percent, reflecting a 4-percent decline in same-store sales at Chili’s and a 0.5-percent bump in same-store sales at Maggiano’s. Tompkins said earnings were likely to see some effect from snowstorms during December, which typically is a strong month for casual dining.

Analysts at Sterne Agee also projected Brinker’s top-line performance in the second quarter to be challenged “as the company was lapping 10 weeks of its ‘3 Courses for $20’ promotion from last year.”

In the first quarter, Brinker reported a nearly 36-percent increase in profit on reduced expenses and a lower tax rate. Net income for the Sept. 29-ended quarter rose to $21.4 million, or 21 cents per share, compared with $15.8 million, or 15 cents per share, a year ago. Revenue fell 6 percent, to $654.9 million from $696.5 million, reflecting lower same-store sales at Chili's and 30 fewer restaurants than in the same period last year.

Chili’s revenue declined 7.7 percent in the quarter, to $557.8 million, and same-store sales were down 5 percent. Brinker said capacity slipped 3.5 percent with the sale of 21 restaurants to franchisees and the closure of nine restaurants since the same quarter last year.

The 45-unit Maggiano’s had first-quarter revenue of $81.7 million and a same-store sales increase of 1.4 percent, mostly because of increased traffic.

Brinker also owns a minority stake in the Romano’s Macaroni Grill casual-dining chain.

Contact Ron Ruggless at [email protected]