Earnings preview: Brinker International Inc.

Analyst expect Chili's to run aggressive promotions to drive traffic

Brinker International Inc. is set to release its latest financial results Thursday, and analysts have predicted that the Chili's parent will say it is ready to launch traffic-boosting promotions earlier and more aggressively than originally anticipated.

Analysts also project new bundled deals at Chili's, like the popular “3 for $20” promotion, only with better margins, and menu initiatives focused on the chain's Tex-Mex heritage in order for it to stand out in the crowded casual-dining pack.

Senior analyst Stephen Anderson of MKM Partners wrote in a research note Tuesday that Brinker will introduce a fall promotion at Chili's three weeks ahead of schedule.

“Although the company did not provide details on the promotion, we would not be surprised to see something more aggressive than recent promotions,” he said.

With its sale of On The Border chain earlier this year, Brinker now is focused on Chili’s Grill & Bar and Maggiano’s Little Italy brands, along with a minority investment in Romano's Macaroni Grill. Analysts said Chili’s now accounts for about 86 percent of Brinker’s sales.

Last week, UBS analyst David Palmer said Chili’s emphasis on burgers in recent months did not seem to boost traffic and that he expected same-store sales at the brand to fall 3 percent in Brinker’s fourth quarter. Brinker reports fourth quarter and fiscal 2010 results on Thursday morning.

“From a menu standpoint,” Palmer wrote, “we still believe that over time there is an opportunity for Chili's to move its brand away from the grill-and-bar pack and perhaps invigorate the Tex-Mex attributes of its brand. To this end, we believe future promotions could feature more unique items and less mainstream products (e.g. burgers).”

Chris O’Cull, senior restaurant analyst with SunTrust Robinson Humphrey, said in a research note Tuesday that Chili’s is still struggling to drive traffic, and he estimated that guest counts were down 6 percent to 7 percent in the fourth quarter.

O’Cull said last year’s “3 for $20” promotion helped guest counts, but put intense pressure on margins.

“As the company begins lapping the heavily discounted three-course promotion, investors are wondering how the company will balance goals of at least maintaining market share while improving margin," O’Cull wrote. "We would not be surprised if the company introduces another bundling campaign that offers value for two guests (e.g., shareable appetizer, two meals for $20) but with slightly better margin that the three-course promotion.”

Anderson of MKM Partners said the bar-and-grill segment is still oversaturated, making it difficult for Chili's to distance itself from the discounting wars in casual dining.

“Until there is a more significant reduction in the number of bar-and-grill restaurants — particularly among independents and smaller chains, as well as a drop in the top-25 unit count to the 8,000-8,100 range from the current 8,400 units — we believe discounting is likely to keep top-line and margin pressure in this segment more than for other restaurant segments,” Anderson wrote, adding that Chili’s independent and regional competitors have increased their reliance on discounting.

Anderson said that in June Chili’s promoted Old Timer burgers at $5.99, which was $1 below the regular price; a limited-time offer Rojo barbecue burger, at $5.99; and three other limited-time offer burgers priced from $7.99 to $9.49.

“Based on what we saw in our checks,” Anderson said, “we do not think the burger promotion led to an improvement in traffic in [the fourth quarter.]”

Casual-dining competition is already mounting aggressive price promotions, Anderson added.

“We acknowledge Brinker does not want to see a return of very aggressive promotions in order to protect margins, but we think the major bar-and-grill chains did themselves a disservice in 2009 when Chili’s, Applebee’s (owned by DineEquity), and T.G.I. Friday’s (privately held) engaged in a ‘mutually assured destruction’ strategy on discounting that undermined margin improvement from cost reductions,” Anderson wrote. “In our view, this was the reason why the $9.99 ‘Fresh Pairings’ promotion, which offered an appetizer and entrée for one (but not a dessert as “3 for $20” did) failed to generate traffic gains in [the third quarter].

“Moreover,” Anderson added, “T.G.I. Friday’s appears to be stepping up its promotional cadence after a cease-fire in recent months with a $10 gift card with purchase of two entrees (a discount of approximately 33 percent) from its special summer Caribbean-themed menu.”

Dallas-based Brinker operates or franchises more than 1,500 restaurants under the Chili’s Grill & Bar and Maggiano’s Little Italy brands.

Contact Ron Ruggless at [email protected] [3].