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Analysts mixed on Brinker’s outlook

Analysts mixed on Brinker’s outlook

DALLAS Brinker International Inc. reported this month fiscal fourth-quarter and full-year earnings that one analyst labeled “the good, the bad and the ugly.” —

Positives included a strong sales finish at the flagship brand, Chili’s, which reported a quarterly same-store sales increase of 3.4 percent. Negatives included margin compression and a continued struggle to maintain or increase guest traffic. The ugly, said Chris O’Cull at SunTrust Robinson Humphrey Inc., included an overly bullish stance on the year ahead from Brinker management. The company operates or franchises 1,888 restaurants. —

(To view charts featured in this week's financial pages, click here.)

Earnings for the quarter ended June 25 totaled $42.6 million, or 41 cents a share, versus $83.6 million, or 71 cents a share, a year earlier. Revenue fell 6 percent to $1.07 billion. The company said it now will sell a majority interest in 212-unit Romano’s Macaroni Grill after previously looking for an outright buyer. —

John Ivankoe J.P. Morgan Securities

Brinker’s current fiscal year should be “no worse than expected,” Ivankoe said. With remodels expected at about 90 Chili’s locations, up from the 73 remodeled in fiscal 2008, same-store sales could rise an expected 1.5 percent. Also helping to boost sales is an expected menu price increase of about 3 percentage points and segment attrition as Applebee’s and Ruby Tuesday have ceased expansion and Bennigan’s and Steak and Ale have closed hundreds of units. —

“As the highest average unit volume, most profitable bar-and-grill chain, we are convinced Chili’s will be a successful survivor,” Ivankoe said. —

He also expects share repurchases funded by proceeds from the sale of Macaroni Grill in the second half of fiscal 2009. —

“We assume that Brinker will maintain about 25-percent interest in the brand,” he said, “and will act as landlord for the prospective buyer with respect to a very small number of properties. We assume that all of the $112 million estimated proceeds will be used to buy back stock.” —

Chris O’Cull SunTrust Robinson Humphrey

O’Cull holds a more bearish view on the year ahead for Brinker, mainly because of continued pressures from both decreased consumer spending and the operating-cost environment. O’Cull lowered his fiscal-2009 per-share earnings guidance. —

He said Chili’s most likely would have to promote lower-priced items, which typically do not aid margin growth, at least until consumer spending returns. —

“The Big Mouth Burger Bites were actually called back into the promotional line-up after the company struck out with its recent fajita promotion that started in July,” he said. “It appears same-store sales [so far in the first quarter] are flattish as a result of the weak fajita promotion. At this point we believe the company will need to continue to promote burger or chicken tender platform extensions to maintain its same-store sales momentum.” —

Jeff Omohundro Wachovia Capital Markets

Omohundro also lowered his fiscal-2009 per-share estimate for Brinker, mostly based on the reduction in sale proceeds from Macaroni Grill, but also because of continued margin pressures. —

He noted many positive drivers for Brinker in the year ahead, however, including the full rollout of new kitchen technology and the testing of handheld payment devices at Chili’s. Both are expected to speed up and improve service. —

Omohundro also pointed to the slowed development schedule at Brinker and its competitors, which should help alleviate oversupply pressures among casual chains. —

“We view the slowdown as an opportunity for [Brinker] to focus more heavily on enhancing operations at existing restaurants to improve performance,” he said. —

Editor’s note: Analyze This is a quarterly look at a publicly traded restaurant company that has sparked discussion, for better or worse, among securities analysts. The comments do not necessarily reflect the views of Nation’s Restaurant News nor should any statement be construed as a recommendation to buy or sell any security.

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