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Brinker to keep focus on value

Brinker to keep focus on value

Chili’s parent credits value for driving traffic and profit in third quarter

Brinker International Inc. credited value at its flagship Chili’s Grill & Bar brand for driving traffic and profit during the third quarter.

In conference call with securities analysts after the earnings release Wednesday, Brinker executives said value would continue to be emphasized at Chili’s and the company’s other brand, Maggiano’s Little Italy, especially in the face of rising gas prices.

For the third quarter ended March 30, Brinker said net income rose 0.6 percent to $40.2 million, or 45 cents per share, compared with year-ago earnings of $40 million, or 39 cents per share. Excluding one-time items, Brinker earned 47 cents a share. Revenue in the quarter rose 0.5 percent to $717.1 million.

Same-store sales at corporate stores rose 0.1 percent, which reflected a 0.3-percent dip at Chili’s and a 3.4-percent rise at Maggiano’s. Traffic at Chili’s was up 0.2 percent, compared with a 4.2-percent drop a year ago. Traffic at Maggiano’s was up 3.3 percent, compared to a 2.4-percent increase in the year-ago period.

Including international locations, Chili’s has 1,571 units and Maggiano’s has 45.

Douglas H. Brooks, chairman, president and chief executive, said during the conference call that the 27-percent increase in per-share earnings was the result of corporate initiatives at both brands.

“This performance builds on traction of initiatives put in place in the first half of the year coupled with a change in top-line sale trajectory,” Brooks said. “Our focus on embedding value in the menu with programs like Chili’s lunch menu and Maggiano’s Classic Pasta section — as well as innovative culinary news that accentuate the kicked-up flavor profiles that Chili’s is known for — proved to appeal to our consumers, contributing to top-line growth.”

Highlights from the conference call:

Effect of rising gasoline prices.

Brooks discounted the effect of rising gas prices on the casual-dining segment, but said it may be in “uncharted waters” if per-gallon prices go past the record $4.11 of 2008. However, he said, Chili’s was well-positioned to withstand the impact of high gas prices by virtue of its size and emphasis on value.

“Historically, when we’ve seen high gas prices, one of the advantages of Chili’s, like many of our competitors, is that we have lots of locations, so there is a nice convenience factor to our consumers, particularly to where they live,” he said. “And historically, we’ve a lot more impact by employment and jobs. So if there is a shining light a little bit going on right now, it looks like that side of the economic situation is getting a little bit better. … Our goal is to make our operating model sustainable in every kind of economic environment.”

Value pricing

Brooks said Chili’s and Maggiano’s have worked to provide value for consumers, who remain reluctant to spend.

“The consumer is certainly going to be under pressure for gas and under pressure for other foodstuffs, but the value spot where we are — the Maggiano’s menu now with Classic Pastas and on the Chili’s menu with Lunch Combos and 2-for-$20 — we feel very good about the convenience factor as well as the value offerings versus where we were just a couple of years ago,” he said.

Lunch traffic

Wyman T. Roberts, president of the Chili’s division, said that early week lunch has been particularly impacted by the recession and competition from fast-casual restaurants. Chili’s helped boost lunch traffic during the third quarter with the introduction of combos, featuring nine items paired with a soup or salad at $6, $7 and $8 price points, he said.

“Since the rollout of this platform, our lunch traffic has moved negative mid-single digits to positive,” Roberts said. “As anticipated, it has had an impact on our mix, resulting in a lower check and preference being slightly higher than expected, based on our test. While we are satisfied by the results thus far, we will continue to learn from the results and work to optimize and balance the top line and profitability.”

Customers have shown a preference for the $8 items in the combo, Roberts added, and the combo has been a higher part of the menu mix than was anticipated from tests.

International business

Chili’s had 20 net openings internationally in the third quarter, including its first unit in Russia and additional units in the Middle East and Latin America. Brinker ended the quarter with 226 Chili’s and one Maggiano’s abroad.

Guy Constant, executive vice president and chief financial officer, said international restaurants posted a 2.6-percent increase in same-state sales in the quarter.

Brooks said Brinker expected to open its first joint-venture Chili’s in Brazil this summer, but he warned that other international development was “definitely lighter than the original schedule.”

Social and political unrest in the Middle East, such as in Egypt, was one of the factors impacting the Brinker’s international business, along with the tsunami disaster in Japan, he said.

“We have five restaurants in Japan that were impacted by the tsunami,” Brooks said. “Luckily we’ve had some strong markets, places like western Canada and Puerto Rico. The United Arab Emirates has come back strong.”

Commodity costs and menu pricing

Brinker has contracted through August for beef and through the end of the year for chicken, Constant said. Dairy prices to be “flat to favorable,” he added.

“Beef continues to present the most significant inflationary pressure in our commodity basket,” Constant said.

Despite rising food costs, Brinker executives said they were hesitant to raise prices.

A stronger profit and loss statement, Constant said, “gives us the flexibility to determine whether there’s an opportunity for us to move some share by not taking price. … We’d like to see what happens competitively before we make that decision.”

Service changes

“Team Service,” a new service model that Chili’s rolled out last year, has provided a faster guest experience, “which is what they are looking for,” Roberts said, and higher service-quality scores.

The new model has two servers working together and sharing a larger number of tables. In the past, one server was assigned per station. Both servers introduce themselves to newly seated tables and work together to provide drinks, take orders, run food and provide other services.

Contact Ron Ruggless at [email protected].

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