Is Chili's the New Market Darling in Casual Restaurants?

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Chili's Restaurant Exterior in Great Falls, Montana, USA
Patti McConville/Alamy
Casual dining may not seem to be a hot industry these days, but it can pay off if you buy the right chain. Shares of Brinker International (EAT) hit a new all-time high earlier this week, and then the company followed that up with an encouraging quarterly report on Wednesday morning.

Brinker isn't a household name, but its flagship eatery is the popular Chili's Grill & Bar, with 1,585 locations. Brinker also owns Maggiano's Little Italy, with 49 restaurants.

Brinker's fiscal second quarter was largely a success. Revenue inched 5 percent higher to $742.9 million, fueled primarily by a 3.7 percent increase in comparable-restaurant sales at its company-owned locations. Adjusted earnings per share soared 20 percent to 71 cents a share, ahead of the 69 cents a share that analysts were expecting. It's the first time that Brinker lands ahead of Wall Street's profit target in the past three quarters.

It wasn't perfect. International franchisees suffered a slight dip in sales. Brinker also had to tackle rising food costs on everything from salmon to avocados. However, at the end of the day we find net margins widening as earnings grew faster than sales.

Eating Up the Competition

Brinker's healthy performance is refreshing to see, but the same can't be said about some of its casual-dining rivals. Shares of Ruby Tuesday (RT) took a hit three weeks ago after it posted a dreadful report. Sales and comps declined, with Ruby Tuesday serving up another quarterly loss.

It's not just Ruby Tuesday that isn't keeping up the pace with Brinker. Darden Restaurants (DRI) has also been a relative disappointment. Brinker's Italian concept -- Maggiano's Little Italy -- has come through with 20 consecutive quarters of year-over-year growth in comparable restaurant sales. Darden's larger Olive Garden eatery hasn't been as consistent.

Brinker and Darden have unloaded concepts to focus on what's working. Darden sold off Red Lobster last year. Brinker has cut ties with Corner Bakery, On the Border and Macaroni Grill in 2006, 2010 and 2013, respectively. However, while activists have taken over the boardroom at Darden to try to improve shareholder value, Brinker investors can't complain, with the stock hitting new highs this week.

Tech and Trends Are on the Desserts Menu

Things should continue to improve for Brinker. It's not providing guidance, but there are plenty of favorable trends that should benefit the casual-dining industry. Cheap gasoline places more money in the hands of consumers while at the same time making it easier to justify driving out to eat. The economy also continues to take baby steps in the right direction, and the improving employment picture is naturally going to allow more folks to head out to restaurants more often.

Brinker has also taken the lead on technology, being one of the first chains to roll out tabletop devices at Chili's where customers can order drink refills and desserts, scroll through colorful new menu options, and even pay the bill at the end of a meal. Having the tablets at every table should help increase orders and customer satisfaction. Waiter-free checkouts also speed up the pace at which tables turn around, allowing Chili's to seat more patrons during the course of the day.

With a casual-dining concept that's resonating with consumers, improving margins, and the added upside of tabletop technology to potentially beef up sales, Brinker's getting things done right by Wall Street's finicky dining standards.

Motley Fool analyst Rick Munarriz has no position in any stocks mentioned. He still sings the old Chili's "babyback ribs" jingle, even if no one is around to hear it. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.
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