Here's Why Chili's Is Eating Red Lobster's and Ruby Tuesday's Lunch

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Brinker International
Casual dining stocks aren't dead as an investment category. Investors just need to know where the tasty treats can be found on the menu.

Chili's Grill & Bar parent Brinker International (EAT) moved higher on Wednesday after reporting better than expected quarterly results. Company sales climbed higher, fueled by a 0.3 percent increase in comparable-restaurant sales. Its international locations fared even better.

Some casual dining chains that are bucking the general downward trend and posting positive comps are doing so by discounting aggressively to keep patrons coming. But that's not Chili's game at all. Net margins actually expanded nicely at Brinker, with adjusted earnings per share climbing 18 percent during its fiscal second quarter.

The 1,557-unit Chili's chain is doing just fine. But the same can't be said about its competition.

Red Ink, Ruby Ink

Seeing shares of Brinker open 8 percent higher after posting better than expected quarterly results may be painful for investors in Ruby Tuesday (RT) or Red Lobster parent Darden Restaurants (DRI). Those two stocks took a hit the last time they offered up fresh financials.

%VIRTUAL-article-sponsoredlinks%Ruby Tuesday and Red Lobster are falling out of favor with the hungry, with comps plunging 7.8 percent and 4.5 percent respectively in their latest quarters. Both companies have fallen short of Wall Street profit targets in each of their past three quarters. Brinker, on the other hand, has now surpassed bottom-line expectations in three of the past four quarters.

With Ruby Tuesday's profits turning to losses and Darden so disillusioned with Red Lobster that it's looking to sell it or spin it off, it's easy to see why savvy investors looking at the casual dining sector are turning to Brinker. The stock hit a new 52-week high on Wednesday, and this could be just the beginning.

Tech is the Secret Ingredient

Why is Chili's succeeding at a time when profits at many of its peers are receding? Barron's argued earlier this month that Chili's is in the sweet spot of serving low-priced meals to high-income consumers. It's the other way around at Red Lobster: Seafood isn't cheap, and affluent foodies looking for it choose to frequent more upscale eateries or indie-owned chains.

Chili's should keep growing in 2014 -- and not just because the economy is at last showing signs of vitiality, or because people are eating out more again in general.

Chili's also has technology on its side. Back in September, it announced that it would be teaming up with Ziosk to install touchscreen tablets at every table. Unlike DineEquity's (DIN) Applebee's, which also plans to roll out tablets at every table later this year, the tablets at Chili's will be merely for ordering drink refills and dessert, and for paying the bill at the end of the meal. That's not quite as ambitious a plan as they have at Applebee's, where the tablets will allow entire orders to be placed.

If casual dining can't compete with the quality of fine dining or the speed of fast food and fast casual, it can at least make the time spent at the restaurant more engaging by providing games and other diversions for diners as they wait for their food.

Chili's is at the forefront of tech in casual dining, and it seems to be serving the right food at the right price points to the right people. Ruby Tuesday, Red Lobster, and other laggards aren't keeping up. So it may be too late to order something else off the growth menu.

5 Less-Known Restaurant Chains You Should Eat At and Invest In
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Here's Why Chili's Is Eating Red Lobster's and Ruby Tuesday's Lunch

If investors are hungry for something a little more exciting, thankfully there's no shortage of faster growing publicly traded restaurant chains that are doing just fine.

So sorry, Olive Garden. You may still offer tasty breadsticks, but that's not the kind of rising dough that investors -- and diners -- crave these days.

One of this summer's hottest IPOs was for Noodles & Company (NDLS), a fast casual restaurant chain that specializes in all types of noodles. Olive Garden bashers will find plenty of Italian pastas on the menu, but diners can also be globetrotters by checking out Asian noodle bowls or come closer to home with the classic Americana comfort food of mac and cheese.

Unlike the many table service restaurants facing an alarming number of empty tables, Noodles & Company has delivered positive comps in 29 of the past 30 quarters. Revenue climbed 17 percent to $300.4 million last year, and it's on pace for similar growth through the first half of this year.  

Ignite Restaurant Group (IRG) owns and operates 134 Joe's Crab Shacks and 16 Brick House Tavern + Taps. The operator essentially doubled in size in April when it acquired smaller Olive Garden rival Romano's Macaroni Grill. The 186-unit Italian casual dining chain was once owned by Brinker, and it's a work in progress. Comps were positive at Ignite's two original concepts in its latest quarter, but the same can't be said for Macaroni Grill.

Then again, the sluggish performance at Macaroni Grill also led to an attractive acquisition price. With Macaroni Grill butting pasta bowls with Olive Garden and Joe's Crab Shack fishing against Red Lobster, we can possibly call Ignite a mini Darden. That's a good thing, especially since Ignite has a lot of room for any of its three concepts to grow before it saturates the market.

Casual dining and Mexican don't mix well over time. There's probably a shuttered El Torito, Chi Chi's or Chevy's somewhere near you.

However, Chuy's (CHUY) has raised the bar by creating a lively environment filled with Elvis shrines and customer-submitted dog photos, and it's winning over patrons with its extensive happy hour specials and a bargain-minded menu where nearly every entree costs less than $10.

Chuy's sales surged 23 percent in its latest quarter, and with just 45 locations across twelve states, there are still plenty more places for pooch snapshots and Elvis busts to go up.
As one of the largest franchisees of Buffalo Wild Wings (BWLD), Diversified's (BAGR) largest concept is no stranger to most sports bar enthusiasts. However, the reason that Diversified makes the cut is because it's in the process of rapidly expanding its proprietary Bagger Dave's Legendary Burger Tavern.

There were just 13 of the full-service, ultra-casual restaurant and bar units open by the end of June, but Diversified is hoping to open another six locations later this year. It may soon rival the nearly three dozen Buffalo Wild Wings eateries that it currently watches over. The genius here is that it's probably putting a lot of what it learned at Buffalo Wild Wings into practice at Bagger Dave's.

Revenue soared 61 percent in its latest quarter, propelled almost entirely by new restaurants, but there was still a healthy 7 percent spike in same-store sales during the period. 
Customers looking to trade up from fast food without shelling out more in time and money at a casual dining concept are flocking to fast casual chains that deliver quality ethnic dishes quickly.

Fiesta (FRGI) owns and operates 96 Pollo Tropical restaurants (primarily in South Florida) and 164 Taco Cabana eateries (mostly in Texas). The company also has dozens of franchised locations, especially overseas, as its Latin American-inspired Pollo Tropical rotisserie chicken has proven to be a potent export.

Revenue climbed 9 percent in its latest quarter, fueled by a healthy 6 percent spike in same-restaurant sales at Pollo Tropical.

(Correction: A previous version of this article incorrectly stated that customers can't use Chili's tabletop touchscreen tablets to pay for their meals. This feature has been part of the system since it was rolled out in September.)

Motley Fool contributor Rick Munarriz has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our newsletter services free for 30 days.
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