Brinker: The Pick of the Lot in a Struggling Restaurant Industry

Brinker: The Pick of the Lot in a Struggling Restaurant Industry

A Blackbox International study has shown that 2013 hasn't been a great year for the restaurant industry. A drop in same-store sales has been witnessed in three out of the last four quarters. For the third quarter of this year, industrywide same-store sales, or comps, were down 0.20%, which represents a sequential drop of 0.60%. Thus, it isn't a surprise that many restaurants are coming out with weak results one after another.

Brinker International has been no exception to the trend of falling comps, while BJ's Restaurants and Darden Restaurants have also followed along .

What's up with Brinker?
In case of Brinker, both Chili's and Maggiano's witnessed a drop in traffic of 3.4% and 2.1%, respectively, in the previous quarter. The acquisition of 11 Chili's units in Canada helped in compensating the fall in comps at company-owned Chili's stores. Comps at franchised restaurants increased 1%, driven by the 2.7% comps growth at the international franchise restaurants, offset by a 2.6% decline in domestic comps. Consolidated franchise comps were much lower than the year-ago quarter's comps growth of 2.9%.

As a result, Brinker International suffered a 3.3% decline in guest count, leading to muted consolidated comps of 1.3% in the first quarter, much lower than the year-ago quarter's comps growth of 2.6%. As a result of weak sales, quarterly revenues grew by a minuscule 0.06% year over year to $683.9 million, and missed the consensus estimate of $687 million .

As a result of a favorable product mix, resulting from the addition of new menu items and better pricing, cost of sales declined by 60 basis points to 27.2%. Brinker posted quarterly earnings of $0.43 per share, which represents a 16% increase over the same quarter last year and the 13th conservative quarter of EPS growth for Brinker. However, it could not meet the consensus expectations of $0.46 due to muted sales as a result of weak store traffic in general.

Apart from this, Brinker opened three international franchised restaurants. At the end of the first quarter, Brinker operated 1,596 restaurants, of which 1,552 were Chili's (including domestic and international) and the remaining 44 were Maggiano's. In fiscal 2014, Brinker expects to open 44-52 restaurants (domestic and international included) under the Chili's brand .

Brinker has been witnessing tepid sales growth in the past two quarters due to a continuous decline in traffic, which has been an industry trend this year as per Blackbox Intelligence's report. A lowered outlook for fiscal 2014 adds to the woes. However, the company is looking to brave these negative market sentiments with various sales-driving initiatives, including new kitchen equipment systems, effective marketing strategy, and an integrated POS system.

BJ's continues to disappoint
Investors don't like a poor quarterly report, and companies missing earnings usually get punished heavily. This is precisely what happened in case of BJ's Restaurants, which missed on both earnings and revenue. In fact, BJ's has missed earnings for four consecutive quarters, so it's no surprise that year-to-date the company's stock has lost 20% of its value.

It reported earnings of $0.13 per share, a sharp decline of 45.8% versus the same quarter a year ago . The weak earnings were due to sluggish top line growth and margin contraction. Comps declined 2.2% as BJ's lacked product innovation. It reported third-quarter revenue of $188.2 million, while analysts had expected $195 million.

Going forward, out of the six new restaurants planned for the fourth quarter, three are already operational. Management has plans to open 17 to 19 new restaurants in 2014. Two-thirds of these new restaurants will be developed under the new format, which will cost the company $1 million less than the current format. In addition, there are plans to roll out a new menu beginning November and in the first quarter of 2014, which, along with other initiatives, should help in repositioning the brand.

Darden down the same route
Given the declining traffic trends of the above two companies, it wasn't surprising to see Darden suffer as well. According to Darden's management, a sluggish macroeconomic recovery, the effects of the Affordable Care Act, and weakening consumer confidence led to weaker traffic at its locations and a 3.3% decline in comps .

In its recent quarter, Darden missed consensus estimates on both revenue and earnings. Darden's earnings declined around 37% from the prior year period as a result of increased expenses and weak store traffic. Its earnings of $0.53 per share missed consensus estimates by more than 23%.

Looking ahead, Darden doesn't expect a rosy future. Management expects the business environment to remain tepid in fiscal 2014 as well, driven by a sluggish economic recovery. However, Darden is looking to reduce its reliance on just one market by expanding its business internationally. Darden is expanding its presence in Asia by way of a local chain known as Secret Recipe, which has more than 300 locations in Malaysia, China, Thailand, Indonesia, Singapore, Philippines, Brunei, Cambodia, India, and Australia.

These moves could help Darden get its same-store sales up, but not instantly. Darden is doing right by diversifying, but investors will need to be patient until the company's initiatives bear fruit.

Final words
Of the three, Brinker looks like a stock worth investing in. It is expected to grow its earnings at a CAGR of 15% over the next five years and is following sound strategies to grow its business. In comparison, BJ's seems to be losing steam, and investors should stay away from it until and unless there are signs of a turnaround. Also, Darden might turn out to be a good pick if its strategy of diversification clicks, but investors should wait and watch how its plans play out.

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Meetu Anand has no position in any stocks mentioned. The Motley Fool recommends BJ's Restaurants. The Motley Fool owns shares of BJ's Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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