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Kryssia Uraguchi

EAT AT A GLANCE

P/E ► 18.8 AVG EV/EBITDA ► 12.4 AVG ROA ► 5% AVG ROE ► 11.3% AVG Debt to Equity ► 1.94 AVG Current Ratio ► 0.984 AVG Interest Coverage Ratio ► 1.86 AVG

 

 

 

 

 

 

Brinker International, Inc. (NYSE: EAT) operates and franchises 1,801 casual dining restaurants^[1] in 49 states and 24 countries. Brinker owns approximately 75% of its restaurants and franchises the remaining 25%. The company's chains include Chili's Grill & Bar, Romano's Macaroni Grill , On the Border Mexican Grill and Cantina, and Maggiano's Little Italy. Brinker's revenue increased to $4.4 billion (2007)^[2], despite decreasing comparable store sales.

Brinker's is highly leveraged to the success of its Chili's brand. Although Brinker's has 4 different brands, Chili's, its flagship chain accounts for 76% of its restaurants. As of June 2007, the company had 1,361 Chili's restaurants, up 400 from just a few years earlier, with plans to grow this number to 2000, over the next several years. The company has announced no similar plans to expand its other chains.

Business Overview

Brinker's International Inc. (EAT) owns and franchises four brands of causal dining restaurants^[3]: Chili's, Macaroni Grill, On the Border, and Maggiano's. Brinker's restaurants can be found nationwide, including Washington D.C. and it has a small international presence.

Brinker's had $4.4 billion in sales for 2007 and it earned $344 million in operating income^[4] Operating income was up 5.4% from 2006 due to increased franchising and new restaurant openings. However, Brinker's net income have been negatively affected by an increase in energy, labor, and food prices, as well as general unfavorable economic conditions.

Darden's revenue has grown steadily over the past three years. From 2005-2007, revenue has grown more than 14% due to new restaurant openings.

• Chili's Bar & Grill is famous for its Baby Back Ribs. Food and non-alcoholic drinks account for 86.5% of sales (Entrees range from $6 to $15) and alcoholic beverages constitute the other 13.5%^[5]. Chili's is Brinker's brand with the most revenue, with $4.2 billion in sales. Brinker's has announced plans to expand Chili's to around 2,000 restaurants in new and existing markets.

• Romano's Macaroni Grill is a casual Italian restaurant. In total, Macaroni Grill had $770 million in sales last year^[6]. Food (Entrees are priced between $6 and $20) and non-alcoholic beverages generate 88% Macaroni Grill's sales and alcoholic beverages account for the remaining 12%^[7]. The Macaroni Grill, Brinker's second largest brand, has experienced a decline in same-restaurant sales from 2002-2207 to a 6% decrease in customer traffic.

• On the Border Mexican Grill and Cantina serves a wide variety of traditional Mexican entrees priced between $5.50 and $15. Food and non-alcoholic beverages account for 80.7% of On the Border's $458 million in total sales. Alcoholic beverages constitute the remaining 19.3%. On the Border posted negative same-restaurant sales growth for the past two quarters and its revenue fell 0.4% from 2006.
• Maggiano's Little Italy is a casual New York Italian restaurant which generates $369 million in revenue throughout its 41 locations. 21% of Maggiano's revenues come from banquet services and facilities, which can host up to 300 people at a time. The average meal ticket is approximately $26 and entrees cost between $8 and $36. Alcoholic beverages account for 19.5% of sales and food and non-alcoholic beverages make up 80.5% of sales. Maggiano's experienced a 1.5% decrease in same-restaurant sales in Q1 of 2007.

Below is a chart with key operating metrics for each Brinker's brand ^[8]

Trends and Forces

Brinker's future rests on Chili's growth

Although Brinker's has 5 different restaurant chains, the company's success is highly dependent on the continued growth of its Chili's franchise. Chili's constitutes 76% of Brinker's restaurants and is by far Brinker's largest, most popular brand. Brinker's plans on expanding Chili's to approximately 2,000 restaurants but has not announced any formal plans to expand any of its other brands in so dramatic a fashion. Brinker's has already begun to expand Chili's by opening 400 restaurants from 2002 to 2006.

Falling sales in restaurant industry lead to falling comps

All of Brinker's brands have decreasing comps, but On The Border and Macaroni Grill impact the negative overall average the most. On The Border has experienced the steepest decrease in comps.

Beginning in 2006, slowing economic growth and concerns among consumers, economists and business owners alike began to take their toll on the restaurant and foodservice industries. Real growth (adjusted for inflation) in restaurant sales was a meager 1.3% in 2007 and is projected to fall faller in 2008. ^[9] due to macroeconomic factors. This downturn has largely been a result of lower consumer spending. Initially, rising interest rates in 2006 combined with slowing home appreciation resulted in tighter economic constraints for many consumers. Although the Fed began to lower interest rates in 2007 and continued to do so in 2008, home values have continued to slump along with the general economy. Since the home is considered the primary form of wealth or savings for many Americans, millions of homeowners have suddenly found themselves significantly poorer while facing higher costs in the form of food and energy inflation, and thus are less willing to spend money on eating out. As evidenced by falling levels of foot traffic to Brinker's various chains, the company has been far from immune to this trend. Brinker's chains all experienced negative same store comps in 2007.

Competition

The restaurant and foodservice industries are extremely competitive, especially within the casual dining sector. Brinker's had $4.4 billion in revenue operating 1801 restaurants. Brinker's main competition includes:

• Darden Restaurants (DRI): Darden owns and operates The Olive Garden, Red Lobster, Bahama Breeze, and Seasons 52 restaurants. Brinker's competes with Darden directly for casual dining customers. Darden's 1300 restaurants generate $5.6 billion in sales (2007)^[10]. Darden's restaurants operate with a higher margin. The Olive Garden has had increasing same restaurant sales for the past 51 quarters^[11] and Darden's other restaurants have also had increasing same restaurant sales throughout the industry downturn.
• Applebee's International (APPB): Applebee's operates and franchises 1,930 Applebee's Neighborhood Bar and Grill restaurants^[12]. Applebee's had $1.2 B in total operating revenue^[13]. Applebee's most closely competes with Chili's for casual dining customers. Applebee's company structure is unique because it franchises 73% of its restaurants^[14]. Brinker’s hopes to franchise 35% of its restaurants to achieve the same results as Applebee's: steady cash flows and stability.
• Cheesecake Factory (CAKE): The Cheesecake Factory and its secondary chain, Grand Lux Cafes directly compete with Brinker's Italian brands, Macaroni Grill and Maggiano's. All four restaurants compete in the casual dining sector and have very similar cuisines and entree prices. Cheesecake Factory had upwards of $1.3 B in sales for 2006^[15] with approximately 130 restaurants. The Cheesecake Factory had a tremendous 19.2% growth in revenue from 2005^[16] and will continue to open close to 20 restaurants a year^[17]. Although Cheesecake Factory is much smaller than Brinker, it could pose more of a threat in the future if CAKE continues its growth pattern.

References

1. ↑ Brinker International Inc. Annual Report 2007, "Consolidated Statements of Income", p. 9
2. ↑ Brinker International Inc. Annual Report 2007, "Consolidated Statements of Income", p. 9
3. ↑ Brinker International Inc. Annual Report 2007, Part I, "Restaurant Brands", p.31
4. ↑ Brinker International Inc. Annual Report 2007, "Consolidated Statements of Income", p. 9
5. ↑ Brinker International Inc. Annual Report 2007, "Restaurant Brands", p. 31
6. ↑ Brinker International Inc. Annual Report 2007, "Restaurant Brands", p. 32
7. ↑ Brinker International Inc. Annual Report 2007, "Restaurant Brands", p. 32
8. ↑ Brinker International Inc. Annual Report 2007, pp. 30-31, 34, 41
9. ↑ "Chains Ready Plans to Ride out Economic Downturn," Bnet.com, October 1, 2007
10. ↑ Darden Restaurants Inc. 2007 Annual Report, "Overview", p. 4
11. ↑ Darden Restaurants Inc. 2007 Annual Report, "Financial Highlights", p. 8
12. ↑ Applebee's International 2007 Annual Report, p. 2
13. ↑ Applebee's International 2007 Annual Report, p. 2
14. ↑ Applebee's International 2007 Annual Report, p. 2
15. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
16. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
17. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
18. ↑ All metrics from company's annual report

1. ↑ Brinker International Inc. Annual Report 2007, "Consolidated Statements of Income", p. 9
2. ↑ Brinker International Inc. Annual Report 2007, "Consolidated Statements of Income", p. 9
3. ↑ Brinker International Inc. Annual Report 2007, Part I, "Restaurant Brands", p.31
4. ↑ Brinker International Inc. Annual Report 2007, "Consolidated Statements of Income", p. 9
5. ↑ Brinker International Inc. Annual Report 2007, "Restaurant Brands", p. 31
6. ↑ Brinker International Inc. Annual Report 2007, "Restaurant Brands", p. 32
7. ↑ Brinker International Inc. Annual Report 2007, "Restaurant Brands", p. 32
8. ↑ Brinker International Inc. Annual Report 2007, pp. 30-31, 34, 41
9. ↑ "Chains Ready Plans to Ride out Economic Downturn," Bnet.com, October 1, 2007
10. ↑ Darden Restaurants Inc. 2007 Annual Report, "Overview", p. 4
11. ↑ Darden Restaurants Inc. 2007 Annual Report, "Financial Highlights", p. 8
12. ↑ Applebee's International 2007 Annual Report, p. 2
13. ↑ Applebee's International 2007 Annual Report, p. 2
14. ↑ Applebee's International 2007 Annual Report, p. 2
15. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
16. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
17. ↑ The Cheesecake Factory 2006 Annual Report, p. 2
18. ↑ All metrics from company's annual report