Overview: Brinker is one of the world’s leading casual dining restaurant companies, which operates two leading brands -Chili's Grill & Bar and Maggiano's Little Italy. Among Brinker’s ~ 1600 total units, nearly 75% are domestic, and the company operates a company owned restaurant/franchise mix of ~60/40. We like EAT because:
Proven Brand with Large Scale: Brinker operates approximately 1600 Chili’s, with nearly 320 units abroad, and 40% being franchised. Chili’s is a 40 year old concept, extremely well known in the US, and well received abroad. The 60/40 company own / franchise model reduces demand for CAPEX while allowing for reasonably fast new unit growth. Maggiano’s has 51 units with a 20 years history, and enjoys faster growth potential than Chili’s domestically.
Strong Operating Margins and Attractive Free Cash Flow Generation: Brinker enjoys the best EBITDA margins when compared to its peers such as Darden, Cheesecake Factory, Texas Road house, etc, partially thanks to the operating mix of franchise. In the past five years, free cash flow generated averaged ~$180 million a year, and is expected to reach $250 million in FY16, ~9% of its latest market capitalization. This ability of strong FCF generation has allowed the company to pay an annual dividend of $1.28 per share, yielding at 2.8%. In the last decade, the company has increased its dividend every year with the exception of FY09.
Plan to Win Again and Vision 2020: From FY10 to FY15, the company’s Plan to Win Together has allowed the Chili’s brand improve margins by 400 bps and grow international locations by 25%. Its Maggiano’s brand also delivered 21 quarters of consecutive positive comparable restaurant sales growth. The company returned $1.4 billion to shareholders during the 5 years, which helped EPS grow 16% CAGR from FY12 to FY15. Currently the company is on track with its Plan to Win Again agenda, which focuses on growing new units and strengthening Chili’s with Fresh Tex, Fresh Mex concepts. Vision 2020 was implemented in FY16Q2, which will take the company to the next stage by revitalizing Chili’s with a new school of thinking, expanding Maggiano’s in the polished casual space, and grow EPS CAGR at 10-15% with superior free cash flow generation. The new school of thinking is to intensely focus on making the Chili’s brand fresh and relevant in today’s fast changing environment, innovate aggressively across Chili’s food, service, and atmosphere to differentiate the brand, and take the market share by leveraging technology to connect with consumers.
Catalyst: EAT stock has been lagging in the past 12 months, due to missed sales expectations for 4 consecutive quarters, though earnings per share have always met or exceeded projections, partially aided by share repurchases. In FY16Q2, Chili’s comps were down 2.8% and Maggiano’s were down 1.8%. However, management said the trend was improving as Q2 progressed and Q3 comps were expected to be closer to flat y-o-y.
Initiatives are put in place to drive traffic and sales growth. Brinker inked a deal with Olo–the leader in digital ordering, and will put Olo's online ordering platform into operation beginning in summer, which would open up great potential for Chili’s To-Go business, including a more robust delivery opportunity. Additionally, Brinker has started integrating its My Chili's Reward program with Plenti—a rewards program by American Express that offers leading brands across multiple categories. It would give Chili’s access to Plenti’s huge database of members that is multiple times larger than Chili’s 7 million members. In addition, Chili’s has implemented actions to improve its My Chili’s reward program focusing on reducing cost and driving incremental usage with heavy users. Most importantly, Brinker remains focused on menu innovation, mainly its core menu items like burgers, ribs and fajitas. The company revamped the existing steak platform with the addition of Sizzling Steak in Jan 2016 and rolled out a new sizzling steak platform in its FYQ3. In fact, Chili’s 2016 is full of new dish introductions.
Overall, we believe comparisons will become easier in the 2H of FY16 for Chili’s and the company has lowered expectations calling for Q3 EPS growth in mid single digits. With multiple initiatives in place especially the new steak menu rollout, we believe Brinker is well positioned to deliver or exceed expectations, which will help shift investors’ sentiments to its attractive valuation and free cash flow generation ability.