EAT BRINKER INTERNATIONAL,
Sector financial performance:
This company, who is primarily an operator (primary) and franchisor of casual dining restaurants –Chili’s and Maggiano’s, has been grouped into bar& grill - casual dining restaurants sector in foodservice industry.
It seems that significantly slowing down traffic is the major reason contributing to downturn in comparable sales of casual dining restaurants between 2015 and 2017. Data indicates the average increase in comparable sales all across this sector went down from around 1.7% of 2015 to around -0.6% of 2017: the average growth in comparable sales for bar& grill-sub sector went down from -0.9% to -2.4%, from 5% to -0.2% for American family sub sector, from 1.6% to 0.5% for Italian sub-sector, from 3% to -0.7% for Mexican sub-sector, from 1.7% to -0.7% for pizza sub-sector. Correspondingly, what accompanied with declining sales is the decreasing traffic all across the sector during this period. For example, our data of casual dining sector indicates that the average growth in traffic for 2015, 2016 and 2017 was -1.1, -2.3, and -2.4% respectively including: 2%, -1.3%, and -1.3% for family dining restaurants; -1.6%, -3%, and -3.1% for bar& grill restaurants; -1.3%, -1.7% and -1.6% for Italian restaurants; -0.7%, -1%, and -2.3% for Mexican restaurants, -1.4%, -2.6%, and -2.7% for pizza restaurants.
Since 2017, it seems the downward trend in comparable sales (up by average 1.3% in first half of 2018 as compared with -0.6% of 2017) has been halted driven by slower decrease in traffic with rising price among almost all of sectors. In fat, for sectors experiencing continuing decrease in traffic, it has been increasingly difficult by rising price to offset the faster decreasing traffic/transaction. For example, in family dining sector, the average growth in comparable sales down to -0.4% in 2018 from -0.2% of 2017 as traffic went down further; For sectors experiencing recovery of traffic, we see increase in sales with slower rise in price. For example, in Italian & steak sector, the average growth in comparable sales up to 1.3% in 2018 from 0.5% of 2017; in Mexican food sector, the average growth in comparable sales up to 0.3% in 2018 from -0.7% of 2017; in Pizza sector, the average growth in comparable sales up to 5% in 2018 from -0.7% of 2017; in Pizza sector, the average growth in comparable sales up to 5% in 2018 from -0.7% of 2017; in bar& grill sector, the average growth in comparable sales up to 0.7% in 2018 from -2.4% of 2017;
It seems, unlike in fast-casual restaurants, the difference in performance in terms of comparable sales and thus the traffic in this sector presents much smaller variations.
Generally, impacts of unfavourable climate of restaurants industry to traffic since 2015 seem to be less significant to casual dining than to fast-casual restaurants but bigger than QSR as indicated by changes in their growth in traffic. However, probably because there are more powers for casual restaurants than another two restaurants to raise menu price since their menu prices a higher, their sales have been better offset by increased menu price or product mix.
For companies in this industry, franchising seems not to be popularly accepted as compared with QSRs. Except for some bar& grill and family restaurants chains, most of companies are operating their own restaurants and their gross margins vary in similar range as those fast-casual restaurants.
However, due to less spending in G&A of casual restaurants ( average 5.5% compared with 10%) the average operating margins are higher (above 7.5%) than fast-casual restaurants (3%): bar& grill casual dining sector - 5.5% with a G&A as percentage of sales of 7.5%; family sector - 11% with a G&A as percentage of sales of 5%; Italian sector - 8% with a G&A as percentage of sales of 6%; pizza - 5% with a G&A as percentage of sales of 5%; Mexican - 6.5% with a G&A as percentage of sales of 5%.
Unlike in QSR where companies use franchise as buffer, companies’ margins in this sector declined as traffic and thus sales slowing down. However, with higher menu price the typical average gross margin of restaurants in this sector decreased by smaller percentage than those in fast-casual sector, which is about 100 basis points less since 2015.
The average cash flow/share of companies in this sector presents decrease of 8% and 4% for 2017 and 2018.
It seems that the demand for service/products of this company has been decreasing in the past four years as indicated by continuingly decreasing traffic. Company has been still able to raise average check size (price/product mix) to offset the decreasing traffic. It seems that decrease in traffic may be stopping in 2018.
The Fiscal 2018 compared with 2017(20180627)
System-wide domestic comparable sales decreased by 1.3%.
Company-owned comparable sales decreased by 1% due to decrease of 3.4% in traffic offset by the increase of 1.3% in price.
The first twenty six weeks in Fiscal 2018 compared with the same period of 2017
System-wide domestic comparable sales decreased by 2.3%.
Company-owned comparable sales decreased by 2.1% due to decrease of 6.2% in traffic offset by the increase of 2.5% in price.
Fiscal 2017 compared with 2016
System-wide domestic comparable sales decreased by 2.0%.
Company-owned comparable sales decreased by 2.1% due to decrease of 5.5% in traffic offset by the increase of 1.8% in price.
Fiscal 2016 compared with 2015
System-wide domestic comparable sales decreased by 2.2%.
Company-owned comparable sales decreased by 2.4% due to decrease of 3.4% in traffic offset by the increase of 1.1% in price.
Its gross margin (primarily including company-operated expenses) went down from 15% of 2014 to about 13% of 2017 primarily due to relatively increased labor and rental costs. Its SG&A as percentage of sales has been flat at around 4% and its operating margin thus decreased to about 9% in 2017. As commodity costs and labor continued to go up, we have seen decreased gross margin and operating margin in 2018.
This stock currently has an enterprise price/EBI ratio of 20. We think that its stock is being relatively undervalued considering the sharply slowing down traffic in 2018.
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