Step Away From the Brinker

The following analysis was published earlier today on Street Insight, and is being republished here as a bonus for TheStreet.com readers.

There was little to like from Brinker International (EAT) today when you consider that:

• EPS and revenue missed targets;

• same-store sales are lousy across the board for all of its four concepts;

• poor marketing decisions hurt the company in the quarter;

• cost pressures are going to hurt margins; and,

• the company has lightened up on new unit-growth plans for fiscal year 2008.

With the exception of the international growth aspect of the company's expansion plan and continued share buyback, I think that management may have a tough time meeting its earnings expansion goals. Put this all together with a problematic environment for the casual dining segment of the restaurant industry and I think EAT should be sold if owned and avoided if not owned.

Brinker released third-quarter EPS from continuing operations of 44 cents on revenue of $1.12 billion.

The disappointing results were attributed to several factors: decline in dining frequency due to the severe weather, consumer spending and a decision to buy less of media (meaning advertising time) during the quarter vs. last year's period.

One bright spot was Chili's, which experienced incremental traffic improvement during the month of March and outpaced the industry. However, looking at the company's press release, same-store sales declined by 4.4% in the quarter and 3% for March, so this was a misleading statement from management

Some Cheer in the International Market

EAT added 55 new units systemwide (company and franchised) during the quarter and added to key locations such as Houston, Atlanta and Southern California. The majority of the new restaurants are Chili's brand.

EAT is working to rebalance its company/franchise mix from 80/20 to 70/30 by the end of the year. Franchise success is evident with the Macaroni Grill, and On The Border concepts are generating faster growth than Chili's franchises. Momentum is building in international markets such as the Middle East and Latin America, having added seven new restaurants with a total of nine by year-end, bringing the total international count to 155 in 23 countries. Per the company's press release, a total of 1,756 restaurants were open as of the end of the quarter.