In early 2018, Brinker International (EAT 2.00%), the Texas-based casual-dining company that franchises Chili's Grill & Bar and Maggiano's Little Italy, developed plans to revive its waning Chili's brand. The plans were necessary, but many investors felt that it was all too little, too late.
Chili's has been a drag on the company's restuls, which was unfortunate for Brinker, because its other brand, Maggiano's, has been a pillar in the casual-dining space. After all, Maggiano's had been exalted as America's Favorite Casual-Dining Chain for 2018, beating out Texas Roadhouse, First Watch, and Cracker Barrel.
What to do about Chili's, then, has been top of mind for Brinker in recent years. Let's dig into some background on the chain, what Brinker has been doing to breathe new life into the business, and what lies ahead for the company.
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Sleeping at the wheel
Hurricanes Harvey and Irma caused a decline in Brinker's bottom line in 2017. According to the company announcement, the company lost $5.4 million in sales. Hurricanes can't be controlled for, but where Chili's was concerned, there were additional events that did nothing to assuage investor concerns.
While other brands were going digital, partnering with third-party delivery outfits, and creating healthier and fresher menus with local ingredients, Chili's was asleep at the wheel. It seemed like younger and more innovative competitors like Chipotle, Panera Bread, and Five Guys were running away with the market.
In fairness, Chili's did take some steps to stop the bleeding. Brinker cut the Chili's menu by 40% in 2017 in an effort to improve margins, and the chain re-instated the tried-and-true items that fans loved. This was commendable, but the company didn't quite take its revitalization efforts all the way, failing to incorporate more locally sourced and healthy ingredients.
Chili's slow wake up
So it has been one step at a time for Chili's, but since Brinker seems to have woken up to its challenges, the company is gaining traction. In January 2018, the company named Wade Allen as its new SVP and chief digital offficer, and, according to Chili's, Allen would spearhead new digital efforts for " seamless, efficient end-to-end digital experience from Team Member to Guest."
More recently, management announced that it would be remodeling many of its restaurants starting in the first quarter of 2019.
There was some good news at the fourth quarter earnings announcement for Chili's. In 2019, there was an increase of 2.3% in the year's comparable restaurant sales compared to 2018. And, for Brinker overall, according CEO and President Wyman Roberts, "Over the last four quarters, the company has outperformed consensus earnings estimates three times."
Going forward, here are some things restaurant investors should consider. According to Zacks, Brinker stock will perform in line with the market in the near future, and the restaurant space is expected to outperform many other industries by 2-to-1.
Brinkner guidance suggested revenues to increase in the range of 9 to 10% because it will buy some of its franchises back from ERJ Dining giving it better control over those assets. Also, according to Brinker, comparable restaurant sales are expected to increase in the range of 1.75% to 2.5%.
Although Brinker has been investing heavily in Chili's, its cash has gone up over the year -- $13.4 million compared with nearly $10.9 million at the end of June 2018 -- and long-term debt has decreased. Long-term debt was $1.2 billion as of June 2019 compared with $1.5 billion as of June 2018.
Finally, focus and control
Some of the additional cash will be put to good use when the company acquires 116 Chili's restaurants in the first quarter of fiscal 2020 from franchisee ERJ Dining. Brinker is planning no other acquisitions or divestments and has only two brands to worry about. Maggiano's should continue to be the biggest feather in Brinker's cap and a strong market leader ahead of Texas Roadhouse, First Watch, and Cracker Barrel.
Some things in life require patience, and this has particularly been the case for Brinker and Chili's restaurants. There is a good chance that, after a long period of rest -- dormancy seems too harsh a word -- the brand will emerge revitalized and stronger. It's bringing back customer favorites, revamping its spaces, and bringing the chain into the digital age. Next quarter should be a better one for Brinker.
