Casual restaurant chain Brinker International (NYSE:EAT) reported results in line with analysts' expectations in Q1 FY2024, with revenue up 5.97% year on year to $1.01 billion. The company's outlook for the full year was also close to analysts' estimates with revenue guided to $4.31 billion at the midpoint. Turning to EPS, Brinker International made a non-GAAP profit of $0.28 per share, improving from its loss of $0.69 per share in the same quarter last year.
Brinker International (EAT) Q1 FY2024 Highlights:
- Revenue: $1.01 billion vs analyst estimates of $1.01 billion (small beat)
- EPS (non-GAAP): $0.28 vs analyst estimates of $0.05 ($0.23 beat)
- The company reconfirmed its revenue guidance for the full year of $4.31 billion at the midpoint (raised full year EPS guidance)
- Free Cash Flow of $12.2 million, up 69.4% from the previous quarter
- Gross Margin (GAAP): 11.3%, up from 6.97% in the same quarter last year
- Same-Store Sales were up 5.5% year on year (slight beat vs. expectations of up 5.4% year on year)
- Store Locations: 1,651 at quarter end, increasing by 6 over the last 12 months
Founded by Norman Brinker in Dallas, Texas, Brinker International (NYSE:EAT) is a casual restaurant chain that operates under the Chili’s, Maggiano’s Little Italy, and It’s Just Wings banners.
The company’s history starts with its 1983 acquisition of Chili’s, which at the time was a Dallas burger joint. Chili’s became the cornerstone of Brinker’s portfolio, and the parent company expanded the Chili’s menu and experience to feature Southwestern American casual fare. Today, Chili’s most famous dish is its Baby Back Ribs.
From that initial acquisition, Brinker has added to its portfolio. The focus was familiar, comfort food served in an inviting family atmosphere. Maggiano’s Little Italy offers big plates of pasta and classic dishes like Chicken Parmasean for the table to share. Just Wings is exactly what the name describes, and it is actually a virtual restaurant. Customers order through an app and have the product delivered, which means there is no physical store to visit and dine in.
For Chili’s and Maggiano’s, the core customer is a middle-income family looking for a nice, full service dinner out. They don’t want to break the bank or visit a restaurant that is too stuffy and serious, though. The Just Wings customer is more tech savvy since the concept is a virtual one. This customer also values the convenience of home delivery.
Sit-Down Dining
Sit-down restaurants offer a complete dining experience with table service. These establishments span various cuisines and are renowned for their warm hospitality and welcoming ambiance, making them perfect for family gatherings, special occasions, or simply unwinding. Their extensive menus range from appetizers to indulgent desserts and wines and cocktails. This space is extremely fragmented and competition includes everything from publicly-traded companies owning multiple chains to single-location mom-and-pop restaurants.
Multi-brand full-service restaurant competitors include Darden (NYSE:DRI), Bloomin’ Brands (NASDAQ:BLMN), Dine Brands (NYSE:DIN), and The Cheesecake Factory (NASDAQ:CAKE).Sales Growth
Brinker International is one of the larger restaurant chains in the industry and benefits from a strong brand, giving it customer mindshare and influence over purchasing decisions.
As you can see below, the company's annualized revenue growth rate of 6.56% over the last four years (we compare to 2019 to normalize for COVID-19 impacts) was mediocre as its restaurant footprint remained unchanged, implying that growth was driven by more sales at existing, established dining locations.
This quarter, Brinker International grew its revenue by 5.97% year on year, in line with Wall Street's estimates. Looking ahead, the analysts covering the company expect sales to grow 3.52% over the next 12 months.
Number of Stores
A restaurant chain's total number of dining locations often determines how much revenue it can generate.
When a chain like Brinker International doesn't open many new restaurants, it usually means there's stable demand for its meals and it's focused on improving operational efficiency to increase profitability. As of the most recently reported quarter, Brinker International operated 1,651 total locations, in line with its restaurant count a year ago.
Taking a step back, Brinker International has kept its locations more or less flat over the last two years compared to other restaurant businesses. A flat restaurant base means Brinker International needs to boost foot traffic and turn tables faster at existing restaurants or raise prices to generate revenue growth.
Same-Store Sales
Brinker International's demand has outpaced the broader restaurant sector over the last eight quarters. On average, the company has grown its same-store sales by a robust 9.3% year on year. Given its flat restaurant base over the same period, this performance stems from increased foot traffic or larger order sizes per customer at existing locations.
In the latest quarter, Brinker International's same-store sales rose 5.5% year on year. This growth was in line with the 5.5% year-on-year increase it posted 12 months ago.
Gross Margin & Pricing Power
Gross profit margins tell us how much money a restaurant gets to keep after paying for the direct costs of the meals it sells.
Brinker International has poor unit economics for a restaurant company, leaving it with little room for error if things go awry. As you can see below, it's averaged a 12.4% gross margin over the last two years. This means the company makes $0.12 for every $1 in revenue before accounting for its operating expenses. 
In Q1, Brinker International's gross profit margin was 11.3%, marking a 4.4 percentage point increase from 6.97% in the same quarter last year. One quarter's performance shouldn't determine your long-term view of a company, but Brinker International's margin expansion is a wonderful sign in the near term. It shows the company received better terms from its suppliers, and if this trend continues, it could suggest a less competitive environment where it has better pricing power and more stable input costs (such as ingredients and transportation expenses).
Operating Margin
Operating margin is an important measure of profitability for restaurants as it accounts for all expenses keeping the lights on, including wages, rent, advertising, and other administrative costs.
This quarter, Brinker International generated an operating profit margin of 2.39%, up 4.3 percentage points year on year. This increase was encouraging and driven by stronger pricing power or lower ingredient/transportation costs, as indicated by the company's larger rise in gross margin.
Zooming out, Brinker International was profitable over the last eight quarters but held back by its large expense base. It's demonstrated subpar profitability for a restaurant business, producing an average operating margin of 4.24%. However, Brinker International's margin has improved, on average, by 1.6 percentage points each year, an encouraging sign for shareholders. The tide could be turning for Brinker International.EPS
Earnings growth is a critical metric to track, but for long-term shareholders, earnings per share (EPS) is more telling because it accounts for dilution and share repurchases.
In Q1, Brinker International reported EPS at $0.28, up from -$0.69 in the same quarter a year ago. This print beat Wall Street's estimates with ease and shareholders should be delighted with the results.
Cash Is King
If you've followed StockStory for a while, you know that we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.
Brinker International's free cash flow came in at $12.2 million in Q1, representing a 1.2% margin and flipping from negative in the same quarter last year to positive. Seasonal factors aside, this was great for the business.
Over the last eight quarters, Brinker International has shown mediocre cash profitability, putting it in a pinch as it gives the company limited opportunities to invest organically in its business, pay down debt, or return capital to shareholders. Its free cash flow margin has averaged 2.22%, subpar for a restaurant business. Brinker International's margin has also been flat during that time, showing the company needs to take action and improve its cash profitability.
Return on Invested Capital (ROIC)
Brinker International has a decent track record of investing in profitable projects and has the flexibility to engage with financiers if it wants to raise or borrow capital. Its five-year average return on invested capital (ROIC) is 10.8%, slightly better than the broader restaurant sector.
We argue ROIC is one of the most important indicators of quality because it tells us how much return (profit) a company makes on the money it invests into its business, shedding light on its prospects and its management team's decision-making prowess. ROIC is also a helpful tool to benchmark performance versus peers, and just like how we focus on long-term investment returns, we care more about a company's long-term ROIC because short-term market volatility can distort results.
Key Takeaways from Brinker International's Q1 Results
Sporting a market capitalization of $1.5 billion, Brinker International is among smaller companies, but its more than $14.4 million in cash on hand and positive free cash flow over the last 12 months puts it in an attractive position to invest in growth.
Same store sales and revenue were roughly in line with expectations, showing that there were no surprises on the topline. We were impressed by how significantly Brinker International blew past analysts' EPS expectations this quarter. That really stood out as a positive in these results. On the other hand, its gross margin sadly missed analysts' expectations. With regards to guidance, full year revenue guidance was reiterated while EPS guidance was raised. Zooming out, we think this was still a decent, albeit mixed, quarter, showing that the company is staying on track. The stock is flat after reporting and currently trades at $33.95 per share.
Is Now The Time?
Brinker International may have had a favorable quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.
We cheer for everyone who's improving the lives of others, but in the case of Brinker International, we'll be cheering from the sidelines. Its revenue growth has been a little slower over the last four years, and analysts expect growth to deteriorate from here. And while its strong same-store sales growth has outpaced the broader restaurant sector, the downside is that its gross margins make it more challenging to reach positive operating profits compared to other restaurant businesses. On top of that, its operating margins are below average compared to other restaurants.
Brinker International's price-to-earnings ratio based on the next 12 months is 10.0x. While we think the price is reasonable and there are some things to like about Brinker International, at the moment, we think there might be better opportunities elsewhere in the market.
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