Brinker International

Moat: 2.5/5

Understandability: 2/5

Balance Sheet Health: 3/5

Brinker International, Inc. is a major player in the casual dining sector, primarily known for its Chili’s Grill & Bar and Maggiano’s Little Italy brands, offering a diverse dining experience.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Brinker International operates in a brutally competitive sector where many companies try and replicate what is successful and where people are very price sensitive.

Business Overview:

Brinker International, Inc. is a company that develops, operates, and franchises restaurants under the Chili’s Grill & Bar (Chili’s) and Maggiano’s Little Italy (Maggiano’s) brands. Both brands have a diverse menu that they are continuously innovating, and they also have a strong online and off-premise business. As of December 2022, they operated 1,651 restaurants, including 1,188 company-owned locations and 474 franchised restaurants, spread across 29 countries and two US territories.

Revenue Distribution:
  • Chili’s Grill & Bar: Primarily operates casual dining restaurants with a menu featuring Tex-Mex inspired favorites, burgers, and salads. Generates revenue from food and beverage sales, as well as through to-go and digital orders.
  • Maggiano’s Little Italy: Operates upscale casual dining restaurants specializing in Italian-American cuisine, with a family-style dining experience that encourages sharing. Generates revenue from food and beverage sales, banquets, and private dining experiences.

Chili’s contributes most of company’s revenues and profits.

The restaurant industry is highly competitive and influenced by several factors. Some key trends include:

  • Digital Transformation: Increasing consumer adoption of digital platforms for ordering, delivery, and loyalty programs. This is a place that Brinker is trying to focus more on.
  • Emphasis on Off-Premise Dining: A growing trend towards delivery, take-out, and drive-through options, necessitating investments in digital capabilities and infrastructure.
  • Changing Consumer Preferences: Shifting dietary and lifestyle trends, requiring the adaptability of menus to reflect consumer demands such as healthy eating habits and more vegan and vegetarian offerings.
  • Supply Chain and Inflation: As we have seen lately, there are strong issues and high costs in the supply chain, and high inflation for inputs. Brinker is trying to cut costs and improve efficiencies.

The restaurant industry is known for its high level of competition. If you are looking for a company to trade higher in this area, you should look for strong brands with pricing power or those that are structurally better positioned for growth.

Competitive Landscape:

The restaurant industry, particularly casual dining, is characterized by intense competition. Brinker competes with:

  • Large Restaurant Chains: Including national and international brands that compete directly with Chili’s and Maggiano’s offerings.
  • Small and Local Chains: Which compete for share of wallet in different regions.
  • Fast-Food and Fast-Casual Restaurants: Which capture traffic that may have otherwise gone to Brinker.

Brinker needs to clearly focus on improving operating efficiency and implementing the right mix of price increases to maintain and grow their profit margins. There is a lot of competition in the restaurant sector and pricing power is not high.

Financials:

Brinker’s financials show it is a company that was hit hard by the pandemic and is trying to recover. Let’s dive deep into the details:

Revenue:

The revenue picture is that is on the recovery route from pandemic slowdowns. In the last several quarters revenues have slowly risen. This is due to favorable comparable sales in both brands driven by menu price increases, traffic increases, and favorable menu item mix. However, the increase is offset by the decreasing franchise revenue due to closed or unconsolidated franchise locations.

  • Q1 2022 vs Q1 2023: Total revenue decreased from $1.059 billion to $1.016, a decline of -4.05%. It is still worth mentioning that while the total revenue decreased, the consolidated comparable sales rose 6.4% across company-owned restaurants and restaurant sales prices were significantly higher. This is probably an indication that the company is focused on pricing power to offset increased cost.

  • FY 2021 vs FY 2022: Total revenue increased from $3.175 to $4.071 billion, a solid 28.2% increase. This was driven by increased sales from the recovery period and the extra week, 53 weeks, from fiscal year 2022.

Profit Margins:

The pandemic put a strain on earnings and margins, so Brinker is trying to restore its margins to pre-pandemic levels.

  • Q1 2022 vs Q1 2023: Operating profit decreased from $60.0 million to $37.0 million. This decline was due to high food and beverage prices. However, there was a small decrease in the cost of labor, and this is a significant expense for the company.

  • FY 2021 vs FY 2022: Net income rose from $19.2 million to $115.6 million, a large change because of the pandemic rebound. The adjusted EBITDA also rose from $379.9 million to $627.2 million. However, expenses are still high at $3.751 billion versus $2.516 in 2021.

The company’s margins need improvement, especially in operating margins. Labor costs and food prices are high for the company.

Financial Strength:

Brinker has good liquidity and a good capacity to meet near term debts.

  • Q1 2023: Cash and cash equivalents were $151.4 million at the end of the quarter and there is another $980 million available from their revolving credit facility for liquidity purposes. There is $1.65 billion worth of long term debt.
  • FY 2022: Cash and cash equivalents were $286.4 million, with a long-term debt of $2.347 billion. The ratio of current assets/liabilities is a bit above 1. The debt is quite high compared to what they have in cash. However, since their business is very stable with predictable cash flows, the debts are probably manageable.

The company’s leverage ratios are high for a traditional investor and this poses a risk for investors. However, if the company can reduce expenses and become more efficient, this could lead to a good turnaround story.

Other relevant information:
  • Share Repurchases: Brinker has been very aggressively buying its shares back to support its stock price. The company repurchased $57.8 million worth of shares in Q1 of fiscal year 2023 and $300 million in fiscal 2022.
  • Dividend Payments: Brinker is not paying any dividends.

Moat Analysis:

Brinker International has some, but not very strong moats. The company has a solid brand name, especially for Chili’s, but the overall competitiveness of the casual dining industry and the ease of replicating good ideas means that it cannot command high pricing power. Some factors that give Brinker an economic moat are:

  • Brand recognition: Chili’s is a well known brand and has a loyal customer base. But, the level of brand stickiness is not high in the casual dining segment where many people easily switch over to competitors. Maggiano’s is more focused on upper end clients and has some brand power in that market.
  • Distribution and scale: Brinker, like other large restaurant chains, has a vast distribution network and economies of scale. But, this is not such an important advantage as other smaller chains can open up easily and offer the same service.

Based on the above analysis, I would rate Brinker’s moat as a 2.5 / 5, meaning it has a narrow but not very defensible moat.

Risks:

These are the risks that can negatively affect the moat and profitability of Brinker:

  • Increased Competition: The casual dining sector is highly competitive, and the increased presence of other restaurant chains and fast-food chains can limit Brinker’s ability to raise prices or to increase traffic.
  • Changing Consumer Preferences: Shifting preferences towards healthier options or diverse food choices may require menu modifications and capital investments, which may be hard to gauge effectively and may not end up being effective.
  • Labor Costs: Increased minimum wages and staffing challenges can put pressure on profit margins.
  • Economic Slowdown: A decline in economic activity may reduce consumer spending on dining out.
  • Inflation and Supply Chain: Inflation in food costs and disruption in the supply chain will limit earnings.
  • Loss of key personnel: A loss of key leaders and people involved in operations can disrupt the company’s growth trajectory.
  • Adverse impacts due to technology: Lack of investment in or inability to successfully implement new tech may result in loss of market share or revenues.
  • Litigation Risk: The restaurant industry is very prone to class action lawsuits. There is a risk from labor law violations and from customers related to food safety and quality.

Business Resilience:

Brinker has proven to be somewhat resilient over the pandemic by its ability to rebound its finances. The diversified portfolio of restaurants and emphasis on takeout and digital delivery makes it somewhat less vulnerable. But its dependence on consumer discretionary spending and high input costs can make its recovery bumpy.

Understandability Rating:

I rate Brinker as a 2 on the understandability scale. It’s not the hardest business to understand, but there are complexities with operating a large number of restaurants and a diverse brand portfolio. Its business model is easy, but its business economics make it a lot complex.

Balance Sheet Health Rating:

Brinker has a healthy cash balance and it can fulfill its near-term obligations. However, its long-term debt is a little worrying. So, I rate its balance sheet health as a 3 / 5. A big push towards increasing revenues and cutting down costs can really make its balance sheet more secure.