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Brinker International Reports Continued Margin Improvements and a Year Over Year Increase in Second Quarter Fiscal 2011 EPS

2011-01-25

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Brinker International Total revenues decreased 4.8 percent to $671.9 million

Brinker International, Inc. (NYSE: EAT) today announced results for the fiscal second quarter ended Dec. 29, 2010.

Highlights for the second quarter of fiscal 2011 include the following:

Earnings per diluted share, before special items, increased to $0.38 compared to $0.25 for the second quarter of fiscal 2010 (see non-GAAP reconciliation below)
On a GAAP basis, earnings per diluted share increased to $0.41 from $0.18 in the second quarter of the prior year
Restaurant operating margin(1) improved 210 basis points to 17.4 percent
Total revenues decreased 4.8 percent to $671.9 million
Same restaurant sales at company-owned restaurants decreased 3.5 percent consisting of a 4.9 percent decrease at Chili's and a 4.7 percent increase at Maggiano's
Cash flows provided by operating activities were $70.0 million and capital expenditures totaled $31.8 million for the first six months of fiscal 2011
The Company repurchased approximately 8.3 million shares of its common stock for $157.2 million in the second quarter resulting in a fiscal year to date total of approximately 13.6 million shares for $249.9 million
The Company paid a dividend of 14 cents per share, an increase of 27.3 percent over the prior year quarter

"Our second quarter results demonstrate progress made on our commitment to double EPS in five years," said Doug Brooks, President and Chief Executive Officer. "We've gained this traction through continued margin expansion at Chili's, top line growth at Maggiano's and investments in our business designed to generate profitable and sustainable long term sales growth."

Table 1: Q2 comparable restaurant sales Q2 11 and Q2 10, company-owned, reported brands and franchise; percentage
	Oct	Nov	Dec	Q2 11	Q2 10(1)
Company-Owned	(3.6)	(7.3)	0.0	(3.5)	(2.9)
Chili's
Comparable Restaurant Sales	(4.3)	(9.6)	(0.8)	(4.9)	(3.2)
Pricing Impact	1.2	1.1	1.1	1.0	1.2
Mix-Shift	0.6	1.5	1.2	1.2	(1.3)
Traffic	(6.1)	(12.2)	(3.1)	(7.1)	(3.1)
Maggiano's
Comparable Restaurant Sales	1.6	9.2	4.2	4.7	(1.6)
Pricing Impact	0.3	1.1	1.5	1.0	0.5
Mix-Shift	(1.8)	0.7	(4.0)	(2.0)	(2.2)
Traffic	3.1	7.4	6.7	5.7	0.1

Franchise(2)				(4.1)	(4.8)
Domestic Comparable Restaurant Sales				(6.5)	(4.8)
International Comparable Restaurant Sales				2.9	(4.6)

System-wide(3)				(3.7)	(3.6)
(1) Brinker International comparable restaurant sales for prior year exclude the impact of discontinued operations. (2) Although franchise comparable sales are not sales attributable to the Company, including franchise comparable restaurant sales provides investors information regarding brand performance that is relevant to current operations and may impact future restaurant development. The Company generates royalty revenue, advertising fees and rental payments based on franchisee sales, where applicable. (3) System-wide comparable restaurant sales are derived from sales generated by company-owned Chili’s and Maggiano’s restaurants in addition to the sales generated at franchisee operated restaurants.

The Company's fiscal 2010 consisted of 53 weeks compared to 52 weeks for fiscal 2011. The comparable restaurant sales percentages above have not been adjusted to reflect the one week calendar shift. Considering this shift, company-owned comparable restaurant sales were (3.7), (4.9) and (4.1) percent for October, November and December, respectively, resulting in (4.1) percent for the quarter. Management believes the adjusted presentation is a useful gauge of the company's performance (see adjusted comparable restaurant sales at Table 3).

Quarterly Operating Performance

CHILI'S second quarter revenues of $548.3 million represent a 7.4 percent decrease from the prior year period driven by a 4.9 percent decline in comparable restaurant sales. Revenues were also impacted by a net decline in capacity of 3.1 percent due to the sale of 21 restaurants to a franchisee in December 2009 and ten restaurant closures since the second quarter of fiscal 2010. Restaurant operating margin increased compared to the prior year due to favorable cost of sales driven by the positive impact of changes to value offerings and decreased commodity prices for chicken, ribs and cheese. Additionally, restaurant labor was positively impacted by the implementation of Team Service, partially offset by sales deleverage and higher restaurant management compensation.

MAGGIANO'S second quarter revenues were $107.8 million and comparable restaurant sales increased 4.7 percent primarily driven by improved traffic. Comparable restaurant sales have increased for four consecutive quarters and traffic has increased for five consecutive quarters. Restaurant operating margin increased compared to prior year primarily due to improved cost of sales resulting from menu changes and sales leverage.

ROYALTY AND FRANCHISE revenues totaled $15.8 million for the quarter, a decrease of 4.3 percent over the prior year driven in part by the recognition of franchise and development fees associated with the sale of 21 restaurants to a franchisee in the prior year quarter. International franchise comparable restaurant sales increased 2.9 percent while domestic franchise comparable restaurant sales decreased 6.5 percent for the same period. Since the second quarter of fiscal 2010, international and domestic franchisees have had net openings of 15 and five restaurants, respectively. Royalty revenues are recognized based on the sales generated and reported to the company by its franchisees. Brinker franchisees generated $372.5 million in sales for the second quarter of fiscal 2011, an increase of 1.3 percent over the prior year.

Other

General and administrative expense decreased $1.0 million for the quarter primarily due to decreased salary expense from lower headcount.

The effective income tax rate increased to 17.5 percent in the current quarter as compared to 16.8 percent in the same quarter last year primarily due to an increase in earnings, partially offset by the resolution of certain tax positions resulting in a positive impact in the current quarter. Excluding the impact of special items, the effective income tax rate from continuing operations increased to 27.3 percent in the current quarter from 27.1 percent in the same quarter last year driven primarily by increased earnings.

Non-GAAP Reconciliation

The company believes excluding special items from its financial results provides investors with a clearer perspective of the company's ongoing operating performance and a more relevant comparison to prior period results.

Table 2: Reconciliation of income from continuing operations before special items Q2 11 and Q2 10; $ millions and $ per diluted share after-tax
	Q2 11	EPS Q2 11	Q2 10	EPS Q2 10
Income from Continuing Operations	37.5	0.41	14.8	0.14
Other (Gains) and Charges	1.7	0.02	11.3	0.11
Adjustment for Tax Items	(4.1)	(0.05)	-	-
Income from Continuing Operations before Special Items	35.1	0.38	26.1	0.25

"The solid EPS growth delivered again this quarter shows the power of working on the middle of the P&L to improve our business model. Initiatives like Team Service are improving the guest experience as well as generating significant savings for the company. This financial flexibility enables us to invest in ways that attract and delight our guests, all with the goal of delivering increased value to our shareholders," said Guy Constant, Executive Vice President and Chief Financial Officer.