First quarter chilly for Chili's

by Monica Watrous
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Chili's restaurant
During the quarter, Brinker International acquired 103 Chili’s restaurants from a franchisee, providing a boost to sales but resulting in a decline in operating margin.

DALLAS – Heightened competition in the casual dining segment and a few operational missteps contributed to a decline in comparable sales at company-owned Chili’s Grill & Bar restaurants in the recent quarter. Parent company Brinker International reported earnings growth in line with expectations but disappointing sales results that were driven by internal and external factors.

For the first quarter ended Sept. 23, Brinker had net income of $33,207,000, equal to 55 cents per share on the common stock, up 1.4 percent from $32,738,000, or 51 cents per share, for the prior-year period. Revenues totaled $762,559,000, up 7.2 percent from year-ago revenues of $711,018,000. During the quarter, the company acquired 103 Chili’s restaurants from a franchisee, providing a boost to sales but resulting in a decline in operating margin.

Comparable-restaurant sales declined 1.6 percent at company-owned Chili’s restaurants and rose 2.2 percent at franchised Chili’s restaurants for the quarter. At Brinker’s Italian brand, Maggiano’s, comparable-restaurant sales decreased 1.7 percent for the quarter.

Brinker’s top executive attributed some of the softness at Chili’s to the roll-out of a rewards program that hasn’t performed to expectations and led to a drop in traffic as the company shifted its promotional strategy to support the program.

Moreover, in an effort to simplify operations at the Tex-Mex chain, the company said it may have trimmed too many menu items. 

Wyman Roberts, Brinker International
Wyman Roberts, CEO and president of Brinker

“We took some things off the menu that didn’t sell as well but actually in hindsight now were driving some incremental check, and so we’ve identified that,” said Wyman Roberts, CEO and president of Brinker, during an Oct. 20 earnings call with financial analysts. “So it’s a combination of what we’ve done to the menu, how we merchandise, how the operations team is engaging in the selling propositions that have been probably more responsible for the softness we’ve seen in the check in the fourth and first quarter.”

The company also was challenged during the quarter by several macro factors within the industry and in the broader economy, Roberts said.

“From an economic perspective, with persistently low oil prices and the appreciation of the dollar, we experienced even greater challenges within our oil markets in border towns,” he said. “While we’ve been seeing pockets of softness within those regions for a while, the top-line challenge has expanded during the quarter across Texas, Oklahoma, Arkansas and Louisiana, home to about 30 percent of our restaurants.”

Simultaneously, he added, the battle for market share in the restaurant industry continues to intensify, with many of Chili’s competitors offering aggressive discounting and deal rates.

“This intense level of promotional activity resulted in some competitors taking share during the quarter,” Roberts said. “We take this competitive activity and the impact on our results very seriously. Over the last six months we’ve stayed consistently focused on our long-term strategies and have refrained from engaging in heavy promotional activity.”

The company has developed a comprehensive strategy for improving Chili’s performance over the remainder of the year by addressing opportunities at lunch, dinner and happy hour.

“We’re introducing new products with more compelling price points and linking that new value proposition to technology like Ziosk, NoWait and our mobile app,” Roberts said. “So guests can now set their own pace that meets their needs at lunch.

Chili's chips and salsa
Chili's is introducing bottomless chips and salsa with any fajita purchase.

“At dinner we’re messaging both value and new news with the launch of our prime rib fajitas and the introduction of bottomless chips and salsa with any fajita purchase…

“We’re also reinvigorating our happy hour business with the launch of a national program that offers more aggressive appetizer pricing and drink specials…”

In the oil markets, the company plans to accelerate local and regional marketing efforts to strengthen its competitive position and drive traffic, Roberts added.

The company also plans to reintroduce some of the menu items that were dropped.

For the full year, Brinker continues to expect a year-over-year increase in earnings per diluted share of 15 percent to 18 percent, driven by commodity favorability, margin improvement and cost management. However, the company has lowered its outlook for revenues and company-owned comparable sales. Revenues for the fiscal year are expected to increase 10 percent to 12 percent, down from the prior guidance of 12 percent to 14 percent, and comparable sales for company-owned restaurants are expected to be down 0.5 percent to 1.5 percent, which compares to the previous target of up 1.5 percent to 2 percent.

“Our sense of urgency is high, and we’re focused on executing our plans to address the sales and traffic challenges we’re currently facing,” Roberts said. “We’re confident in the plans we have laid out over the next few quarters, and we remain committed to our long-term strategy of continuing to deliver a better guest experience and strengthening the relevance and differentiation of the Chili’s brand which gives me confidence that we’ll deliver on our long-term earnings per share goals.”

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