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Brinker International, Inc. (EAT): Should You Invest Where You Eat?

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Have you eaten at Chili’s lately? If so, then you have supported Brinker International, Inc. (NYSE:EAT). If you prefer a more upscale dining experience, or if you simply prefer Italian food, then perhaps you have dined at Maggiano’s at some point. If so, then you have also supported Brinker International.

Between these two establishments, Brinker International, Inc. (NYSE:EAT) owns and operates nearly 1,600 restaurants around the world. Brinker’s stock is up more than 200% over a three-year time frame, as well as 35% year to date. While this kind of upward momentum is possible to continue in the near term, it isn’t necessarily sustainable over the long haul.

The good news

Brinker International, Inc. (NYSE:EAT) relies heavily on a free spending consumer and the Consumer Confidence Index has shown steady gains over the past several months. This relates to job growth and the housing recovery. Though it’s not often discussed as a reason for rising consumer confidence, the stock market’s ascent also plays a significant role.

Brinker International, Inc. (NYSE:EAT)Another plus for the industry is a decline in food cost inflation. The United States Department of Agriculture has reduced its 2013 expectation for food cost inflation to 2.5% to 3.5% from 3% to 4%. This will lead to significant cost reductions for companies like Brinker International, Inc. (NYSE:EAT), Darden Restaurants, Inc. (NYSE:DRI), and DineEquity Inc (NYSE:DIN).

Other positives for the restaurant industry include a consistent increase in employment within the industry (which indicates confidence in future prospects), more middle-income consumers in emerging markets, improving traffic, strong same-store sales growth, and effective cost containment.

The bad news

We can look at all the trends, but it all goes back to the strength of the consumer. And today’s consumer is constantly looking for value. This has led to a lack of pricing power throughout the industry, which may eventually hurt margins.

Impressive numbers

Brinker International, Inc. (NYSE:EAT) management expects comps to come in at 2% to 3% for this year. It even expects a price increase of 1% to 2% at Chili’s for the year, which is impressive considering how value driven today’s consumer is.

It should also be noted that Brinker International, Inc. (NYSE:EAT) hosts over 1 million diners per day. That being the case, Brinker should be able to weather the storm, even if the economy completely tanks. Once a brand is established on a global basis, there’s a very good chance it will succeed over the long haul.

An interesting disconnect

Brinker International, Inc. (NYSE:EAT) has focused on international expansion, (while also cutting costs), and it has been successful. On the other hand, while revenue increased over the past several years, it still hasn’t reached the 2009 level. At the same time, the stock is at an all-time high.

This tells us that since the depths of the financial crisis, expectations have been extremely low. These low expectations combined with cost-cutting measures have led to consistent earnings growth, but demand still isn’t nearly as high as it was four years ago.

Better options?

Darden Restaurants, Inc. (NYSE:DRI) is a much larger company with a more diversified portfolio. Brands include Red Lobster, Olive Garden, LongHorn, The Capital Grille, Bahama Breeze, and Wildfish Seafood Grille. Darden owns and operates approximately 2,000 restaurants in the United States and Canada.

Revenue has consistently increased over the past three years. Earnings have also been strong on an annual basis, which has allowed Darden Restaurants, Inc. (NYSE:DRI) to return capital to shareholders. For example, Darden currently yields 4.30%, considerably higher than Brinker International, Inc. (NYSE:EAT), which yields 1.90%.

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