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Domino’s Pizza, Inc. (DPZ), Brinker International, Inc. (EAT): Are These Restaurant Chains Satisfying Investors’ Appetites?

Weak economic growth in the U.S. has dampened sales prospects for many restaurant chains, which now must fight intensely for each customer they get. Although the industry continues to recover in terms of sales growth, the cloudy jobs picture remains troublesome for restaurant chains’ management. The labor force participation rate remains at historically low levels. Those without jobs or who have given up looking for work are forced to cut back on discretionary spending such as dining out.

A strategic theme restaurant chains have adopted is Affordability. They are seeking to draw customers back by providing more reasonably priced dining choices and adding new menu items.

Domino's Pizza, Inc. (NYSE:DPZ)

Today we look at three well-known restaurant brands that have coped with the choppy economy with varying degrees of success. The question is whether they have the right strategies in place to achieve sustained revenue growth, given the intense competition in the restaurant industry, as the economy (hopefully) continues to improve. 

Pizza spanning the globe

Domino’s Pizza, Inc. (NYSE:DPZ) announced excellent first-quarter results compared to the same quarter last year. Their recipe for success had two key ingredients: Domino’s ran their operations more efficiently while increasing same store sales. The cost of sales dropped significantly from 70.2% to 68.9%.

Domestic same-store sales (revenue from restaurants that were in operation both years) rose 6.2%, and Domino’s Pizza, Inc. (NYSE:DPZ)’s international division did even better with a 6.5% increase. Net income for the quarter jumped to over $34 million compared to $21 million in 2012’s first quarter.

The company now has more than 10,000 stores worldwide, with 52% of these outside the U.S.They added a net of 80 new international locations during the quarter, but showed a net loss of 5 stores domestically.

Domino’s Pizza, Inc. (NYSE:DPZ)’s franchise-oriented business model allows the company to generate cash flow from royalties without having to incur the expense of operating each store. The company used some of this cash to buy back more than 300,000 of its common shares and pay a $.20 per share dividend.

A good way to learn about a restaurant’s company strategy is to visit its website, where you can see menu changes and promotions they are running. Domino’s Pizza, Inc. (NYSE:DPZ)’s strategy includes adding a selection of pan pizzas, but also offering yummy non-pizza dishes such as a Chicken Habanero sandwich or a Pasta Primavera pasta dish. Does this sound like they aim to compete with the casual-dining style restaurant segment? Absolutely.

Domino’s Pizza, Inc. (NYSE:DPZ) began rolling out these menu innovations in 2008 through 2009 with stunning results. Same-store sales for the first quarter of 2010 rose a whopping 14.3 percent over the same period in 2009.

On the Brinker of higher profits

Brinker International, Inc. (NYSE:EAT) is the operator or franchisor of 1,544 Chili’s Grill & Bar restaurants and 44 Maggiano’s Little Italy restaurants. Chili’s results for the quarter ended ended March 27 showed a 1.1% decline in comparable restaurant sales for company-owned stores. Among franchise properties, comparable sales were up 1.3%; the star performer was the international segment, up 5.1%.

Chili’s third-quarter companywide sales declined 0.7% to $633 million. The company said this was due to a decline in restaurant guest traffic. The company was able to improve operating margins by changing the ingredient mix in its menu and installing new kitchen equipment that improved productivity. They also reported savings in G&A expense due to lower performance-based compensation.

Of course, the goal is to achieve higher sales and have to pay higher bonuses to the restaurant managers. The bottom line: net income increased 10% compared to 2012 despite what Brinker International, Inc. (NYSE:EAT) CEO Wyman Roberts described as “a tough industry sales environment.”

One of Chili’s recent menu innovations: pizza. Do we detect some competitive convergence in this industry? Chili’s also recognizes the trend toward healthier dining options. On the menu page of the company’s website you can click on a menu of vegetarian choices. One option offered is a Grilled Chicken Sandwich without chicken or bacon. At my house, we call that two pieces of grilled toast.

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