Business Summery

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					By George Kruglov

Brinker International
Executive Summery
Brinker International is a company that operates, develops, and franchises Chili‟s Grill and Bar, Romano‟s Macaroni Grill, On the Border Mexican Grill and Cantina, Maggiano‟s Little Italy, Corner Bakery, and Bowl Asian Kitchen, restaurant concepts. The company also has a 43% interest in Rockfish Seafood Grill restaurant chain. Brinker currently has 1403 restaurants in operation, and plans to increase its capacity by about 10% by opening about130 to 150 new restaurants in 2004. The company also is experiencing a two percent growth in same store sales. In the past two years the company has bought out a number of its substantial franchises, resulting in an increasing its share of company operated restaurants, which has served to increase its revenue from system wide sales. Recently Brinker‟s EPS has fallen slightly below analysts‟ expectations resulting in a prime buying opportunity. While in the short-term the operating and administrative costs have somewhat offset the double digit growth in revenue, we believe that management will be able to hold down cost and new concepts such as “TO GO” will result in even higher revenue growth in the near future. The company‟s entry into smaller markets such as malls and airports should further increase their market share and boost future earnings.


By George Kruglov

(NYSE: EAT) S&P MidCap 400 Industry: Restaurants Sub Industry: Casual Dining Restaurants Share Information Market Capitalization $3 Billion Shares Outstanding $96.7 Million Monthly Trading Volume $28.8 Million Institutional Ownership 92.5%
Developments  In fiscal 2003 closed one of the two remaining PIZZAAHHH! restaurant locations and canceled all future development of the concept  In fiscal 2003 (4th Q) entered into negotiations to sell all 16 of its Cozymel‟s restaurants  Nov 2001 acquired 39 Chili‟s restaurants from Sydran Group  July 2001 obtained 40% interest in Rockfish restaurant concept  April 2001 acquired 40 Chili‟s and 7 On The Border restaurants from NE Restaurant Company  Feb 2001 acquired 50% interest in Big Bowl restaurant concept  Feb 2001 sold Wildfire restaurant concept Strengths  Entering smaller markets, such as airports and regional malls  Developing their “TO GO” program, which allows for takeout (9% of sales „03)  11% overall unit growth  Should benefit from continues expansion, and from the improving economy

Eat has outperformed the S&P 500 for the majority of the year and their recent price drop places the stock at a very attractive price level. Current Price Price (Data): 52 Week High (7/8/03): 52 Week Low (2/24/03)

$30.85 $37.21 $26.32

S&P rates EAT out of a possible 5 stars. S&P downgraded EAT from 4 stars on 09/08/03

Opinion Strong Buy Buy Hold Underperform Sell Total

Analysts Included in Consensus 6 5 9 20

Weakness  Can be effected by the rising beef prices  Inflation may increase operating expenses  Restaurant business is very competitive making it difficult to adjust prices to match increasing operating expenses  Brinker is subject licensing and regulation by alcoholic beverage, health, sanitation, and fire agencies, which can hinder new openings and continues operations


By George Kruglov

Business Summery
Brinker operates, develops, and franchises Chili‟s Grill and Bar, Romano‟s Macaroni Grill, On the Border Mexican Grill and Cantina, Maggiano‟s Little Italy, Corner Bakery, and Bowl Asian Kitchen, restaurant concepts. The Company also owns a 43% interest in the legal entities owning and developing Rockfish Seafood Grill. As of June 25, 2003, Brinker's system of Company-operated, jointly developed and franchised units included 1,402 restaurants located in 49 states, Washington, D.C., Australia, Bahrain, Canada, Egypt, Great Britain, Guatemala, Indonesia, Kuwait, Lebanon, Malaysia, Mexico, Oman, Peru, Philippines, Puerto Rico, Qatar, Saudi Arabia, South Korea, Taiwan, United Arab Emirates and Venezuela. Chili's Grill & Bar Chili's is a full-service restaurant featuring a casual atmosphere and a varied menu of chicken, beef and seafood entrees, steaks, hamburgers, ribs, fajitas, sandwiches, salads, appetizers and desserts, all of which are prepared fresh daily according to Chili's recipes. A full-service bar is available at each Chili's restaurant, with a variety of margaritas, including The Presidente Margarita, offered as the concept's specialty drink. Chili's restaurants feature table service designed to minimize customer waiting time and facilitate table turnover, with an average turnover time per table of approximately 45 minutes. Service personnel are dressed casually in jeans, knit shirts, t-shirts and aprons to reinforce the casual, informal environment. The decor of a Chili's restaurant consists of booth seating, tile-top tables, hanging plants and wood and brick walls covered with memorabilia. Romano's Macaroni Grill Macaroni Grill is a casual Italian restaurant full of the sights, sounds and aromas of a traditional Tuscan kitchen. Enjoyed for any occasion, guests enjoy their favorite Italian dishes along with special signature pastas, grilled features, seafood, salads and pizza, all prepared by talented chefs in open kitchens. The restaurant has wood burning ovens, festive string lights, fresh flowers, broad selection of wine and display cooking. Guests are met with a welcome at the door and enjoy warm service. In addition, guests enjoy the convenience of Macaroni Grill's Curbside To Go service, where chef-prepared meals are delivered right to their cars for them to share at home with friends and family. Maggiano's Little Italy Maggiano's restaurants are classic re-creations of dinner houses found in New York's Little Italy in the 1940s. Each of the Maggiano's restaurants is a casual, full-service Italian restaurant with a family-style menu, as well as a full lunch and dinner menu offering southern Italian appetizers, homemade bread, pasta, chicken, seafood, veal and prime steaks, as well as a full range of alcoholic beverages. Most Maggiano's restaurants also feature extensive banquet facilities.


By George Kruglov

On The Border Mexican Grill & Cantina On The Border restaurants are full-service, casual Mexican restaurants featuring mesquite-grilled favorites and traditional Tex-Mex appetizers, entrees and desserts served in generous portions at modest prices. On The Border restaurants feature a full-service bar, an outdoor patio, booth and table seating in the dining room and a colorful, festive atmosphere. On The Border restaurants also offer enthusiastic table service to facilitate table turnover while simultaneously providing customers with a satisfying casual dining experience. Additionally, On The Border offers To Go service intended to fill the need for speed and convenience while offering a take-out experience. On The Border also offers catering service from simple drop-off delivery to full-service event planning. Corner Bakery Cafe Corner Bakery is a retail bakery cafe serving breakfast, lunch and dinner in the emerging quick-casual dining segment. Corner Bakery is committed to providing a variety of menu selections. Featured in the cafes are specialty sandwiches, fresh salads, hot soups, panini and pastas. Most bakeries having both indoor and outdoor seating. Savory foods, breads and sweets are created seasonally. Corner Bakery catering offers a wide range of gift baskets, breakfast and sandwich trays and lunch boxes for any size meeting or social event. Big Bowl Asian Kitchen Big Bowl features contemporary Asian cuisine prepared with fresh ingredients in a casual atmosphere. Big Bowl is distinguished by its menu that features four kinds of fresh noodles, chicken pot stickers and dumplings, hand-rolled summer rolls, seasonal stir-fry dishes featuring local produce, wok-seared fish and signature beverages, such as homemade ginger soda and tropical cocktails. Garlic, ginger and lemon grass are chopped daily, lemon juice is hand squeezed and peanut sauce is prepared with fresh peanuts. Big Bowl's flavorful broths, curry pastes, dip sauces and condiments are made from scratch. Its interactive stir-fry bar allows the guests to help themselves to a farmers' market array of vegetables to be wok-cooked with their own choice of sauces and meats with noodles or rice. Rockfish offers fresh, flavorful seafood dishes served in a lively environment. Reminiscent of a fly-fishing camp, the Rockfish decor features piney wood tables, river rock fireplaces and an open kitchen with chefs preparing the catch of the day. The restaurant serves a wide variety of reasonably priced seafood ranging from salmon and trout to catfish, shrimp and crab. Daily chalkboard specials feature various items including when in-season and Copper River Salmon. The restaurant industry is a very competitive industry, and some of Brinker‟s competition consists of Darden Restaurants, Inc. (DRI), Mitchells & Bulters (MLB), Outback Steakhouse, Inc.(OSI), and Applebee‟s International, Inc. (APPB).


By George Kruglov

Recent News
Chili's Opens on Okinawa Military Base
Wednesday October 29, 1:07 pm ET Kadena Air Base Chili's Is First Casual Restaurant on Any U.S. Air Force Installation
KADENA AIR BASE, Japan, Oct. 29 /PRNewswire-FirstCall/ -- U.S. military personnel stationed on the island of Okinawa will no longer have to hold out for a stateside trip to satisfy their cravings for Baby Back Ribs and Big Mouth Burgers. Chili's Grill & Bar has opened for business on Kadena Air Base. The location is the first Chili's to open anywhere in Japan -- Chili's 23rd country -- and is the first major U.S. casual dining brand to operate on any U.S. Air Force installation. The Kadena Air Base Services Squadron will operate the restaurant under a franchise agreement. "We are very excited to open our doors to the more than 20,000 servicemen and women, family members and civilian employees who work and live on Kadena Air Base," said Wilson Craft, President of Chili's. "This is a particularly important opening for Chili's because it is another step in our growth strategy of expanding our brand into untapped markets and non-traditional locations." Craft added that Chili's is planning a second base opening in mid-2004 at Ramstein Air Base, Germany, through Air Force Services Agency and is charting future opportunities for on-site operations with the U.S. armed forces. He also noted that Chili's has made significant strides in growing its presence at airports and in shopping malls, and has recently turned its attention to expansion onto college campuses. "Recognizing a significant demand for a branded casual dining experience to serve our market, we began a search nearly six years ago to bring a major casual brand restaurant to the Air Force," said Frank Black, Chief of Air Force Clubs for Air Force Services Agency. "We selected Chili's from a short list of qualified concepts because of the strength of the brand, the diversity and popularity of the menu, as well as Chili's successful track record in supporting its global franchise partners.

The Kadena Air Base Chili's is approximately 5,500 square feet, has seating for 247 guests and employs more than 100 "ChiliHeads" from the surrounding Okinawa community.

Brinker International cuts full-year earnings view
NEW YORK, Oct 21 (Reuters) - Restaurant owner and operator Brinker International Inc. on Tuesday said it expects earnings for this fiscal year to fall below its previous forecast and Wall Street's view. Chief Financial Officer Charles Sonsteby said during a conference call Brinker expects to earn $2.13 to $2.17 per share in fiscal 2004, down from its previous target of $2.19 to $2.23. Analysts, on average, expect the Dallas-based company, the parent of Chili's Grill & Bar and other restaurants, to earn $2.19 per share, according to Reuters Research, a unit of Reuters Group Plc.


By George Kruglov Earlier on Tuesday, Brinker forecast a profit for its current quarter below Wall Street estimates and Smith Barney cut its rating on Brinker's stock to "hold" from "buy." Brinker shares fell 15 percent to $28.60 on the New York Stock Exchange. Brinker International Inc.'s Romano's Macaroni Grill and United Specialties, Inc. Team Up to Introduce New Line of Truffle Products 2003 Sep 24 7:33 AM Romano's Macaroni Grill, a member of Brinker International Inc.'s family restaurant chain, announced that it has entered into a purchase agreement with United Specialties Inc. to introduce a line of truffle pasta dishes exclusively featuring the Da Rosario brand of truffle oil. The focus of this relationship is to introduce up-market gourmet foods to the mass market.

Financial Data and Ratios
4 3.5 3 2.5 2 1.5 1 0.5 0 1999 2001 2003 Revenue ($Bil)

       

Revenue is expected to continue to grow at a pace of about 11% per year. This growth is fueled by increase in same store sales, new restaurants, and steady increase in Brinker‟s share of its system wide sales. Since 2001 Brinker has increase its share of system wide sales from 79.2% to 86.3%.

 Free Cash Flow
50 0 -50 -100 -150 1999 2000 2001 2002 2003 Free Cash Flow ($Mil)

Key Revenue Points Average menu prices increased 1.1% and same store sales increased 2.3% in 2003 Chili‟s average revenue per meal is about $11.15 13.8% of Chili‟s revenue comes from alcoholic beverage sales Romano‟s Macaroni Grill‟s average revenue per meal is approximately $13.84. 12.8% of Romano‟s revenue comes from alcoholic beverage sales Maggiano‟s Little Italy average revenue per meal in about $25.34 21.8% of Maggiano‟s revenue comes from alcoholic beverage sale On The Border‟s average revenue per meal is $13.40 21.2% of On The Border‟s revenue comes from alcoholic beverage sale

Unit Growth
Total Units 2003 Company-Owned Units: Chili's Macaroni Grill On The Border Maggiano's Cozymel's Corner Bakery Projected Openings Fiscal 2004

693 194 114 25 16 85

70-75 21-23 4-5 3-4 5-8


By George Kruglov
The decline in free cash flow in 01 and 02 was primarily the result of restaurant purchases.
Big Bowl Total JV/Franchise Units: Chili's Macaroni Grill On The Border Corner Bakery Rockfish Total 18 1,145 2-3 105-118

207 8 19 3 20 257

20-24 2-4 0-1 4-6 26-35

The overall unit growth in 2004 is projected to be 9.5 to 11 %.

EPS Growth
0.7 0.6 0.5 0.4 0.3 0.2 0.1 0 1999 2000 2001 2002 2003 2004 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr 1200 1000 800 600 400 200 0 1999

Owners’ Equity

Owners' Equity ($Mil)



Brinker has experienced steady earnings growth over the last 5 years, averaging 17.5% yearly growth.

Shareholder equity has grown at an average of 16% per year.

Valuation Ratios P/E Ratio (TTM) P/E High - Last 5 Yrs. P/E Low - Last 5 Yrs. Beta Price to Sales (TTM) Price to Book (MRQ) Price to Tangible Book (MRQ) Price to Cash Flow (TTM) Price to Free Cash Flow (TTM) % Owned Institutions

Company 18.13* 27.00 14.67 0.55 0.90* 2.64 3.15 9.34 24.94 95.00

Industry 28.34 34.72 15.03 0.62 1.85 4.08 4.02 21.00 40.44 63.47

Sector 26.78 47.63 16.27 1.02 2.63 3.77 6.26 17.44 42.95 48.76

S&P 500 25.04 47.92 16.16 1.00 3.30 4.29 7.21 19.26 31.31 63.97

As the ratios show the company has is currently trading with a P/E ratio that is well below its industry. As the Price to Book ratio shows, the company is currently trading at only 2.64 times its book value, which is very low compared to its industry and the S&P. Brinker also trades at a lower multiple of sales than average for the Restaurant industry.


By George Kruglov
Growth Rate Ratios Growth Rates(%) Sales (MRQ) vs Qtr. 1 Yr. Ago Sales (TTM) vs TTM 1 Yr. Ago Sales - 5 Yr. Growth Rate EPS (MRQ) vs Qtr. 1 Yr. Ago EPS (TTM) vs TTM 1 Yr. Ago EPS - 5 Yr. Growth Rate Capital Spending - 5 Yr. Growth Rate Company Industry Sector S&P 500 12.54* 13.19* 15.85 -0.88* 7.40* 20.02 16.03 13.97 13.12 10.88 13.72 -2.97 10.70 7.17 15.40 13.59 18.79 11.92 21.41 17.09 12.45 12.71 10.58 9.74 24.46 21.46 10.42 6.01

One of the most attractive aspects of EAT is its impressive growth. Its growth clearly outpaces that of most of its competitors and the overall market. It is our belief that the company‟s fast growth will continue in the upcoming years, both through gain of market share and restaurant unit growth.

Financial Condition Ratios Financial Strength Quick Ratio (MRQ) Current Ratio (MRQ) LT Debt to Equity (MRQ) Total Debt to Equity (MRQ) Interest Coverage (TTM) Company 0.22 0.54 0.31 0.33 21.42 Industry 0.61 0.97 0.63 0.66 8.78 Sector 0.89 1.49 0.78 0.88 7.17 S&P 500 1.27 1.79 0.65 0.97 12.97

Brinker is less leveraged than the average for the restaurant industry.

Management Effectiveness Management Effectiveness (%) Return On Assets (TTM) Return On Assets - 5 Yr. Avg. Return On Investment (TTM) Return On Investment - 5 Yr. Avg. Return On Equity (TTM) Return On Equity - 5 Yr. Avg. Company 8.96* 9.69 10.73* 11.78 15.80* 15.96 Industry 7.95 8.67 9.66 10.86 20.04 15.03 Sector 5.99 5.64 8.04 8.10 15.04 14.82 S&P 500 6.14 7.21 9.65 11.69 18.00 20.10

Brinker‟s superior ROI and ROE demonstrates that the company‟s management is able to efficiently utilize the resources available to them. Their ROI and ROE fall well within our range of desired returns on Investment and Equity.


By George Kruglov

Financial Models
1). P/E Model Ave P/E ratio: 17 5 year EPS estimates: 3.25 Projected Future price: 17*3.25 =55.25 Current Price: $ 30.78 Price appreciation potential over the next 5 years: $24.47
2). CAPM – Model

Risk Free rate (T-Bill rate): 4.18% Expected Return on Market: 7.5 % Beta: 0.90 (CAPM= 4.18 + 0.90(7.5-4.18) = 7.168 %) Required rate of return is: 7.168 %

3). Value-Line Model Working Capital: $ 1494.1 Mil ROTC: 12 % Growth rate: 12 % Average P/E 17 Common Sh Outstanding: 92 Mil Current Stock Price: $30.78 1494.1(1.12)^10= 4640.45 4640.45/92 =50.43 50.43*.12=6.05 6.05*17=102.89 102.89/30.78=3.34 3.34^(1/10)=1.128 The calculated return on EAT at current price and with estimations is about 12.8 % annually. This is inline with our desired levels of return. 4) Intrinsic Value Growth Rate Risk Free Rate WACC 32.64 12% 4.18% 6.51


By George Kruglov Institutional Selling Shares Purchased 13.7 million Shares Sold 10.6 million
Short Interest Month 10/08/03 09/08/03 08/08/03 07/08/03 Shares % % (Mil) Outs. Float Days 2.811 2.906 2.913 4.122 2.870 2.967 2.974 3.310 2.780 2.874 2.881 2.198 3.102 3.207 3.215 4.483 Top Institutional Holders Shares Held % Position Shs. Value (000) Out.

The shorts do not possess a high percentage of EAT‟s float, and their interest has somewhat declined in October.


6,315,937 $227,500.05 6.51% 4,570,070 $164,613.92 4.71% 3,309,677 $119,214.57 3.41% 2,863,322 $103,136.86 2.95% 2,822,300 $101,659.25 2.91% 2,742,929 $98,800.30 2.83% 2,356,400 $84,877.53 2.43% 2,305,296 $83,036.76 2.38% 2,201,763 $79,307.50 2.27% 1,999,210 $72,011.54 2.06% 1,988,497 $71,625.66 2.05%


By George Kruglov

Officers & Board Members
Executive Officers Ronald A. McDougall Chairman of the Board and Chief Executive Officer President Douglas H. Brooks Chief Operating Officer Todd E. Diener Executive Vice President, Starlette B. Johnson and Chief Strategic Officer Executive Vice President, Charles M. Sonsteby and Chief Financial Officer Executive Vice President, Roger F. Thomson Chief Administrative Officer, General Counsel and Secretary Michael B. Webberman Executive Vice President Concept Services Board Of Directors Ronald A. McDougall Chairman of the Board and Chief Executive Officer of Brinker International President of Brinker Douglas H. Brooks International Senior Advisor MHT Dan W. Cook III Partners President of Texas A&M Robert M. Gates University Chairman and CEO of Pier Marvin J. Girouard 1 Imports, Inc. Partner, Gardere Wynne Ron Kirk Sewell, LLP Former Vice Chairman and George R. Mrkonic President of Borders Group, Inc. Chairman of the Board and Erle Nye Chief Executive Office of TXU Corp James E. Oesterreicher Chairman of the Board and Chief Executive Officer, J.C. Penney Company, Inc. (Retired) Managing General Partner, Cece Smith Phillips-Smith-Machens Venture Partners Chairman and Chief Roger T. Staubach Executive Officer, The Staubach Company

BUY: 250 shares Price: $30.72 (market price) Stop-Lose: $24.6


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