You Should Do More Than Just Eat at Chili's

Mark is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

It always surprises me to see a little bit of Americana in Asia, particularly Tex-Mex chain Chili's Grill & Bar. Brinker International (NYSE: EAT) has done a great job with Chili's international expansion and creating a restaurant concept that diners enjoy and love. According to the company's website:

Every day from Chicago to Cairo, more than a million people dine at Brinker International restaurants.

What I like about Chili's is that it appeals to the value-conscious consumer with entrees priced from $5 to $20. In a difficult economy, Chili's is one place that customers can go and get a great meal at a reasonable price without having to go to a fast-food chain.

Latest results

This month, Brinker International released its fourth quarter and full fiscal year financial results. Earnings rose 26.2% to $0.77 per share compared to the fourth quarter of last year. This marked the 12th consecutive quarter of earnings per share growth for the company. For the full year, earnings per share rose 19.4% year-over-year to $2.34.

The operating margin improved from 9.8% to 11.6% due to better cost-control measures. Chili's U.S. comparable-restaurant sales decreased 0.3% in the fourth quarter, but international comparable-restaurant sales increased 2.3%. Brinker International also owns Maggiano's Little Italy with 45 locations and that chain saw comparable sales increase for the 14th consecutive quarter by 0.2%.

Brinker International continued to return money to shareholders. During the fourth quarter, the company repurchased 3.5 million shares for $141.6 million. Its dividend increased 25% over last year's fourth quarter. The annual dividend will now be $1 per share for a yield of 2.3%. Brinker International still has $330 million left on its authorized share-repurchase plan heading into the next quarter.

Growth going forward

One of the key drivers for Brinker International will be the continued development of its menu offerings. In May, Chili's rolled out three new flatbreads. The goal is to not only sell them as appetizers, but as entrees as well. The company was able to gain exposure for the new flatbreads with its comprehensive email database. The plan for Chili's is to gain exposure in the pizza category with the new flatbreads and drive comparable-restaurant sales.

Chili's is also focused on further international expansion, particularly in Canada. Brinker International just completed the acquisition of 11 restaurants in Canada from its largest Canadian franchisee. According to CEO Wyman Robert on the company's earnings call:

With these locations, primarily in Alberta, but good consumer acceptance for the brand across the country, we're bullish on the growth potential for Chili's in Canada.

The focus for Brinker International at Maggiano's is on the roll-out of its new smaller restaurants. The first prototype will open in Annapolis, MD later this year. The restaurants will have a new menu and a lower investment model. Brinker International sees the new concept having a greater return on investment and expects it to drive new restaurant expansion for Maggiano's.

Competition

Two of Brinker International's biggest competitors in the casual-dining space are Darden Restaurants (NYSE: DRI) and DineEquity (NYSE: DIN). Darden is the largest of the two with over 2,100 restaurants under the names Red Lobster, Olive Garden, LongHorn Steakhouse, The Capital Grille, Bahama Breeze, Seasons 52, Eddie V's and Yard House. DineEquity operates Applebee's and International House of Pancakes (IHOP).

Darden Restaurants is focused on international expansion in Latin America. The focus will be expanding its Red Lobster, Olive Garden and LongHorn Steakhouse brands in the region. To do so, the company is partnering with Grupo Piramide and Dosil. Grupo Piramide will develop Darden restaurants in Guatemala, El Salvador, Honduras, Costa Rica and Nicaragua. Dosil will be focused on Peru. Darden already has a franchise agreement with International Meal Company in Brazil, Colombia, Panama and the Dominican Republic. According to senior vice president of business development Kim Lopdrup:

As we've stated previously, Darden remains committed to owning and operating its restaurants domestically. We believe the best way to expand internationally, however, is to partner with outstanding local chain restaurant operators, so we can benefit from their existing infrastructure, market knowledge and relationships.

In the U.S., Darden is finally focusing on the affordability factor. I remember growing up and going to Red Lobster was considered a real splurge. Darden is working to change that by advertising its new core menu at Red Lobster, Olive Garden and LongHorn Steakhouse. Darden is offering daily and weekly specials to get diners in the door. By focusing on affordability and the great customer service that Darden Restaurants are known for, comparable-restaurant sales should start to pick up.

The focus for DineEquity is on being the dining choice for value-conscious consumers. For DineEquity it starts with consumers choosing to grab breakfast at IHOP and finishing their day at Applebee's Neighborhood Bar & Grill. The strategy behind both brands is great food at an affordable price.

For shareholders in DineEquity, the company should complete its transition to being a 100% franchised business model by the end of the year. This will reduce overhead and boost margins and cash flow. The focus will then be on rolling out more franchises to more markets. Currently, the company is operating in only 17 countries, so there's plenty of room for expansion.

Foolish assessment

I see plenty of room for further growth in the casual-dining segment. Brinker International has done a great job with its Chili's international expansion. Brinker International has a low PEG ratio of approximately 1.2 and a forward P/E of 13.

Darden has the highest yield among the three for income investors at 4.4%. Over the last five years, Darden has increased the dividend at a 22% compounded annual rate. The enterprise value/EBITDA is also the lowest among the three at 8.8. 

DineEquity just increased its dividend to $3.00 per share for a yield of 4.2%. Now that the company is pretty much free of its company-owned stores, I see the dividend continuing to increase. Its current payout ratio is only 25%, so there's plenty of room to increase the dividend and share repurchases.

Of the three, my favorite would be Brinker International, followed by DineEquity and Darden. Brinker International and DineEquity have the edge when it comes to the value-conscious consumer, but Darden is taking steps to catch up.

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Mark Yagalla has no position in any stocks mentioned. The Motley Fool owns shares of Darden Restaurants. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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