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Brinker International Plans to Buy 116 Chili's Restaurants

Brinker International, Inc. EAT has issued a letter of intent to acquire 116 Chili's Grill & Bar restaurants from ERJ Dining. The deal is likely to be sealed in the first quarter of fiscal 2020.

Brinker said that the acquisition is likely to generate incremental free cash flow in fiscal 2020 apart from being EPS accretive. Annually, 116 Chili's Grill & Bar restaurants garner nearly $300 million of revenues.

Chief financial officer and executive vice president of Brinker, Joe Taylor, said that “This acquisition is a compelling opportunity to further invest in our brand, broaden our scale and create growth in earnings and cash flow.”

However, Chili’s franchise restaurants have been witnessing comps decline, which is concerning. In the third quarter of fiscal 2019, comps at Chili's franchised restaurants decreased 0.2% compared with a 2.2% decline registered in the year-ago quarter and a 0.8% drop in the second quarter.

Also, shares of the company have declined 9.3% in the past three months against the industry’s 9.8% growth.



 

Sales-Building Initiatives to Spur Growth

Brinker remains steadfast in its goal to drive traffic and revenues through a range of sales-building initiatives such as streamlining of the menu and its innovation, strengthening its value proposition, better food presentation, advertising campaigns, kitchen system optimization and introduction of better service platform. This Zacks Rank #3 (Hold) company also launched a strategic plan — Vision 2020 — focusing on menu innovation in Chili's, continuous improvement in service and atmosphere to differentiate the brand and gain market traction to achieve long-term earnings per share growth target of 10-15%.

In the trailing four quarters, Chili’s turn-around strategies paid off, with traffic and sales moving in a positive direction. Chili’s comps and traffic increased 2.9% and 3%, respectively, in third-quarter fiscal 2019. Brinker said that the positive momentum is likely to continue in fourth-quarter fiscal 2019 as well. The company is particularly focusing on simplifying Chili’s core menu by improving recipes and strengthening value proposition with some higher-quality ingredients and new cooking techniques to deliver better food at even more compelling price points. In fact, the early momentum resulting from the menu launch has been positive and serves as the fundamental move in the process of driving traffic at Chili's.

Meanwhile, at Maggiano's, the company is poised to continue delivering differentiated dining experience with the rollout of a new menu. The new menu expands dining options to increase incremental visits.

Key Picks

Better-ranked stocks worth considering in the same space include Chipotle Mexican Grill, Inc. CMG, Papa John's International, Inc. PZZA and Noodles & Company NDLS.  While Chipotle and Papa John's sport a Zacks Rank #1 (Strong Buy), Noodles & Company carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Chipotle Mexican Grill and Noodles & Company’s earnings in 2019 are likely to witness 43.6% and 700% growth, respectively.

Papa John's has an impressive long-term earnings growth rate of 12.5%.

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Noodles & Company (NDLS): Free Stock Analysis Report
 
Chipotle Mexican Grill, Inc. (CMG): Free Stock Analysis Report
 
Brinker International, Inc. (EAT): Free Stock Analysis Report
 
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