UPDATE 3-Chili's parent Brinker beats Street, shares soar

Wed Jan 20, 2010 1:14pm EST

* Q2 EPS 29 cents vs. Street view of 22 cents

* Q2 revenue down 17.6 pct

* Q2 same-store sales down 3.1 percent

* Shares up 10.5 percent (Recasts with analyst, executive comment; adds LOS ANGELES to dateline)

By Lisa Baertlein and Phil Wahba

LOS ANGELES/NEW YORK, Jan 20 (Reuters) - Chili's Grill & Bar parent Brinker International Inc (EAT.N) posted quarterly profit on Wednesday that topped Wall Street's view on better than expected sales at established restaurants, sending shares up as much as 13.3 percent.

Despite aggressive discounts to lure consumers, Brinker's same-store sales were more resilient than analysts had anticipated.

Brinker's sales at established restaurants fell 3.1 percent during the quarter. JP Morgan analyst John Ivankoe said that appeared to be better than the casual dining industry's overall 4.8 percent drop reported by sales tracking firm KnappTrack.

The narrower same-store sales decline boosted hopes for the battered mid-market restaurant segment, which began to falter months before the United States officially slipped into recession in late 2007.

"We believe the surprise reflects an improving industry trend as well as the reintroduction of discounting at Chili's," Bernstein Research analyst Sara Senatore said in a note.

The company's profit beat was also helped by lower restaurant expenses and smaller interest payments as it paid down debt.

Brinker, which also owns On the Border and Maggiano's Little Italy restaurants, reported net income of $18.3 million, or 18 cents a share, for the second quarter ended Dec. 23, compared with a loss of $21.8 million, or 21 cents a share, a year earlier.

In the year-earlier quarter, Brinker completed the sale of a majority interest the Romano's Macaroni Grill chain while retaining a minority stake.

Excluding one-time items related to that sale, Brinker posted a profit of 29 cents per share for the quarter.

Revenue fell 17.6 percent to $781.9 million, in large part because of the sale of the Macaroni Grill restaurants.

Analysts on average were expecting earnings of 22 cents per share on revenues of $774.2 million, according to Thomson Reuters I/B/E/S.

THE DISCOUNT DILEMMA

As consumers continue to spend cautiously, restaurant operators have been discounting to lure diners. The risk in that strategy comes when specials fail to draw enough customers -- or when those customers do not buy other high-margin items like cocktails and soft drinks.

Brinker said in October that its so-called 3 for $20 promotion at Chili's -- offering two entrees and both an appetizer and a dessert to split between two diners -- had cut into margins.

But in the recent quarter, that promotion helped stem a fall in sales at established restaurants by driving customer traffic, said Brad Ludington, an analyst with KeyBanc Capital Markets.

"It may be a loss leader to bring some people in, but I don't think it's translating into high enough bar sales to drive margin improvements," said Ludington.

To that end, Brinker executives said they will focus near-term advertising on new, simplified menus but they intend to return to "value" messaging before the end of the current quarter.

During the quarter, interest expense fell by more than a third to $6.8 million. Restaurant expense as a percentage of revenue fell to 56 percent from 58 percent in the prior year, primarily due to having fewer employees following the sale of 189 Romano's Macaroni Grill restaurants a year ago.

Shares were up $1.61 or 10.5 percent to $16.92 in afternoon trade; earlier, the stock got as high as $17.35.

Brinker rivals Darden Restaurants Inc (DRI.N) and DineEquity Inc (DIN.N) were up 1.8 percent and 3.3 percent, respectively. (Editing by Michele Gershberg and Gerald E. McCormick)

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