The Generation That Doesn't Cook (EAT)

By Ryan Barnes | April 09, 2007 AAA

I openly admit that I cannot cook. Not a lick. My mother is a pretty good cook, and my grandmother is a fantastic cook. I wish that I knew more than I do, but unless the preparation of dinner involves throwing a slab of meat on a grill, I am out of luck.

I am a product of the '70s, and while I sometimes lose track of whether that constitutes "Generation X" or "Generation Y", I never lose track of the fact that most folks in my demographic either aren't able to, or just don't wish to cook.

It is because of this that I am always keeping my eyes open for restaurant chains that look like they're poised to benefit from the trends my generation is providing them.

So, I focus on the so-called "casual dining" group, where meal prices range from around $5 up to $15-20 on the high end.

Restaurants in this space hope to capture, not just weekend and date traffic, but day-to-day flow from consumers that may visit them multiple times in one week.
Brinker: An Industry Heavyweight
One of the broadest plays in the casual dining space is Brinker International (NYSE: <?xml:namespace prefix = st1 /?>EAT), the second-largest operator by market cap with a capitalization of just under $4 billion (the largest is Darden Restaurants (NYSE: DRI) at $5.95 billion). Brinker is the parent company of four branded themes:

Romano's Macaroni Grill
On The Border Mexican Grill & Cantina
dutch auction for the buyback of about 12 million shares that went horribly wrong, as the offering range was only a few percentage points higher than the stock price at the time, and shares traded higher than the offering price range shortly thereafter.

Brinker would have been much better off if it had simply repurchased the shares on the open market, as it was only a fraction of the 12 million shares that were repurchased. Brinker would have not only received a better price via a standard buyback, but also would have avoided the public relations smearing that took place when the offering failed.

A Side Order of Risk
There does seem to be a price war forming, with many competitors recently advertising meals or combos for under $10. Chili's is up against a lot of opponents that have similar themes within their restaurants, such as Applebee's (Nasdaq: APPB), Ruby Tuesday (NYSE: RI), and T.G.I. Friday's.

And with middle-of-the-road price points on most of their menu items, Brinker also finds itself competing with lower-end "fast-casual" offerings like Chipotle Mexican Grill (NYSE: CMG) and Panera Bread (Nasdaq: PNRA), and higher-end restaurant chains like Cheesecake Factory (Nasdaq: CAKE) and P.F. Chang's China Bistro (Nasdaq: PFCB).

Events like rising gas prices can really take a cut out of sales for the restaurant group. One simple example is that summertime family vacations may involve flying somewhere rather than driving long distances; people tend to eat out the most when traveling and during the summer months.

The whole industry would likely be under pressure if the economy takes a downturn, as measured by Real GDP. Consumer income levels are of specific importance, and as such the Personal Income & Outlays report released monthly by the Bureau of Economic Analysis should be watched closely by investors in this sector.

Buying Interest in the Sector
Applebee's recently announced that it was "exploring strategic options" for the company, which is basic industry parlance for "we are looking to see if somebody wants to buy us". And private equity historically does like the restaurant space, which is known for solid cash flows and low debt levels.

Brinker has been making some moves itself, agreeing in January to sell 89 company-owned Chili's restaurants to Pepper Dining, Inc. (a unit of private equity). This is a major step in Brinker's plan to raise the percentage of franchisee-owned stores from current levels of about 20%, and should help to drive gains in operating margins in upcoming quarters. Company-owned restaurants tend to carry lower returns than those gained from franchisee cash flows, and the transition to a franchising company is usually a sign of maturity within the business model.

If Brinker sticks to its strategy of having fewer company-owned stores and geographic expansion of its younger brands (On The Border and Maggiano's), it should be able to continue keeping my generation and others quite full in the years to come.

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