Brinker International (EAT): Significant changes after the appointment of new CEO

M.Cap: $2.07 Billion | Debt: $2.09 Billion | Cash: $23M | EV: $4.14 Billion

EV/Revenue: 0.97X

Volume: 777,741

Shareholders: Blackrock: 15.9% | FMR: 14.9% | Vanguard: 12.2% | Holocene Advisors: 6.1%

I. RESEARCH

1. Basics

The company operates and franchise the Chili's® Grill & Bar and Maggiano's Little Italy® restaurant brands, as well as a virtual brand, It's Just Wings.

Chili's

• Chili's is a recognized leader in the casual dining industry and the flagship brand of Dallas-based Brinker International, Inc.
• Chili's has built a reputation for big mouth burgers, full-on sizzling fajitas, crispy Chicken Crispers® and hand-shaken margaritas

 Maggiano's Little Italy

• Maggiano's is a full-service, national, polished casual restaurant brand offering Italian-American cuisine.

 2. Key financials

 Solid FCF

II. WHY ARE WE FLAGGING THIS?

1. Track record of new CEO

• In May 2022, the company appointed Kevin Hochman as CEO.

Turnaround at KFC:

• At the time of his appointment, the US operation of KFC was facing stagnant sales, declining restaurants in the US, and lost its top spot to Chick-fil-A.
• One of his impactful strategies was bringing back Colonel Sanders (Founder of KFC) as the face of KFC. He hired various celebrities to play the role of Colonel Sanders. This helped to create a social media buzz and revitalize the brand.
• In early 2017, when Yum Brands promoted Mr. Hochman to "US President," they highlighted his leadership. Under his direction, KFC US experienced ten consecutive quarters of same-store sales and transaction growth. This success led to increased customer engagement and stronger collaboration with franchisees across the US.

Turnaround at Pizza Hut:

• He was responsible for a $5 billion Pizza Hut business in the US.
• Off-premises: During his tenure, he focused on generating revenue from delivery and carryout, improving the company's mobile app and website to support these efforts.
• Newstalgia Marketing: Pizza Hut revived nostalgia for customers with a new brand campaign that captures the concept of "Newstalgia."
• Hut Lane: In March 2021, the company launched Hut Lane – a dedicated digital order pick-up window. This feature was made available at over 1,500 locations across the country.
• Plant-based Pizza: Pizza Hut introduced a plant-based pizza option, meeting the needs of consumers who have gone meatless.
• Outcome? Pizza Hut's same-store sales increased by 8% in Q4 2021, the best quarterly performance in the last decade. Note: In the recent quarter, sales performance declined due to driver shortages.
• Recognition: QSR Magazine named Pizza Hut Transformational Brand of the Year in 2021.

2. Significant changes after the appointment of Kevin Hochman as CEO

Hiring two key roles:

• July 2022: Chief Marketing Officer
• Feb 2023: SVP - Supply Chain
• Two teams: Within a few months after his appointment, he chartered two teams- one focused on driving sustainable and profitable sales layers, and the other one taking unnecessary costs and complexity out of the business to reinvest in more impactful areas.
• Product improvement: Under his leadership, the company rolled out new drink offerings and new food.
• 3 for me: The company kept the $10.99 as the entry price point for its "three for me" value menu. At the same time, it right sized the number of offerings to reduce the overall mix in the value platform. https://chilis.com/menu/3-for-me

 Cost cutting:

• The company is streamlining operations by removing low-demand or redundant menu items, reducing excess pantry SKUs and unnecessary dishware in the back of restaurants, cutting out ineffective processes that do not benefit guests but consume significant labor hours annually, and minimizing administrative tasks in the back of the restaurants that do not enhance guest experience.

 New pricing strategy:

• He implemented a new pricing strategy to help expand restaurant margins and grow profits by providing a value price point for cash-strapped. He moved away from frequent deep discounting.
• The company strategically shed the unprofitable Maggiano's virtual brands sales, and some Chili's sales that were driven by deep discounting.
• Also, the company continue to reduce its reliance on coupons.
• Premium menu: He also introduced more premium price points at 13.99 and 15.99 for those value focused guests who want a little something more like Staker Shrimp.

 National advertisement:

• For the first time in more than three years, the company returned to national advertising.
• The company's advertising focus is on its unbeatable 3 for Me value platform.
• We drove positive traffic in October, while we were on TV, and we continued to beat the industry in traffic for the remainder of the quarter. –Q2, 2024

Chicken Crispers - Simplifying Operations:

• Historically, the company had two breading recipes for its chicken tenders. original Crisper (tempura batter) & Crispy Crispers.
• In October 2023, the company streamlined its chicken tender offerings by eliminating the original Crisper (tempura batter) recipe. This simplification allows for bulk breading procedures, freeing up operational capacity.

 Guest feedback on the new Crispers, Fries and Mac and Cheese has been phenomenal and has confirmed moving to one type of breading, to both improve the recipe and allow teams to produce much higher quantities consistently, has been the right choice.

 The end results, a much bigger and margin accretive Crisper business driven by both higher pricing, higher piece counts and better taste, with less complexity because we eliminated the low mixing original Crisper. And our restaurant teams loved the changes. More sales with less complexity is a big win.

• Planning to eliminate slicers that are time consuming to clean: In Q2 2023, the company announced it is evaluating the removal of inefficient slicers and a shift towards consolidated onion SKUs to reduce costs.
• Twitter: In the last two quarters of 2023, the company has been a top trending topic on the Twitter platform

CRM marketer:

• The company is developing a modern CRM system.
• This system will use tokenization to recognize guests across transaction methods, enabling more effective targeting with relevant messaging and offers.

 Outcome?

• Consistent improvement in profitability in the recent quarters. 

 3. Notable shareholder

• Cooper Creek Partners Management
• The stock is the 13th largest position
• The company accounts for roughly 2% of its portfolio.

OUR COMMENT

The CEO's commitment to cost-cutting and operational improvement is evident throughout the past six conference call transcripts, demonstrating a sustained, strategic effort. For example, he discussed eliminating time-consuming equipment like slicers to streamline kitchen processes.