UPDATE: Brinker Up As It Cooks Up Cost Savings To Beat On 2Q

With consumers cutting back on restaurant visits and spending less when they do go, Brinker International Inc. (EAT) hunkered down in its fiscal second-quarter by slashing spending for remodeling stores, closing underperforming ones and controlling other expenses.

The news helped the operator of Chili's Grill & Bar and other casual dining chains top analyst estimates for earnings and revenue, and sent shares rallying $2.82, or 34%, to $11.12, in recent trading.

While more prudent cost controls and capital spending helped propel Brinker through its current quarter, the company faces continuing headwinds in declining same-store sales that show few signs of abating soon.

"The sales environment still remains challenging and will likely remain so for the next few quarters, but it appears that some of the costs may be easing," SMH Capital restaurant analyst William Hamilton said.

Same-store sales at Brinker's Chili's, Maggiano's and On The Border Mexican Grill restaurants fell 4.5% for the quarter ended Dec. 24, and Brinker Chief Executive Douglas Brooks said a disappointing holiday season brought "little relief" to sales and that government efforts to stimulate consumer spending are still a far off from being realized.

"While there are multiple efforts to reenergize the economy and encourage consumer spending, we realize that lasting change will only happen over time," Brooks said. "At Brinker, we are not waiting for external action to strengthen our company."

Brinker said that it will close up to 35 underperforming restaurants, most in the upcoming quarter, and it also plans to spend $110 million this fiscal year on remodels of Chili's restaurants and other capital expenditures, down from $147 million.

Brinker becomes the latest chain to announce it would close some locations, something analysts are calling on the casual-dining sector to accelerate to overcome a glut of eateries in the U.S. Goldman Sachs analyst Steven Kron recently said that as many as 12,000, sit-down restaurants, or 8% of all locations, are needed to close to correct a supply-demand imbalance.

Like other restaurant chains, Brinker also expects to see relief from falling ingredient prices as commodity costs ease.

While Brinker showed the ability to control costs this quarter and benefitted from a slightly better tax rate as well, Morgan Stanley restaurant analyst John Glass said he's unsure how many of those benefits are sustainable in the future. More important is that declining cash flows and sales show no signs of abating in the near term, he said.

"We reiterate that casual dining remains a dangerous place for investors as it appears the deceleration in industry sales is only accelerating into 2009," Glass said in a note to investors.

Brinker swung to a loss of $21.8 million, or 21 cents a share, for the quarter, compared to year earlier net income of $54.5 million, or 52 cents in the recent quarter. The company recorded $85.1 million in charges related to restaurant closings and another $43.3 million loss related to the sale of an 80% stake in Macaroni Grill last month.

Excluding charges, earnings from continuing operating came in at 27 cents a share, beating analyst expectations of 18 cents a share, according to Thomson Reuters.

Brinker's revenue slumped 7.8% to $949.4 million from the year-ago period, although that also beat analyst expectations of $839 million.

Brinker said it expects to refinance a $300 million credit facility that was to mature in October "in a matter of weeks," Chief Financial Officer Charles Sonsteby said.

Shares of another casual-dining giant, Darden Restaurants Inc. (DRI), also rose Thursday, adding 7.2% in recent trading to $26.68, as the operator of Olive Garden, Red Lobster and other restaurants reaffirmed its fiscal 2009 guidance ahead of an investor meeting.

-By Paul Ziobro, Dow Jones Newswires; 201-938-2046; [e-mail]

(Shirleen Dorman contributed to this report.)

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